Definition of Monopoly
Monopoly is a market structure characterized by a single player’s dominance over the industry. Loo (2023) defined monopoly as a structure where one company fully controls the market and determines the supply and price of products or services. Hence, one can state that a monopoly establishes a non-competitive market. The reasons for its emergence may differ depending on the source of strong competitive advantage.
For example, Apple had a short-time monopoly in the tablet market when it introduced the iPad. De Beers claimed control over the diamond industry by securing access to large diamond deposits (Agarwal, 2022). Regardless of conditions leading to monopoly, this structure has five distinctive characteristics true for any monopolistic market.
Characteristics of Monopoly
Single Supplier
Firstly, a monopoly is characterized by the lack of close competition, a challenge to the dominant supplier. As such, the market demand for products and services turns into the demand for products and services provided by the market leader (Loo, 2023). Technically speaking, other companies may be present in a monopolistic market. However, they cannot create significant competition due to the significant advantages enjoyed by the monopolist.
Barriers to Entry and Exit
The reason for such a low level of competition lies in the second characteristic of monopoly — barriers to market entry. A monopolistic structure may be sustained through such barriers as government licenses, patents, copyrights, high startup costs, or resource ownership (Loo, 2023). In extreme cases, a monopolist ceases to be a business entity and becomes an industry (Agarwal, 2022). Ultimately, the entry barriers act as artificial obstacles designed to cement the leader’s dominance.
Unique Product
Furthermore, monopoly is based on the uniqueness of products and services supplied by the industry leader. Substitutes for monopolist products may either be of worse quality or nonexistent (Agarwal, 2022). Due to this fact, the monopolist can dictate its terms to the customers. Customers usually have no choice but to accept the will of the market leader. In the best-case scenario, a monopoly based on uniqueness ends when competitors develop decent alternatives.
Profit Maximizer and Price Discrimination
The fourth and fifth characteristics of monopoly are related to price regulation. As a dominant or potentially sole provider of goods and services in the market, the monopolist acts as a price maker (Agarwal, 2022). Hence, the monopolistic market is characterized by an emphasis on profit maximization (Loo, 2023). The market leader uses its privileged position to make higher profits since the customers cannot respond by switching to alternative suppliers.
Assumptions of Monopoly
Given the characteristics of the monopoly, one can outline the following assumptions of this market structure. Firstly, the prices of monopolist products are likely to be higher than in more competitive conditions. The consumers have nowhere to go, which forces them to cope with pricing policies. Secondly, price discrimination may emerge when the monopolist charges different prices for the same products and services. Since the market leader has the main influence over price regulation, nothing would stop them from favoring certain customers.
Thirdly, the quality of products and services may deteriorate since there is little point in investing in quality when the competition is weak. Fourthly, monopoly depends on government interventions because only the government seems powerful enough to prevent extortionary price increases.
Finally, a monopolist may not necessarily make profits in the long run despite the monopoly’s innate emphasis on profit maximization. The lack of reasons for improvement may make the monopolist’s operation highly inefficient, forcing it to rely on government support for survival. Therefore, the monopolist is not invincible — moreover, one can claim that the monopoly has to embrace competition to avoid potential collapse.
References
Agarwal, P. (2022). Monopoly market structure. Intelligent Economist. Web.
Loo, A. (2023). Monopolistic market. Corporate Finance Institute. Web.