Pure monopoly
| Pure monopoly |
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| See also |
Pure Monopoly is a market that is served exclusively by only one producer whose market position is guarded by barriers to entry that are prohibitively costly to overcome for would-be competitors. The pure monopolist faces the downward-sloping market demand curve for its commodity, meaning it can choose any price combination throughout the demand curve. If the pure monopoly can make a profit it does not have to worry about its market ever being eroded by the entry of competitors. Other producers can't enter the pure monopolist's market, which means that the entry costs are prohibitive. Technically, this means only that the costs of entry exceed the present discounted value of the future stream of monopoly profits that entering rivals could obtain[1].
Assumptions of pure monopoly
The requirements that must be met to form a pure monopoly are as follows[2]:
- There is a single company selling the product
- There are no close substitutes for the product
- Entry into the industry is very onerous or not possible
The causes of pure monopoly
There are some conditions may give rise to a pure monopoly for example[3] :
- The company has control over the entire supply of raw materials required to manufacture the commodity
- The company may own a patent which prevents other companies from manufacturing the same commodity
- A monopoly was established by a government franchise
Pure monopoly in the real world
Rigid requirements that must be met to create pure monopoly make it very scarce in the real world. There are very few industries that face almost no competitors however most companies face at least very marginal rivalry from substitute products. In reality, even if only one railroad serves a particular town, it must still compete with bus lines and airlines. Similarly, the producer of a particular brand of beer might be the sole supplier of that specific product. However, by definition this is not pure monopoly. There are many other beers produced by different companies, which means that there are close substitutes for this product. If the company decides to raise the price of the product far above its competition it will lose much of its business.
There is also another reason to why pure monopoly is rarely found in practice, it can have several undesirable features. Governments often have to intervene in markets where a pure monopoly might otherwise prevail, to prevent the monopolist to set its price to an unreasonable degree.
Pure monopoly also tends to be easier to analyze than most of the common market structures thus it is a stepping stone toward more realistic structures. It also is very easy to point out all the possible evils and to a degree benefits of monopoly if we examine it in its purest form[4].
Footnotes
References
- Baumol W., Blinder A. (2015).,Microeconomics: Principles and Policy, Cengage learning, Boston, United States of America
- McKenzie R., Lee D. (2008).,In Defense of Monopoly: How Market Power Fosters Creative Production, University of Michigan Press, Michigan, United States of America
- Salvatore D. (2006).,Schaum's Outline of Theory and Problems of Microeconomic Theory, McGraw-Hill, United States of America
Author: Jakub Irauth
