Monopoly can be defined as a situation whereby a single individual or firm has adequate control when it comes to supplying a specific good or service to be able to considerably determine the conditions on which other individuals or firms will have access to them. Monopolies are characterized by an absence of competition for the goods and services they produce. “Monopolies can arise through natural means or they be formed through vertical or horizontal mergers of firms” (Lee, 213). There is usually a single seller who produces all the output and therefore the seller serves the whole market. Price pressures brought about by competition do not affect monopolistic firms.
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Nonetheless, to make sure that there is control of new entrants in the market, the firm needs to control the prices of the services or products produced within the model of the monopoly theorem.
Monopolistic firms are also usually characterized by control of information and other technologies used in production which is inaccessible to other market players. This is achieved through patents that are legally established, copyrights, and trademarks. An example is AT&T which existed as a monopoly in the early twentieth century mostly due to the telephone patent. Besides, monopolies present opportunities for increased mergers between firms. As a result of the control of one single entity, the extent of vertical and horizontal mergers increases and creates coercive forms which ultimately do away with any competition. However, competitive laws restrict monopolies when it comes to the degree to which they can dominate and engage in illegal or abusive behavior. This might only apply to a government-granted monopoly as an incentive to partake in a risky domestic activity. Since monopolies have absolute controls of the market, there is very little innovation and therefore, there is a tendency of becoming inefficient over time with little investment being channeled towards innovations and marketing.
Monopolies have several merits and demerits. Despite them having a bad reputation for being evil, society can benefit immensely from monopolies. One advantage of monopolies is their ability to produce goods at very low costs, mainly due to economies of scale. This is in contrast to competitive firms producing the same goods in the same area. Therefore, low production costs will translate to lower prices to final consumers of those products. Another advantage of monopolies, especially those granted by the government through patents, copyrights or trademarks act as incentives to innovation and creativity by groups of people like entrepreneurs, artists, and inventors. Besides, some form of monopoly is necessary for the distribution of public utilities like electricity and water. These are essential needs of populations and their distribution must remain stable to ensure that they are not affected by market forces and hence adversely affect the supply of these essential needs.
However, on the flipside, monopolies have their limitations. Monopolies tend to stifle innovation(Kreps, 219). Since they might be the only suppliers of certain products in the market, the firm might be sluggish in adopting new technologies, ideas, and change because in the first place they don’t have any competitor to beat or market share to maintain. They may also produce goods of poor quality because of a lack of competition. When there is completion, a company is forced to produce quality products or be edged out of the market. Therefore, there is a lack of any incentives to maintain quality because they are the only players in the market. It can lead to customer dissatisfaction because the customers have no other choices in the market and are forced to buy from a single supplier.
Monopolies can also harm other companies that provide raw materials to them, especially if they are the primary consumers of those materials since they have the discretion of demanding certain prices which have to be met by the suppliers. They further create barriers to entry by other competitors because they control the supply chain.
There are several ways through which the problem of monopolies can be approached. The first approach is through coming up with antitrust policies by the government that is meant to encourage competition in the market. The law makes it illegal to engage in certain practices that are detrimental to businesses and consumers and are against ethical standards. These policies are implemented through the department of justice and the federal trade commission.
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It is also important that the government get involved in managing monopolies through public regulations. These regulations are meant to ensure that the monopolies don’t exploit consumers. The regulation can be done in terms of price controls. However, there is a need to do this without compromising the quality of products and services produced. There should also be some levels of regulation through prohibition to ensure that monopolies don’t enter into anti-competitive agreements which will give them control over fixing unfair prices and abusing their dominance in the marketplace.
In conclusion, monopolies exist in all market structures. Several factors might contribute to their existence. These monopolies have their own merits and limitations depending on the sector they serve.
Lee, Symon. Post-Keynesian Price Theory. Cambridge: Cambridge University Press, 1998
Kreps, David. A course in microeconomic theory. New York: Bantam Books, 1990