A business situation where there is only one supplier of a good or service. This is unusual except where there is only one possible source of supply (natural monopoly) or the state excludes competition (eg in postal services). In economics, the term refers to a lack of competition. Monopoly is often opposed, as it is believed to result in excessive prices, either to boost profits or because of a lack of incentive to keep down costs through efficient or innovative operations. Monopoly is defended where there are large economies of scale, or it is thought that profits will help consumers in the long run by financing research. A bilateral monopoly exists when there is both only one buyer and only one seller of a good. This is even rarer than monopoly.
In economics, a monopoly (from the Latin word monopolium - Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service.
Monopoly should be distinguished from monopsony, in which there is only one buyer of the product or service; In a monopoly a single firm is the sole provider of a product or service;
Forms of monopoly
Monopolies are often distinguished based on the circumstances under which they arise;
Legal monopoly, statutory monopoly, or de jure monopoly
Main article: legal monopoly
A form of monopoly based on laws explicitly preventing competition is a legal monopoly or de jure monopoly. When such a monopoly is granted to a private party, it is a government-granted monopoly; when it is operated by government itself, it is a government monopoly or state monopoly. A government monopoly may exist at different levels (eg just for one region or locality); a state monopoly is specifically operated by a national government.
An example of a monopoly is AT&T, which was granted monopoly power by the US government, only to be broken up in 1982 following a Sherman Antitrust suit. Another example is the United States Post Office which has a legally protected monopoly on nonurgent letter mail delivery.
In many countries, almost all public utilities operate as monopolies granted by state and local governments. It is believed by some that these services must be provided through legal monopoly because the costs to a nation or economy to have multiple providers is greater than the cost of only having one provider (see natural monopoly).
Governments grant legal monopolies in the form of patents, trademarks, and copyrights.
Laws Against Monopolies
The barriers for business or organizations to become a monopoly are great.
Efficiency monopoly
An efficiency monopoly (or monopoly of efficiency) exists because one firm is doing such a good job at satisfying consumers, that no one is willing to buy competing products offered by other firms.
Natural monopoly
Main article: Natural monopoly
The term natural monopoly is used to refer to two different things. This has been a source of some ambiguity in discussions of "natural monopoly." Unlike in the ordinary understanding of a monopoly, a natural monopoly situation does not mean that only one firm is providing a particular kind of good or service. Rather it is the assertion about an industry, that multiple firms providing a good or service is less efficient (more costly to a nation or economy) than would be the case if a single firm provided a good or service. There may, or may not be, a single supplier in a natural monopoly industry. Claims of natural monopoly are often used to justify the creation of statutory monopolies, where government prohibits competition by law.
Local monopoly
A local monopoly is a monopoly of a market in a particular area, usually a town or even a smaller locality: the term is used to differentiate a monopoly that is geographically limited within a country, as the default assumption is that a monopoly covers the entire industry in a given country. This may include the ability to charge (to some extent) monopoly pricing, for example in the case of the only gas station on an expressway rest stop, which will serve a certain number of motorists who lack fuel to reach the next station and must pay whatever is charged.
Coercive monopoly
Main article: coercive monopoly
In economics and business ethics, a coercive monopoly is the exclusive control over a vitally needed resource, good, or service such that the community is at the mercy of the controller. A coercive monopoly may be result of legal prohibitions against competition by the establishment of a statutory monopoly.
Horizontal versus vertical monopoly
Large corporations often attempt to monopolize markets through horizontal integration, in which a parent company consolidates control over several small, seemingly diverse companies (sometimes even using different branding to create the illusion of marketplace competition). Such a monopoly is known as a horizontal monopoly. A monopoly arrived at through vertical integration is called a vertical monopoly.
Economic analysis
Primary characteristics of a monopoly
Single Sellers A pure monopoly is an industry in which a single firm is the sole producer of a good or the sole provider of a service. No Close Substitutes The product or service is unique in ways which go beyond brand identity, and cannot be easily replaced (a monopoly on water from a certain spring, sold under a certain brand name, is not a true monopoly; Price Maker In a pure monopoly a single firm controls the total supply of the whole industry and is able to exert a significant degree of control over the price, by changing the quantity supplied (an example of this would be the situation of Viagra before competing drugs emerged). In subtotal monopolies (for example diamonds or petroleum at present) a single organization controls enough of the supply that even if it limits the quantity, or raises prices, the other suppliers will be unable to make up the difference and take significant amounts of market share. Depending upon the form of the monopoly these barriers can be economic, technological, legal (e.g.Price setting for unregulated monopolies
In economics a company is said to have monopoly power if it faces a downward sloping demand curve (see supply and demand). A price taker cannot choose the price that they sell at, since if they set it above the equilibrium price, they will sell none, and if they set it below the equilibrium price, they will have an infinite number of buyers (and be making less money than they could if they sold at the equilibrium price). In contrast, a business with monopoly power can choose the price they want to sell at.
In most real markets with claims, falling demand associated with a price increase is due partly to losing customers to other sellers and partly to customers who are no longer willing or able to buy the product. In a pure monopoly market, only the latter effect is at work, and so, particularly for inflexible commodities such as medical care, the drop in units sold as prices rise may be much less dramatic than one might expect.
If a monopoly can only set one price it will set it where marginal cost (MC) equals marginal revenue (MR) as seen on the diagram on the right. This can be seen on a big supply and demand diagram for many criticism of monopoly. The offensive monopoly gains is the shaded in area labeled profit (note that this diagram looks only at the case where there is no fixed cost.
As long as the price elasticity of demand (in absolute value) for most customer is less than one, it is very advantageous to increase the price: the seller gets more money for less goods. With an increase of the price, the price elasticity tends to rise, and in the optimum mentioned above it will be above one for most customers. A formula gives the relation between price, marginal cost of production and demand elasticity which maximizes a monopoly profit: (known as Lerner index). The monopolist's monopoly power is given by the vertical distance between the point where the marginal cost curve (MC) intersects with the marginal revenue curve (MR) and the demand curve. The longer the vertical distance, (the more inelastic the demand curve) the bigger the monopoly power, and thus larger profits.
The economy as a whole loses out when monopoly power is used in this way, since the extra profit earned by the firm will be smaller than the loss in consumer surplus.
Calculating monopoly output
The single price monopoly profit maximisation problem is as follows:
The monopoly's profit is its total revenue less its total cost. Let the price it sets as a market response be a function of the quantity it produces (Q) P(Q) and let its cost function be as a function of quantity C(Q). The monopoly's revenue is the product of the price and the quantity it produces. Hence its profit is:
Taking the first order derivative with respect to quantity yields:
Setting this equal to zero for maximisation:
i.e. marginal revenue = marginal cost, provided
(the rate of marginal revenue is less than the rate of marginal cost, for maximisation).
This procedure assumes that the monopolist knows exactly the demand function.
Monopoly and efficiency
In standard economic theory (see analysis above), a monopoly will sell a lower quantity of goods at a higher price than firms would in a purely competitive market. In this way the monopoly will secure monopoly profits by appropriating some or all of the consumer surplus, as although the higher price deters some consumers from purchasing, most are willing to pay the higher price.
It is also often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they don't have to be efficient or innovative to compete in the marketplace. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition, because of the risk of losing that monopoly to new entrants. For example, a canal monopoly in the late eighteenth century United Kingdom was worth a lot more than in the late nineteenth century, because of the introduction of railways as a substitute.
Some argue that it can be good to allow a firm to attempt to monopolize a market, since practices such as dumping can benefit consumers in the short term; (This is a rather optimistic view of how effectively regulation can substitute for competition.) When monopolies are not broken through the open market, often a government will step in to either regulate the monopoly, turn it into a publicly owned monopoly, or forcibly break it up (see Antitrust law). AT&T and Standard Oil are debatable examples of the breakup of a private monopoly.
The mathematician Harold Hotelling came up with Hotelling's law which showed that there exist cases where monopoly has advantages for the consumer. Advocates of laissez-faire capitalism, such as the Austrian school, maintain that a salt monopoly would never develop without such government intervention. Retrieved on October 2006. “A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes and in which is very difficult or impossible for another firm to coexist” ^ Competition, Interconnection, and Monopoly in the Making of the American Telephone System, American Enterprise Institute (1998), p.
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