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.
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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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:
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.
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.
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.
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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Now that you know what a monopoly is, let's look at some real-world examples that will help you understand the concept better:
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.
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.
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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Students who are more inclined towards visual learning can use monopoly diagrams to understand the intricacies of the monopolistic characteristics.
If you'd like a more detailed analysis of the monopoly diagrams, you can ask our economics experts to help you analyse them better. We ensure that you'll have a better understanding of the concept.
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:
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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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The monopolistic market approach has both positive and negative sides to it. Let's have a look at both in detail:
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