This is the opposite extreme of perfect competition, and in it’s most crude form there is only one supplier of goods only(pure monopoly). The seller has a huge bargaining power advantage over the consumer, with total control over the market price of that product(monopoly power, conveniently), as they are the market(producer sovereignity).

The biggest characteristic is a lack of consumer choice in that industry. The only alternatives the consumer has is to not buy, or buy a substitute product in another(hopefully more competitive sellers), otherwise you must accept the price the monopoly will offer. Due to this lack of choice, demand is often inelastic, and changes in output directly influence price. Secondly, there are extremely high barriers to entry. The supplier can earn huge profit and other firms wanting some fo the action are prevented from doing so(the incentive function of the price mechanism breaks down as there is no reaction). Because of this power the firm enjoys from dominance, huge abnormal profits are often earnt.

The monopoly will proft maximise in general(in most cases, see individual firms behavior), output up to where MC=Marginal Revenue. Due to the inelastic demand(Average Revenue) curve it, being the market, has for it’s product, this will usually rest at an output which a very high clearing price shown above. Setting obscenely high prices means these max profits will be very high. There is a deadweight welfare loss, especially on the consumer side as some demand will be unsatisfied as some cannot afford this price.

Some products, such as water and power, cannot easily be abstained or substituted, and are necessities in day to day living. It is absolutely crucial that any monopolies in necessities suppliers are regulated. Such necessities are typically utilities, and are generally monopolies due to their ability to exploit economies of scale up to the market output(natural monopolies) meaning that, when regualted, consumers can enjoy lower prices.

Advantages of Monopoly: If one firm fills the industry, it is likely to be huge and reap the whole benefits of economies of scale(internal), which a bunch of competitive firms are unable to achieve. This can cut costs for the consumer, and still leave huge margins. Also, the giant profits allows reinvestment in product, in research and development. A competitive market such as nightclubs cannot better it’s product much over time, the lights, the music, the drinks will tend to be similar. A monopoly drugs company(for example) can search into life-saving products which have changed the world. There is also a more recent argument, put forward by Ausrian Joseph Schumpeter(sometimes in The Economist) of creative destruction. Say we have a popular industry which is monopolised, such as rail. The prospect of monopoly in a huge market creates great incentives not to beat the monopoly in the industry, they cant, but create a new one. Consumers tired of the (typically) high prices aswell as beaten firms will want to better the technology of the monopoly, beating their product all ends up. Schumpeter argued that this is good for technological advance in the long haul, changing guards of monopoly as replacement products are made is better than a competitive market with little advance, which is likely.

Disadvantage of Monopoly is the deadweight welfare loss mentioned, where if the market was competitive(Price=Marginal Cost) more consumers would be satisfied than they are now, and more firms would enjoy profitability instead of just one. Also consumer surplus is eaten into, and people have to accept price hikes for the product. Even though there is the R and D/ lower costs argument of monopoly, the two are not really exploited if the monopoly is complacent. This is likely to happen where the industry product does not have a strong substitute, and demand is assured with high prices and stagnated product(boardroom complacency diseconomy).

cmon, dont do me for copyright;).

Monopolies and Efficiency: Because of a lack of incentive to minimise costs in it’s dominance, productive efficiency is unlikely(although with this costs can still be lower than PC due to economies of scale, appears to contradict I know!). Deadweight welfare losses and shortages mean high prices. An unregulated monopoly is allocatively inefficient, with prices not reflecting free supply and demand, monopolies control all supply, and need not react to market forces. Monopolies are to an extent dynamically efficient, due to R and D, creative destruction and incentives. Advance in product aswell as tech are more likely.

Monopolies in real life

Most monopolies we have, have created the market they dominate, rather than taken over an existing market. By creating the market we mean inventing a new version of a product, a market which didnt exist then patenting selling their idea. Very few have been allowed to take over an existing market due to AntiTrust Laws in the U.S and Competition Authorities in the UK stopping this from happening. Utilities, however, have been monopolies simply because of the natural monopoly concept(see above), subject to heavy regulation(Ofwat in water, Ofgem in energy etc). Typically these powerhouses are government or privatised firms.

One Response to Monopoly

  1. Pingback: My Space. « Zahablog's Economic Page

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