Monopolistic Markets: Characteristics, History, and Effects
Its controversial history as one of the world’s first and largest multinational corporations ended in 1911, when the United States Supreme Court ruled that Standard was an illegal monopoly. The Standard Oil trust was dissolved into 33 smaller companies; two of its surviving “child” companies are ExxonMobil and the Chevron Corporation. Monopolies can often lead to unfair trade practices like charging different prices from different consumers (price discrimination), setting prices far above the costs of manufacturing, selling inferior products and services, etc. Monopolies are discouraged in several countries as power and wealth tend to concentrate with a single seller. Moreover, such sellers may offer low-quality products at high prices, thus exploiting the consumer. A monopoly can be broken by imposing government regulations or opening the market to competition.
It concerns with the competition that would come from other undertakings which are not yet operating in the market but will enter it in the future. So, market shares may not be useful in accessing the competitive pressure that is exerted on an undertaking in this area. The potential entry by new firms and expansions by an undertaking must be taken into account,[89] therefore the barriers to entry and barriers to expansion is an important factor here. In second degree price discrimination or quantity discrimination customers are charged different prices based on how much they buy.
In this, the monopolist firm usually operates in one market and its consumers are price takers. If the commodity is produced under the Law of Increasing Returns, the monopolist may be producing more at lower costs and selling at lower prices. A monopoly is characterized by a single company supplying a good or service, a lack of competition within the market, and no similar substitutes for the product being sold. Monopolies can dictate price changes and create barriers for competitors to enter the marketplace. Consumers often develop trust and loyalty with firms that offer them quality products and services. A sense of familiarity that generates consequently deters them from going elsewhere to satisfy their demand.
Breaking up monopolies
A monopoly is a single seller or producer without direct competitors for its products or services due to its business practices. A monopoly can dictate price changes and create barriers write the meaning of monopoly that prevent competitors from entering the marketplace. Price discrimination allows a monopolist to increase its profit by charging higher prices for identical goods to those who are willing or able to pay more. For example, most economic textbooks cost more in the United States than in developing countries like Ethiopia. In this case, the publisher is using its government-granted copyright monopoly to price discriminate between the generally wealthier American economics students and the generally poorer Ethiopian economics students.
As of May 2024, its desktop Windows software still held a market share of more than 73%. With the existence of a large monopoly, the risk of a potential entrant going out of businesses always looms. Hence, these potential entrants hesitate when it comes to taking a risk that could cost them too much.
The barriers to entry consist of the advantages that sellers already established in an industry have over the potential entrant. Such a barrier is generally measurable by the extent to which established sellers can persistently elevate their selling prices above minimal average costs without attracting new sellers. The barriers may exist because costs for established sellers are lower than they would be for new entrants, or because the established sellers can command higher prices from buyers who prefer their products to those of potential entrants. The economics of the industry also may be such that new entrants would have to be able to command a substantial share of the market before they could operate profitably. When they do occur, the monopoly that sets the price and supply of a good or service is called the price maker. Due to a lack of competition in the market and high barriers to entry, the company can inflate prices.
When a single seller supplies the entire output of an industry, and thus can determine his selling price and output without concern for the reactions of rival sellers, a single-firm monopoly exists. Standard Oil was an American oil producing, transporting, refining, and marketing company. Established in 1870, it became the largest oil refiner in the world.[100] John D. Rockefeller was a founder, chairman and major shareholder. The company was an innovator in the development of the business trust. The Standard Oil trust streamlined production and logistics, lowered costs, and undercut competitors. “Trust-busting” critics accused Standard Oil of using aggressive pricing to destroy competitors and form a monopoly that threatened consumers.
Monopolistic Markets: Characteristics, History, and Effects
- A monopolistic market is the opposite of a perfectly competitive market, in which an infinite number of firms operate.
- It is, hence, evident that the new entrant would be at a disadvantage in terms of production costs.
- Under monopoly, monopolist has full control over the supply of the commodity.
- Established in 1870, it became the largest oil refiner in the world.[100] John D. Rockefeller was a founder, chairman and major shareholder.
- In other words, under monopoly there is no difference between firm and industry.
De Beers settled charges of price-fixing in the diamond trade in the 2000s. De Beers is well known for its monopoloid practices throughout the 20th century, whereby it used its dominant position to manipulate the international diamond market. The company used several methods to exercise this control over the market.
A natural monopoly develops from reliance on unique raw materials, technology, or specialization. Companies with patents or extensive research and development costs, like pharmaceutical companies, are considered natural monopolies. Microsoft Corporation was the first company to hold a pure monopoly position on personal computer operating systems.
What Is a Monopoly? Types, Regulations, and Impact on Markets
Sometimes, a monopolist often sets the price of its product or service just above the average cost of production of the product/service. This is because if a competitor too decides to charge the same price for the commodity, the competitor will face losses as the cost of production for the monopolist is far lower than the competitor’s cost of production. The railroad industry is considered a monopolistic market due to high barriers of entry and the significant amount of capital needed to build railroad infrastructure. These factors stifled competition and allowed operators to have enormous pricing power in a highly concentrated market.Historically, telecom, utilities, and tobacco industries have been considered monopolistic markets. Nevertheless, governments often regulate private business behavior that appears monopolistic, such as a situation where one firm owns the lion’s share of a market. The FCC, World Trade Organization, and the European Union each have rules for managing monopolistic markets.
It sums up the squares of the individual market shares of all of the competitors within the market. Antitrust cases can be brought against companies who violate antitrust laws and prosecuted by state or federal governments. This can discourage other companies from behaving in ways that violate such laws and harm consumers. Consumers who suspect a company is violating antitrust laws can contact the Antitrust Division or Federal Trade Commission at the federal level. A local company operating within one state can be investigated by the Attorney General of that state. Historically, monopolistic markets arose when single producers received exclusive legal privileges from the government, such as the arrangement reached between the Federal Communications Commission (FCC) and AT&T between 1913 and 1984.
A monopoly exists when one supplier provides a particular good or service to many consumers ultimately allowing it to set the price and supply of a good or services. There are no products (or services) that match the offerings of the monopolist firm. The absence of close substitutes makes the demand for monopolist products relatively inelastic. The demand is inelastic when it does not change much with a change in the price of the product.
Market performance refers to the end results of these policies—the relationship of selling price to costs, the size of output, the efficiency of production, progressiveness in techniques and products, and so forth. Since some goods are too expensive to transport where it might not be economic to sell them to distant markets in relation to their value, therefore the cost of transporting is a crucial factor here. Other factors might be legal controls which restricts an undertaking in a Member States from exporting goods or services to another. A monopolist can extract only one premium,[clarification needed] and getting into complementary markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem is not true if customers in the monopoly good are stranded or poorly informed, or if the tied good has high fixed costs.
Due to this, these scarce but essential resources are made unavailable to the potential entrants. The term “monopoly” originated in English law to describe a royal grant. Such a grant authorized one merchant or company to trade in a particular good while no other merchant or company could do so.
Monopoly Equilibrium and Laws of Costs:
Inelastic demand refers to the situation in which consumers must have to buy the commodity what-so-ever may be the price. On the other hand, if demand is elastic, the monopolist will fix low price per unit. The decision regarding the determination of equilibrium price in the long run depends on the elasticity of demand and effect of law of costs on monopoly price determination.
