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Monopoly: Types, Elements, Effects

Introduction

A monopoly is an economic situation in which only a single seller or manufacturer makes and supplies a commodity or service. In order that a monopoly is effective one of the preconditions that should exist is that there should not exist a practical substitute for the product or service produced and sold. Similarly, there should not be any serious threat of entry of competing firms into the market. Because of this, the seller would be in a position to control the price and supply.

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It is to be noted that there are no possibilities for a pure monopoly to exist in any economy. Monopoly may exist in varying degrees. Normally it is possible to consider a business entity to be a monopoly even when there are relatively smaller suppliers posing strong competition to the firm. Thus the monopoly may vary in degrees and there may not be a chance for pure monopoly.

The policies of the governments with respect to regulating the monopolies and also with respect to encouraging or discouraging will have a major impact on specific industries or businesses where monopoly is intended to be practiced. Apart from affecting the specific industry or business, these policies may have an impact on the total economy as a whole.

Elements of Monopoly

To establish a monopoly in any industry, one or more of the following factors must exist.

  1. The producer or seller should have control over a major resource that is necessary to manufacture or sell a product
  2. There should exist technological capabilities that enable a single entity to manufacture a specific commodity or service. This particular situation in economic terms is described as a “natural monopoly”.
  3. The control over the patent for making a product or the processes used in the manufacture of a product should be possessed by any entity in an exclusive manner and
  4. The franchise granted by the government to any company to control the exclusive right to produce a commodity or service in any given location. (Encarta)

Theory of Monopoly

Microeconomics has developed theories that explained the different behavior of monopoly from that of competitive firms. The firm which is a monopoly-like any other business gets confronted by the following forces:

  1. Specific demand conditions for the goods or service the company produces or deal with
  2. Specific cost conditions determines the costs to be incurred on the supply of resources and labor required for manufacturing the good or service

Based on the demand and cost conditions it is for every firm to adjust its production so that it can earn maximum profit. The maximum profit is arrived at by the difference between the sales revenue and the costs to be incurred by the firm for manufacturing the quantities being sold by it. The level of production at which the firm is able to earn maximum revenue need not necessarily be the one at which the firm is able to obtain the highest possible price. In this case, the monopoly firm differs from a firm in the competitive industry in that it is possible for the monopoly firm to have absolute control over the price it realizes for its product or service. The monopoly firm has the ability to adjust both the price and the quantity it produces in order to maximize its profits.

Demand Curve under Monopoly

Although the monopolist has the power to control the prices in the market, it is not possible for any monopolist firm to charge a price that the consumers cannot bear. In this respect the demand position and demand elasticity act as a constraint on the pricing by the monopolist. Assuming that the firm would like to maximize its profits in the short run where MR = MC the short-run equilibrium can be established by the following diagram. (Tutor2u)

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Monopoly Profits

Types of Monopoly

There can be different types of monopolies. The classification of monopolies usually depends on the degree of monopoly power a firm or business possesses. The cause of monopoly, the structure of monopoly, and whether the monopoly is related to selling or buying also decides the classification of monopoly. There may be a situation in which instead of a single company there may be a group of companies that collude with each other to have effective control over the supply and the prices. This particular type may be termed as ‘oligopoly’ in which a small number of traders or manufacturers have the ability to control the supply and prices on a collective basis.

A ‘cartel’ on the other hand consists of a centralized organization to control and coordinate the activities of various independent suppliers of a specific product. The best example of a cartel is the Organization of Petroleum Exporting Countries (OPEC).

Another form of monopoly which is of recent origin is the ‘trusts’ formed in the United States. The trusts by the authority given to them by transfer of shares by several stockholders proceed to dominate and control a number of major industries. Standard Oil may be cited as an example of this kind of monopoly. Apart from the above, there are other kinds of monopolies like legal monopolies (US Postal Service) and Natural monopolies (American Telephone and Telegraph AT&T). In the case of natural monopolies since the firm enjoys the maximum cost advantage, no other firm would be willing to enter into the business. (Wonnacott)

Effects of Monopoly

Under circumstances where the power and duration of monopoly can be kept under strict control and regulation, the monopolies may turn out to be beneficial to society. Especially in the case of natural monopolies where the entity is able to achieve the lowest cost of production than other competing firms in the same region, these may prove highly beneficial to the public. However, these monopolies have to be strictly regulated by corruption-free governments to offer benefits to society.

Similarly, the government awarded monopolies which may take the form of patents, copyrights may prove to be beneficial to the society as these monopolies are capable of providing financial incentives to all those who are connected with innovative and creative works. However, these monopolies are also restricted in other ways like limiting the time period for which the rights will be available.

By virtue of monopoly, firms can increase their market share by enhancing sales on the basis of economies of scale. (Economics Help)

There are some harmful effects of monopoly both on the economy as well as on society. The following are some of the harmful impacts of monopolies:

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  1. In the case of monopoly, there are usually significantly higher prices and lower levels of production than normally would exist under a competitive environment.
  2. Under a monopoly situation, there will be a deterioration in the quality of products and services being marketed. Not only the quality of the product and service will get adversely affected even the services associated with such products and services will be totally affected.
  3. In monopoly conditions there will be a complete slowdown on the advancement of technology and its application. Generally any advancement in technology will result in improvement in the quality of the product and service. However it will not be in the interest of the monopolists to indulge in any innovation. In fact this is a serious disadvantage of monopoly as the economists have pointed out the innovation is one of the key factors that contribute to the development of the economy.

Predatory pricing, collusion with suppliers, and the leveraging of a monopoly with respect to one product to acquire monopoly over other products are some form of abuses by which the monopoly impacts the economy. Monopolies are regarded as harmful to the economy even when the monopolists are not engaged in these kinds of abuses. (LINFO)

Monopolies and Political situations

It is the normal practice of the businesses to influence the governments in some way so that they can get some favors and advantageous legislative provisions such as relaxations in environmental or safety regulations. In an industry where competition exists it may not be possible for any single firm to influence the political process to offer favors as there will be more number of players in the market. But in the case of monopolies the situation is different.

A large monopolist is in a position to influence the government in a stronger way due to the following reasons;

  1. the firm may have a large financial resource as compared to the individual competitors, since the monopoly enables the firm to maximize its profits
  2. the monopoly operator may be able to exert significant pressure on its customers and suppliers to influence the political process on behalf of the monopoly operator and
  3. the monopoly firms face less opposition due to weaker competition.

There are strong reasons for the monopolist to influence the governments. These include to enable the monopolist

  1. to restraint the government from undertaking anti-monopoly measures,
  2. to strengthen its existing monopoly position,
  3. to weaken the legislative provisions about the environmental or safety measures,
  4. to promote the political affiliation of the owner. (LINFO).

Conclusion

When the governments allow the monopolists to operate it should be ensured that the government implements suitable legislative policies which regulate the price discrimination by the monopolists, restricting the use of one product with intention to gain monopoly in respect of other products, ensuring strict quality control norms and putting adequate restraints on the monopolists with respect to their actions to influence the political process.

If the governments could ensure that all these conditions are met, then the monopoly can bring substantial benefits to the society and assure the growth of the economy. Because of the opinions of the economists that large monopolies which exercise abusive practices would harm the economies significantly most of the industrially advanced countries have implemented regulations with the object of preventing anti-competitive practices. The governments have also empowered regulators to strictly enforce such legislations.

References

Economics Help ‘Monopoly’. Web.

Encarta ‘Monopoly (Economics)’. Web.

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LINFO ‘Monopoly: A Brief Introduction’. Web.

Tutor2u ‘Price and Output under a Pure Monopoly’. Web.

Wonnacott Paul and Wonnacott Ronald ‘Economics’ McGraw-Hill Kogakusha Ltd Tokyo International Student Edition 1979.

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