What is a Monopoly Market?
When a company and its products dominate a sector or an industry, it is termed a monopoly. When a firm and its products control a market, then it is called a monopoly.
Monopoly is possible in extreme free-market capitalism where there are no restrictions or restraints when a product or service is owned by a company or group.
Characteristics of Monopoly
- Absence of competition: In a monopoly market, there is an absence of competition as the only monopolist dominates the market and earns the profit. This is because of the barrier to entry in the market due to monopoly.
- Lack of varieties of product: There is a lack of varieties in the product offerings as there is a limited seller in the market. The monopolist solely provides the products or services in the monopoly market.
- Price: The prices of the product are normally fixed by the producers as there are no competitors in the market. This is because the demand for products or services is constant.
- Quality of the product: In the monopoly market, the quality of the products is rarely updated as the business sector or industry dominates the industry. Monopolists feel the need for updating the product or services only when there is the possibility of new entry into the market. Product differentiation here is difficult.
- Natural monopoly: Sometimes, there is a natural monopoly when the government allows providing essential services to specific firms. In this case, there could be a patent provided to the firm, and the barriers to entry are definite by the government.
Factors of Monopoly
- High barriers to entry: Competitors in the monopoly market have a high barrier to entry, and they are not allowed to enter the market. This eliminates the competition in the market.
- Single seller: No other seller except the monopolist can sell into the monopoly market.
- Price maker: The firm operating in the monopoly market decides the price. Monopolies can increase the price as per their convenience. The supply is less as compared to the profit earned.
- Economies of scale: Normally, in a monopoly market, producers produce at a lower cost. Buys inventories in bulk. Hence it is easy to maintain economies of scale as they can anytime lower the prices in order to restrict new entries in the market and eliminate competition.
- Pure monopoly: Pure monopoly refers to a situation wherein, in the market, there is only one seller with no other close substitutes. There is a high barrier to entry in a pure monopoly. Pure monopoly generally occurs when government regulates the market.
Example of Monopoly
Microsoft Corporation for many years has dominated the market of Software and operating systems used in computers. There is a lack of perfect competition in the monopolistic market.
Other forms of Market Competition
Perfect competition is a market situation when a large number of purchasers and sellers trade homogenous products.
Monopolistic competition is a situation where there are multiple sellers in the industry with many similar substitutes for goods, and the company retains some power in the market.
Duopoly in the market is when there are multiple sellers in the firm offering similar product or services, but the offers which they give are not perfect substitutes. In a duopoly market, there is less restriction in the entry into the market. Companies in the duopoly try to differentiate themselves by the prices and better marketing. However, it becomes difficult for the consumer to choose between the products of competitors in the duopoly market as the features of the products are very similar to each other. For example, restaurants, retail products, salons, etc.
An oligopoly is a market form in which only a few enterprises can prevent others from exerting considerable influence. The concentration ratio is a measure of the largest company's market share.
One firm is a monopoly, two firms are a duopoly, and two or more firms are an oligopoly.
When there is a high fixed cost and start-up cost involved, it is termed a natural monopoly. Some products require some unique raw materials or technology for the production of the product, which is available in some particular company, then it is termed as a natural monopoly.
Some firms have patents for the product, and this eliminates the competition. For example, pharmaceutical firms have the patent to produce certain drugs helps to eliminate competition and be a monopoly in the industry.
Monopolies set up by the government are termed public monopolies. For example, the utility industry provides water, electricity production. The government allows limited firms to enter into such markets. This is because the resources are limited and should not be wasted or used in bulk. The government hence imposes heavy regulations in these industries as it will become more efficient to have a sole provider of services like this.
Sources of Monopoly Power
There are certain powers to monopolies that affect the new entry into the market. These are as follows:
- Capital requirement: In the monopoly market, the production of goods or services requires a large investment in capital and use research and development costs. This eliminates new entries.
- Technological superiority: A monopoly market may require a huge investment in technologies. Efficient technology which requires high cost possibly avoids the new entry into the market.
- No substitute goods: the goods sold in the monopoly market may have any close substitutes, which makes the demand for the same goods relatively inelastic.
- Control of raw materials: If a monopolist controls the raw materials required for the production of goods, then it's difficult for new entrants to enter the market.
Why is Monopoly Unfair?
As there is the absence of competition in the market due to monopoly, this always affects the price of the product. Consumers have to pay high prices for products or services which are not worth the high prices. Sometimes inferior products also have high prices due to monopoly. Firms take advantage of dominance and create artificial sacrifices, high prices, dodge the natural law of demand and supply. This discriminates and inhibits experimentation and new product development.
Antitrust law was introduced by the US government in the year 1890 to eliminate monopolies in the market. This law was formed to protect the rights of the consumers and prohibition practices that restrain trade.
Further in the year 1914, two other antitrust laws were passed to prevent monopoly and protect consumer rights.
The purpose of these laws was also to enable the firms to do business in the market and eliminate restrictions on trade.
Further, many rules and regulations were imposed by the government of many countries to avoid monopoly in the market. In order to protect consumer rights and allow new business enterprises to enter the market
Disadvantages of Monopoly
Monopoly markets restrict the efficiency of the market and have a negative effect on consumers as well as producers' rights.
The prices set in the monopoly market are quite unfair as normally there is always a high price of the products. As there is no competition, monopolies have no fear of losing customers and reduction in sales. The customers do not have many options as the monopolist dominates the market, and the demand remains constant.
Context and Applications
This topic is significant in the professional exams for both undergraduate and graduate courses, especially for
- BA in Economics
- MA in Economics
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