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Monopoly Market

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A market structure is characterized by a single seller, selling a unique product on the market. In a monopolistic market, the seller faces no competition, since he is the only seller of the goods with no close substitute.
In a monopoly market, factors such as government licenses, resource ownership, copyrights and patents, and high start-up costs make an entity a sole seller of goods. All of these factors restrict the entry of other sellers into the market. Monopolies also contain information that is unknown to other vendors.

The characteristics associated with a monopolistic market make a single seller both a market controller and a price maker. He enjoys the power to set the price of his goods.

Characteristics of the Monopoly Market –There are many different types of monopoly markets, but they all have one common feature: a downward-sloping demand curve. In other words, the demand curve for a monopoly market is not perfectly elastic. Monopolies are the opposite of oligopolies; Multiple smaller companies compete for a single market. As a result, each company can exercise some monopoly power over the other companies in the market.

  1. A monopoly market is one in which one company controls the supply of a particular product. This means that any change in production greatly affects the price.
  2. Monopoly also removes the distinction between a company and an industry since there is no close substitute for a product.
  3. In a monopoly market, the cross elasticity of demand is zero. Therefore, in a monopoly market, the price of a product is largely fixed, with no possibility of a change in supply.
    In a monopoly market, there is only one seller and there is no competition. There is no substitute for that product, and a monopoly company can charge a higher price than its competitors.
  4. In a competitive market, all products are substitutes. Thus, a firm that dominates a monopoly market will be able to maximize its profits while maintaining its position as the dominant seller.
  5. A monopoly market occurs when one company dominates a particular industry and controls a large part of its productive capacity. The company’s pricing power depends largely on its superior knowledge and low barriers to entry.
  6. A monopoly market results in higher prices, allowing monopolist to set their prices. This makes the prices of some products higher.
  7. The monopolist can raise or lower prices to attract customers.

Type of Monopoly

Pure Monopoly
A pure monopoly is a sole seller in a market or industry with high barriers to entry, such as significant upfront costs with no substitute for a product.
Microsoft Corporation was the first company to have a pure monopoly on personal computer operating systems. As of 2022, its Windows desktop software still held a 75% market share.

Monopolistic Competition
Monopolistic competition is defined as having multiple sellers with similar substitutes in an industry. Barriers to entry are low, and competing companies differentiate themselves through pricing and marketing efforts.
Their offerings are not perfect substitutes like Visa and MasterCard. Other examples of monopolistic competition include retail stores, restaurants, and beauty salons.

Natural Monopoly
A natural monopoly develops based on unique raw materials, technology, or expertise. Companies with patents or large research and development costs, such as pharmaceutical companies, are considered natural monopolies.

Public Monopoly
Public monopolies provide essential services and goods, such as the utility industry, because only one company typically supplies power or water to an area. Monopolies are allowed and heavily regulated by government municipalities and increase in rates and fees.

Reasons for the Existence of the Monopoly Market- Monopoly arises in the market due to the following three reasons.

  1. The firm has a significant resource base, for example, DeBeers and Diamonds.
  2. The company obtains exclusive rights from the government for the production of a particular product. Such as patents on new drugs, copyrights on books or software, etc.
  3. One producer may be more efficient than others due to the cost of production. This results in increasing returns on sales. Some examples are American electric power, and Columbia gas.

What are the Sources of Monopoly Power?

In a monopolistic market structure, individual control of the market is due to the following:

  • Sources of Power.
  • Legal Obstacles
  • Sales Economy
  • Technical Superiority
  • Control of Natural Resources
  • Network Externalities
  • Deliberate Action
  • Capital Requirements
  • No Suitable Option

A market can be defined as a place where two or more parties meet for economic exchange. A marketplace facilitates the exchange of goods and services, such as in a retail store where people meet face-to-face, or even virtual, such as on online e-commerce websites. In a market, there are buyers and sellers.

Pros and Cons of Monopoly Market –

Pros of Monopoly Market:
1. Research and Development
Monopoly companies make huge profits. The company can invest this profit to fund research projects to bring innovative and attractive products to the market. Thereby, in the long run, successful research will result in higher profits for the company.

2 . Improve Innovation
Information technology companies invest heavily in the development of new software because of the monopoly that comes with patents. Due to patents, the information technology is guaranteed to yield returns to cover the initial capital invested. Society will benefit from such innovation.

3. Sustainable Development to Benefit Society
The companies that benefit from monopoly power are considered the most dynamic and effective. Most of these companies continuously develop to bring more products to consumers at a much lower cost.

For example, Google benefits from a certain monopoly in the search engine industry. Google is constantly improving its platform to improve the user experience day by day.

4. International Competition
If a firm has a domestic monopoly, the firm gains a lot to expand its business internationally. The company can invest more in the international market with good profits earned in the domestic market.

5. Build a Cash Reserve for Tough Times
Monopolistic companies are more likely to accumulate cash reserves from extraterrestrial profits. They can use their advantage to survive in difficult times.

For example, from 2020 to 2022, the COVID pandemic affected most businesses around the world. Companies that had cash reserves could have easily recovered and avoided this situation.

Cons of Monopoly Market:
1. High Prices of Goods and Services
A monopoly firm is the sole product provider in the entire market. Therefore, the monopolist can charge a higher price for goods and services than in the competitive market.

Monopolistic firms can increase the price of goods and services without worrying about the competition (since no competition is available in a monopoly market).

2. Scale Discrepancies
Monopolistic firms try to produce as much as they can in the market because there is no competition in the market. This is known as anomalies of scale.

3. Lack of Other Product Options for Consumers
There is no other product option available to the consumer, so there will be a lack of satisfaction among the consumers, there is only one option available in the market, which will have no measure of quality and price.

4. Lack of innovation and improvement in product quality
Monopolistic firms lack the motivation for innovation and product improvement because there is no competition in the market. This is a disadvantage for the consumers as the same level of experience will continue for a long time.

5. Low Wages for Working Employees
The entire control of the market is in the hands of monopolistic firms. Hence, they do not give much thought to employee welfare. Hence monopoly firms work intending to reduce the wages of their employees.

Regulation of Monopolies

The government may wish to regulate the monopoly to protect the interests of consumers. For example, monopolies have the market power to set prices higher than competing markets. The government can control monopolies by:

  1. Price Cap – Limit Price Increase:  Intervention in the pricing of goods and services through various government regulatory bodies such as the Competition Commission of India(CCI), TRAI, SEBI, IRDA etc.
  2. Merger Regulation: Regulation in the market is based on the concern that a merger essentially eliminates competition among the firms that have merged. This concern is most acute where the participants are direct rivals, as courts often recognize that such arrangements are more prone to restrict production and increase prices.
  3. Break the Monopoly: The only way to legally break a legal monopoly is to pressure the government to change the law and remove restrictions on a market through a process called deregulation. This may be due to public demand, a change in technology, or pressure from companies wanting to compete in a market.
  4. Investigation of Cartels and Unfair Practices: Regulation by rules and laws by the government to prevent cartel systems and illegal activities, so that healthy competition can be maintained in the market.
  5. Nationalization – Government Property: The government aims to end the monopoly of private companies through nationalization.

Why does the Government Control Monopolies?

  1. Stop Overvaluing: Without government regulation, monopolies can keep prices above competitive equilibrium. This will lead to allocative inefficiency and falling consumer welfare.
  2. Quality of Service: If a company has a monopoly on the provision of a particular service, it may have little incentive to provide good quality service. Government regulation can ensure that the company meets minimum service standards.
  3. Monopsony Power:  A company with monopoly selling power may also be in a position to exploit monopoly purchasing power. For example, supermarkets can use their dominant market position to reduce farmers’ profit margins.
  4. Promote Competition:  In some industries, it is possible to encourage competition and therefore there will be less need for government regulation.
  5. Natural Monopoly: Some industries are natural monopolies: due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition and it is necessary to regulate the company to prevent the abuse of monopoly power.

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Last Updated : 22 Nov, 2022
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