Monopoly
Monopoly occurs when one company provides the entire production of goods and services in particular country or industry (e.g. postal services, gas pipelines). It may take the form of associations of producers (cartel, trust, group). These associations offer an economic advantage over its competitors, by achieving higher profits, thanks to the favourable price setting. The premise of the existence of the monopoly could be owning a patent, copyright or exclusive right to sell a given product in a given market.
Monopoly product or service is the only of its kind (unique), which means that it has no close substitute. At the same time there are many buyers, none of which are particularly important, so their behaviour could not affect the formation of prices. Monopolistic company control prices.
Under conditions of monopoly producer (service provider) actively influence the price and quantity of offered goods (services offered). In a monopoly, production is at the optimum economic volume, supply does not depend on price. The supply is determined in relation to the size of the existing demand.. In the case of a pure monopoly, product has no substitutes, which means that elasticity of demand is equal to zero.
Assumptions of full monopoly
- on the market there are many buyers and one seller (monopoly of supply), or one buyer and many sellers (monopoly of demand),
- products are homogeneous or differentiated. (there are no close substitutes),
- there is perfect information about the market. (supply monopolist knows the demand for products manufactured, while demand monopolist knows the supply of goods, for which there is demand),
- there are barriers to entry in the market captured by monopoly,
- monopoly sets the price.
The causes of monopoly
- monopolist holds patents and copyrights to the product,
- monopolist is the sole and exclusive owner of strategic resource, not having close substitutes,
- monopolist has exclusive sales of the product in particular area,
- monopolist has a sufficiently large capital
- administrative and legal barriers - state policy protecting domestic producer from the influx of foreign products on the market.
Nature of monopoly
Monopoly may be either:
- forced - occurs when one of the producers of the goods or services reaches a dominant position in the market and other manufacturers go bankrupt
- state - occurs when the law of the country allows to provide a service or produce a specific range of goods by only one entity (e.g. lottery, postal services, etc.).
- natural - due to the nature of the service provided or the goods manufactured, when competition of many companies for technical reasons is difficult or impossible (e.g. railways, natural gas supply, electricity supply, telecommunications).
See also:
Examples of Monopoly
- Microsoft: Microsoft is a technology company that holds a monopoly in the computer software market. It is the largest software company in the world, and its products are sold in virtually every market in the world. Microsoft has a wide variety of products, including Windows operating systems, Office applications, video games, and other services. The company has a monopoly on the operating system market, which gives it an advantage over other companies in the same space.
- Apple: Apple is a technology company that holds a monopoly in the smartphone market. It is the largest manufacturer of smartphones in the world, and its products are sold in virtually every market in the world. Apple has a wide variety of products, including iPhones, iPads, Macs, and other services. The company has a monopoly on the mobile phone market, which gives it an advantage over other companies in the same space.
- Amazon: Amazon is a technology company that holds a monopoly in the online retail market. It is the largest online retailer in the world, and its products are sold in virtually every market in the world. Amazon has a wide variety of products, including books, electronics, clothing, and other services. The company has a monopoly on the online retail market, which gives it an advantage over other companies in the same space.
Advantages of Monopoly
Monopoly has some advantages that could benefit the company and its customers. These include:
- Improved efficiency and production costs, as a single company can produce a large quantity of products, leading to economies of scale. This allows the company to lower its prices, making the products more affordable.
- Monopoly can provide better customer service and product quality, as the company can focus its resources on a single product or service.
- Monopoly can create more jobs and economic stability in a given economy, as a single firm can generate more revenue and hiring more employees to do the same job.
- Monopoly can also lead to innovation, as companies are more willing to invest in research and development in order to stay ahead of their competitors.
Limitations of Monopoly
Monopolies often come with certain limitations such as:
- Higher Prices: Monopolies are able to set higher prices than if there were competition in the market. This means that consumers may have to pay more for goods and services than they would if there were more competition.
- Lower Quality: Monopolies can reduce the quality of goods and services since there is no competition to provide better quality.
- Reduced Innovation: Monopolies can reduce innovation since there is no need to compete for customers through new products or services.
- Negative Economic Effects: Monopolies can lead to negative economic effects such as decreased investment and job loss as well as reduced economic growth.
- Legal Issues: Monopolies can be subject to legal action due to anti-competitive behavior. This can lead to fines and other penalties.
The other approaches related to Monopoly include:
- Price Discrimination - This is the practice of setting different prices for the same product or service based on consumer characteristics, such as income, age, or even location.
- Natural Monopoly - This occurs when a single company has gained a large enough market share that it can effectively set prices without the risk of competitors entering the market.
- Oligopoly - This is a market structure in which a few large companies control the majority of the market. Companies in an oligopoly often engage in price wars and other tactics to try to gain a greater market share.
In summary, there are several approaches related to Monopoly, such as price discrimination, natural monopoly, and oligopoly. Each of these approaches provides an economic advantage to the companies involved, allowing them to set prices and maintain a monopoly.
| Monopoly — recommended articles |
| Free competition — Factors affecting pricing — Barriers to exit — International competitiveness — Price-Taker — Cartel — Oligopoly — Market structure — Competition |
References
- Merhav, M. (2013). Technological dependence, monopoly, and growth. Elsevier.
- Foster, J. B. (2014). The theory of monopoly capitalism. NYU Press.
