Monopolistic agreement
Agreement monopolistic is the behavior of the companies which is undertaken to reduce competition in the market. Their goal is to avoid the competitive struggle and maximize profit.
Supporting factors
Factors supporting the tendency to creating monopolistic agreements:
- High barriers of entry to the market
- Homogeneity of goods produced by companies
- Stability of the market
- A small number of companies in the industry
Types
There are two types of monopolistic agreements:
- Horizontal - concluded between companies at the same level of production or marketing. Agreements may include price collusion by competitors, market sharing according to territorial criteria, product and determining the volume of sales or production.
- Vertical - entered into by firms located at different levels of production or marketing. Such agreements involves intent on the unlawful restriction of competition.
Forms of monopolistic agreements under oligopoly
- Pull or Ring - loose agreement for the implementation of specific projects (short duration)
- Cartel - created in order to reduce competition between traders belonging to the same industry (common prices, production, markets)
- Syndicate - a higher form of the cartel agreement, where the joint venture involves a commercial office, which handles the sales price or policy
- Trust - companies associated in the same industry lose their legal status and economic independence and are subject to the joint management board
- Group of companies - an association of companies operating under common management, but with a distinct organizational and legal status
- Conglomerate - a monopoly agreement where companies act under one management in addition to the core business operating in other industries.
- Holding - a public company that holds shares of various companies
Examples of Monopolistic agreement
- Price Fixing: This is when companies agree to set a certain price for goods or services, in an effort to limit competition and increase profits. This type of agreement is illegal and can result in fines and other penalties.
- Exclusive Dealing: This type of agreement occurs when companies agree to only sell their products or services through a single supplier or distributor. This reduces competition, as the company can control the market and price of the goods or services.
- Bid Rigging: This is when companies agree to take turns submitting the highest bids on goods or services in order to win the contract, thus eliminating competition and allowing the companies to maximize their profits.
- Collusion: This type of agreement occurs when companies agree to limit production, charge higher prices, or otherwise limit competition in the market. This type of agreement is also illegal and can result in fines and other penalties.
- Market Division: This type of agreement occurs when companies agree to divide markets amongst themselves, in order to limit competition and increase profits. This type of agreement is also illegal and can result in fines and other penalties.
Advantages of Monopolistic agreement
Monopolistic agreements have several advantages. Firstly, they allow companies to set prices and production levels without facing competition from other firms. This ensures that profits are maximised and that prices remain stable. Furthermore, companies can collaborate to ensure that their products and services meet the needs of their customers. This can lead to increased customer loyalty and higher levels of satisfaction. Additionally, monopolistic agreements can lead to increased innovation as companies are encouraged to develop new products and services that are not offered by other firms. Finally, monopolistic agreements can provide companies with the opportunity to share resources, such as production facilities and research and development, which can help to reduce costs.
Limitations of Monopolistic agreement
Monopolistic agreements have some limitations that should be taken into consideration before implementing them in the market. These limitations are as follows:
- Monopolistic agreements have the potential to reduce competition in the market, leading to higher prices and decreased choice for consumers.
- Monopolistic agreements can be difficult to monitor, leaving room for companies to engage in unethical or illegal behavior.
- Monopolistic agreements can create a barrier to entry for new businesses, which can keep innovative ideas and solutions out of the market.
- Monopolistic agreements can be difficult to enforce, as companies may not be willing to comply with their terms.
- Monopolistic agreements can be seen as anti-competitive by government regulators and may result in legal action against the companies involved.
Monopolistic agreements are used by companies to gain an advantage over competitors and to increase their profits. Other approaches related to monopolistic agreements include:
- Price Fixing - this involves companies agreeing to set a certain price for their products or services, to prevent competition and maximize profit.
- Collusion - companies may collude to reduce competition in the market by agreeing to limit the supply of certain products or services, or to set certain prices. This is illegal in many countries.
- Refusal to Deal - companies may agree to not deal with certain competitors, in order to reduce competition. This is also illegal in many countries.
- Market Sharing - companies may agree to divide up the market and limit their competition to specific areas. This is also illegal in many countries.
Overall, monopolistic agreements are used by companies to increase their profits and gain an advantage over competitors. These agreements may involve price fixing, collusion, refusal to deal, and market sharing, which are all illegal in many countries.
| Monopolistic agreement — recommended articles |
| Price controls — Barriers to exit — Monopoly — Fair competition — Cartel — Tying arrangement — Oligopoly — Resale price maintenance — Syndicate |
References
- Mussa, M., & Rosen, S. (1978). Monopoly and product quality. Journal of Economic theory, 18(2), 301-317.
