What exactly is an Monopoly?
A monopoly market is dominated by a single seller (called”monopolist) however, numerous buyers exist. In a highly competitive market with a considerable amount of buyers and sellers, not a one buyer or seller is able to affect the price of a product. In contrast to sellers in a competitive market, monopolists exercise significant control over the cost of the commodity.
The quantity of goods sold by the monopolist will usually be lower than what could be sold by an extremely competitive company, and the price that the monopolist charges is typically higher than what would be paid by a competitive firm. Although a competitive firm is considered to be a “price taker,”” an monopolist is a “price maker.” A similar to the term “monopoly,” it is monopsony it is a marketplace with numerous sellers but just one buyer.
A monopolist may increase the cost of their product without worrying about rivals’ actions. In a highly competitive market where a company raises the cost of its goods typically, it will be unable to compete as buyers shift to other sellers. The key to understanding the concept of monopoly is to understand the following simple fact: A Monopolist creates the market who is the one who determines the amount of a product or commodity that is available on the market.
In reality the case, a profit-maximizing monopolist cannot just set a price at whatever they want. Take the following instance for a company: ABC has monopoly control in the industry of tables made of wood and is free to charge any price it wishes. But, Company ABC realizes that when it charges $10,000 for a wooden table, nobody would ever buy one and the business would need to close down. The reason is that consumers will replace other products such as iron tables and plastic tables to wooden tables.
So, Company ABC will charge the amount it needs to earn the highest profit feasible. To achieve this, the monopolist has first to identify the market’s characteristics demand.
Sorts of Monopolies
Monopolies usually enjoy an advantage over their competitors due to the fact that they are traditionally the sole producer of a particular product or dominate its market. Although monopolies can differ from one industry to the next however, they typically share the same characteristics:
- High barriers to entry The competition is not able to enter the market because of the control of a single firm over it.
- One seller The market is dominated by one seller on the market.
- Price makers The company who owns the monopoly has the power to decide the price of its product without the chance of a competitor sub-par pricing its product. Monopoly companies can increase prices at any time.
- economies of scale: A monopoly can purchase large quantities of the materials it requires at a discount to volume. Then, it can lower prices to the point that competitors of lesser size can’t compete.
The Pure Monopoly
A company with a “pure” monopoly can be the sole seller in a market with no competitors. For a long time, Microsoft Corporation had a virtual monopoly over operating systems for personal computers. At the time of writing, July 20, 2021 Microsoft’s desktop Windows software was still a market share of around 73%. 1 lower than the 97% in the year 2006. 2
A pure monopoly (as contrasted to an oligopoly such as) is a business with the highest barriers to entry, for example, high costs to start, which prevent competitors from getting into the market.
When several vendors in an industry offer similar products or services to the products produced, and businesses maintain some control within the marketplace, this is referred to as monopolistic competition. In this case, the industry is comprised of numerous businesses offering similar services or products; however, their offerings aren’t an ideal substitute. In some instances, this could lead to duopolies.
Visa and MasterCard could be examples of duopoly. They have a monopoly on their respective industries, however neither of them can take on the other.
In a monopolistic , competitive business, the barriers to entering and leaving are usually minimal, and various firms attempt to differentiate themselves by pricing reductions and marketing initiatives. However, since the goods that different companies offer are alike, it is difficult for consumers to discern which one is superior. Examples of monopolistic competition are restaurants, retail stores, and hair salons.
The Natural Monopoly
A natural monopoly can develop. A business with high fixed or start-up costs, relies on exclusive raw materials or technologies, or is highly specialized, may result in an natural monopoly.
Businesses that hold patents for their products that hinder competitors from making the same product may have monopoly advantage. Pharmaceutical companies rely on patents in order to cover the cost of development and research.
The Government-Sanctioned Monopoly
Public monopolies are often set by governments in order to provide essential services and products. The U.S. Postal Service was established as one, however, it has lost a lot of its exclusivity since the rise of private carriers like United Parcel Service and FedEx.
In the utility industry within the U.S., natural or permitted monopolies by the government thrive. In most cases, just one company supplies water or energy in a municipality or region. This monopoly is permitted since these providers incur considerable expenses in the production and delivery of water or power and a single provider is thought to be more reliable and efficient.
The downside lies in the fact that the federal government controls and regulates these businesses. Regulations can regulate the rates that utilities are charged and the timeframe of any rate increase.
Antitrust laws and regulations are put in place to discourage monopolistic operations–protecting consumers, prohibiting practices that restrain trade, and ensuring an open market.
In 1890 in 1890, in 1890, the Sherman Antitrust Act became the first act that was enacted in Congress in the U.S. Congress to limit the power of monopolies. The legislation received overwhelming support from Congress and was passed by the Senate by a vote of 51-1, passing it through the House of Representatives unanimously with 242 to. 3
The year 1914 saw two other laws against competition passed to safeguard consumers and stop monopolies. The Clayton Antitrust Act introduced new rules for mergers and corporate directors. It also provided instances of conduct that could be in violation of laws of the Sherman Antitrust Act. The Federal Trade Commission Act created the Federal Trade Commission (FTC) which establishes standards for business practices, and enforces the antitrust laws as well as the Antitrust Division of the U.S. Department of Justice. 4
The laws are designed to ensure the market and allow smaller businesses to compete in markets rather than stifle large corporations.