How can the abuses of monopoly power lead to market failure? So I know that the abuses of monopoly power can cause market failure, but I don't know why that is. I am guessing that because monopoly's face a lack of competition, they have no incentive to improve their product or service, therefore they are not allocating resources efficiently (market failure), however, in my book, a lack of competition is a seperate cause, so I was wondering if there was anything else to it.

P.S. If you could include a logic chain of reasoning and an example in your answer, that would really help me to understand it. I am also revising for GCSEs so the answer need to be extremely advanced. Thanks
First, let's be clear what we mean by abuse of dominance: this is when a firm is a monopoly or near-monopoly, and attempts to use that position in order to perpetuate or enhance its dominance of the market at the expense of competition.

So we need to know: why would a market with a monopoly perform worse than one with competition. Here are the main typical answers:


A monopoly will increase the price above marginal cost by artificially constraining supply. This means that some units that consumers' value above the cost of production don't get traded, resulting in the usual dead weight loss triangle.
Some people speculate that a monopolist has less incentive to innovate (create new products or means of production) than a competitive firm because there is no competitive pressure to be more efficient or to have a better product than other firms. Others, though, have argued that monopolists have a larger incentive to innovate because they can capture more of the gains from invention. This is the subject of a classic debate between Arrow and Schumpeter. The empirical evidence on whether competition is good or bad for innovation is extremely mixed.
Rent-seeking is a concern. If a monopoly makes profit $\pi_m$ and a competitive firm makes profit $\pi_c&lt;\pi_m$ then a firm would be willing to spend $\pi_m-\pi_c$ to become (or remain a monopoly). This is fine if the resources are spend on something socially constructive. But not if it is spent on wasteful advertising, lobbying, engineering products with poor compatibility, creating needless switching costs, etc.
Another concern is managerial slack / x-inefficiency. If a firm has no competitors then there is very little incentive to exert effort to become more efficient, meaning that the firm may end up spending more resources on production than necessary.


If you want to read more about these things, I would recommend the first couple of chapters of Motta's book on competition policy.