Monopoly Assgnment Help

Everything You Need To Know About The Monopoly Power

When you're studying economics and marketing, you'll come across the term' monopoly.' You can divide the word into two parts- 'mono' meaning 'one' and 'poly' meaning 'seller.' Therefore, monopoly refers to the situation where one company or a group of companies come together to exercise their power on the supply of a product.

What Is Monopoly?

You can define the term monopoly as the market situation in which one single producer controls the supply of a commodity with no close substitutes.

This means there is no other competitor in the market for that kind of product. Consumers have to depend entirely on a single supplier to get the service.

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Characteristics of Monopoly

In a competitive market structure, you will find various companies providing a single product or products similar to one other, thereby creating competition among themselves. However, in a monopolistic market, only one company has a unique item that helps them dominate the market without any competitors. This is called a monopoly, and you can identify this situation through specific characteristics:

1. One supplier

An essential characteristic of a monopoly is that a single supplier regulates the market. It is an entirely non-competitive market where the single supplier meets the demands for the product or service on its own.

2. No entry to competitors

To maintain a monopoly, the supplier has to ensure that other competitors cannot enter the monopolistic market. This can be possible through government licenses, patents, and copyrights that legally prevent others from producing similar products.

3. Maximisation of profit

The supplier has complete control over setting the prices for the product as there are no competitors who can challenge them. Therefore, they can have a high price for the product to maximise profits.

4. Price discrimination

As the company has complete control over the prices and production of a particular product, it can increase or decrease the supply to the market and control costs. Price discrimination occurs when the seller sells the product at different prices to various customers.

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Real-World Examples Of Monopoly

Now that you know what a monopoly is, let's look at some real-world examples that will help you understand the concept better:

1. Google

Whenever you have any queries, the first place you go to is Google. At present, the web searcher controls 92.05% of the market share in the global search engine segment. It is a common household name that everyone is familiar with, whether they use the internet or not.

2. Facebook

Even with the increase in various social media platforms recently, no one comes close to Facebook. The company has the largest share in the social media market and an active user base of more than 2.6 billion. The acquisition of Whatsapp in 2014 has made it more monopolistic.

3. American Tobacco Company

Before the Sherman Antitrust Act, the American Tobacco Company maintained monopolistic control over the supply of tobacco in America. The company built itself into a powerful force during a time without government regulation. However, in 1911, the Supreme Court ordered the company to dissolve.

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Different Kinds Of Monopoly Diagrams

Students who are more inclined towards visual learning can use monopoly diagrams to understand the intricacies of the monopolistic characteristics.

• Monopolies are the best way to maintain a good profit margin. You can maximise profits when MC = MR. In any competitive market, the profit depends upon the sale of similar products and their demands. However, in the case of monopoly, the competition is zero. Assume that the output is Q and the price is P. Therefore, given that price AR is above ATC at Q, an extraordinary amount of profit is possible in the area PABC.

• A monopoly has the power to charge higher prices (P1) than any competitive market (P). The area of economic welfare under a competitive market is E, F, B. The loss of consumer surplus due to a monolithic agency is P, P1, A, B, and the new area of producer surplus at P1 is E, P1, A, C. Then the overall loss of economic welfare is A, B, C. 

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What Is Natural Monopoly?

Sometimes, one industry will have high production costs, making it costlier for multiple companies to produce the same thing at once. The minimum efficient production scale is significant at the get-go, preventing other companies from entering the market. Moreover, having multiples companies produce the product at high costs can affect production efficiency. 

Therefore, a natural monopoly occurs where one firm controls the production instead of letting others enter the market. Some examples of this kind of monopoly are:

• Tap water supply
• Gas network
• Electricity grid
• Railway infrastructure

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The Economic Case For And Against Monopoly

A pure monopoly refers to when a single producer controls the supply of one product or service in the market. Therefore, the demand for this product is the market demand in total. In the case of monopolies that control more than 25% of the market, there is always a continuous debate whether it is advantageous for the economic case.

In theory, a monopoly in the market can lead to a loss of economic welfare because of higher prices and lower output. However, these can also help ensure continuous delivery of a product or a service with a high production cost.

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Pros And Cons Of Monopoly

The monopolistic market approach has both positive and negative sides to it. Let's have a look at both in detail:

Cons of monopoly

• Price fixing– This occurs due to producers having the advantage to set any price of the product regardless of demand. The consumers have no one else to turn to for alternatives as this company holds supreme power in the market.
• Low product quality– Monolithic companies have the power to maximise profits by decreasing product quality. Left with no other alternative, consumers have to settle for low-quality products.
• Inflation – Monopolies have a considerable role to play in inflation. They can set high costs for consumers, thereby increasing the cost-push inflation.

Pros of monopoly

• Price stability– Due to an absence of competition in the market, consumers don't have to worry about being affected by the price fluctuation in competitive markets.
• Easy scaling up– A monopoly allows a company to produce significant quantities of the product at low costs. Depending on the company, the consumers can benefit from the low prices as well.
• Research and development opportunities– Monopoly companies are more secure in their market standing and feel safe enough to invest in research and development to make their products better or produce new items that can benefit the consumers in the future.

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