Monopoly is an ideal case of capitalism. In the contemporary world, finding a pure monopoly is extremely hard which might be so because the world has become so competitive that people are more aggressive than before. Consequently, no one wants such kinds of markets to manipulate them. Usually, many people (anti-monopolists) view monopoly as a distraction to the well-being of humans because they see a scenario where this market domination could lead to extortion of the consumers. In spite of the above, there still exist some firms or industries, which normally conduct their market operations as monopoly firms. Examples of such firms are Microsoft, Windows, Diamonds, and even Motion Picture Association of America that controls film ratings in America (Taylor & Weerapana 2012, P.16).- In the simplest term, one can understand monopoly as a market structure comprising of many buyers but only a single seller. The key and the most essential feature is that there is a single seller, but numerous buyers. O’Connor (2010, p.301) notes that a monopoly could refer to a situation where a firm owns all the market share of a particular product or service. Monopoly may take various forms such as a unified business organization or an association of firms controlled separately, but for the sole purpose of selling their products at a profit. Monopoly market has a distinct feature from other forms of market in that it has exclusive control of the market of a specific product or service. In such way, it grants the privilege and power to determine the price to charge on its commodities. The products that these firms sell have no close substitutes. It totally negates the presence of competitors, and the buyers have to purchase from the sole seller. The non-existence of a substitute for the products or services that monopolistic firms offer is the reason behind the lack of competition at all in this market setting.
- The anti-monopolies claim that the lack of competition in this form of market may lead to poor service delivery. It is because, irrespective of the quality of service that they provide to their product, consumers will still go back to them because they do not have an alternative. Lack of consumer sovereignty also limits the choice of buyers that may lead to monopolies charging high prices for low quality products that they offer. People have also accused monopolies of exploiting their workers through offering lower wages relative to what they earn as profits. Perhaps this is one source of lowering their cost of production, hence the high revenues (Taylor & Weerapana 2012, p.17).
- Firms operating as a monopoly are only concerned with making profits, and prompting them to use restrictive methods at some time. A perfect example of such restrictive practices happened in the 1930 economic depression. It involved the Brazil Institute of Coffee dumping large amounts of coffee into the sea. Economists who are against capitalism also see monopolies as a source of concentrating wealth in the hands of few individuals, which may end up disrupting smooth running of democracies. Majority of economists also agree that competition is a key factor in economic growth. However, monopolies tend to eradicate competition, which may end up reducing the pace of economic growth because the monopolistic firms are fond of unfair market practices with the aim of eliminating or barring competition from the market where they operate.
- On the contrary, Taylor & Weerapana (2012, p.17) notice that proponents of monopolies give very cogent arguments for their support of this market structure. First, they believe that monopolies eliminate duplication of products that are already in existence. Consequently, this leads to a reduction of resource wastages, which investors can channel to other productive economic activities. Secondly, they point out that monopolies are always large-scale firms. Therefore, it means that they are able to enjoy some benefits of economies of scale like low production costs. The reduction in the production cost may reflect in the final prices of these products that they pass on to the consumers. Thirdly, such supporters of monopoly markets claim that monopolies always realize a lot of profits at the end of each financial year. As a result, monopolies can decide to reinvest some of the proceeds to research and development. Ultimately, it will make them improve on the quality of the products that they provide and concurrently maintain their status of monopoly.
- Furthermore, most of the supporters of this kind of market have stated that monopolies are in a position to effect price discrimination. With price discrimination, the economically weak sections of the society may benefit. A good example to show this kind of benefit is the Indian railway monopoly that gives discounts to students traveling on their trains. Lastly, supporters of monopoly have also claimed that since monopolies have big and stable financial base, they can afford setting aside some money for purchasing modern technology and machinery. Such latest machines and technologies may lead to efficient production and avoid market competition (Dwivedi & Dwivedi 2009, p.34).
- Apart from the absence of close substitute for their products, the existence of a sole seller and many buyers. monopolies also have some distinguishing features from other market arrangements. Monopolies can decide to set either their prices or the quantity that they sell because the monopolist firm constitutes the industry, making it to have a downward sloping demand curve. Morishima (2004) defines a downward sloping demand curve as where an increase in price would lead to a decrease in the quantity that consumers demand and vice verse. Therefore, it is at the discretion of such firms to either sell more products at a cheaper price or sell a few at exorbitant prices.
- The second characteristic of a monopoly is that they enjoy super-normal profits. They are able to make abnormal profits because they solely determine the price of their products. Consumers are price-takers in this market structure and they will buy the products or services at the prices that the producers have tagged. O’Connor (2010) noted that consumers also lack sufficient market information unlike the producers. Thus, they become susceptible to manipulation by the seller.
- Taylor & Weerapana (2012, p.18) put forth another salient feature of monopoly, which is non-existence of free entry into this market structure. Deterrent to entry could be because of several reasons one of which is the possession of the patent right. In such case, only the monopolizing firm has the sole right of production and sales of such products. The start-up capital for the potential competitors could also be very high. Concisely, it means that the competitors cannot afford to start producing a competitive or substitute product that the firms offer to insufficient initial capital. They cannot rival the strong financial muscles of already well-established monopolistic firms which do take advantage of economy of scale to continue dominating the market. With economies of scale, the monopolistic firms are able to offer high standard services and quality products at a price that is relatively lower than smaller firms.
- A monopoly could also arise when a firm is capable of acquiring a particular superior technology. The use of most sophisticated and latest technologies may make the monopolistic firm to produce more efficient and lower production cost. The outcome of this is that the monopolistic firm may sell what it produces at a cheaper price. In such case its potential rivals may not be able to compete. Other than technology, Morishima further says that the firm may also own a critical resource invaluable for the production of its communities. Possession of a unique talent that no one else has also illustrates this concept. In such case, the nature of the product will allow the monopoly existence.
- Though a rare occurrence, firms may deliberately create an environment of monopoly. Several firms may collude with each other to eliminate a competitor. Such deliberate moves to maintain monopoly power may also include lobbying of government. In an extreme case, a firm may use anti-competitor malpractices such as dumping (selling a product cheaply in the competitor market), exclusive dealings, price fixing, refuse to transact with a competitor, limiting prices (low or high), tying ( a firm sells products that are not related jointly), and even impose resale price on retailers (Morishima 2004, p.5).
- The above discussion clearly elaborates why monopoly is not a desirable market structure to any economy. The graphs below will further clarify how monopoly makes the super-normal profits at the expense of the consumers well-being.
- In a perfect competitive market with many buyers and sellers, firms are at equilibrium when the marginal cost equals the marginal revenue. In such market, the demand curve is perfectly inelastic (AC=MC). The average revenue equals the market price that they charge (P2). In the case, the firms can not charge higher price than the market one because consumers will buy from other suppliers. Similarly, the firms in perfectly competitive market can also not charge a lower price than the set market one because they will make losses. Therefore, they will produce Q2 and price their products at P2. In such case, firms in perfectly competitive markets are price takers. They can only set lower prices at a greater output when there are economies of scale.
- However, this is not the case with monopolies as they have their demand curve same as average revenue (D=AR). At equilibrium (point B), the monopoly can decide to produce more at Q2 and set a lower price at point P2 (TR=4x2=8). Alternatively, they might also set the quantity to produce at Q1 and charge P1 (TR=2x4=8) which is the reason why consumers are price-takers because the monopolist firm sets the commodity price. Nevertheless, monopolies always set a high price (P1) and produce a few commodities (Q1). The result of this is that they will be making super-normal profits at the expense of consumers enjoying the commodity at a lower price. In fact, such gap gets bigger as the quantities they produce approach zero (Q(0). Deadweight loss is a society loss due to market inefficiency. Additionally, monopoly leads to consumer surplus, which is the difference between the price that consumers are able and willing to pay and the actual market price (Taylor & Weerapana 2012, p.23).
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