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Monopoly and competition Definition, Structures, Performance, & Facts

Monopoly and competition Definition, Structures, Performance, & Facts

As of 2022, its desktop Windows software still held a market share of 75%. A monopoly is a business that is characterized by a lack of competition within a market and unavailable substitutes for its product. Monopolies can dictate price changes and create barriers for competitors to enter the marketplace.

Governments also provide patent protection to inventors of new products or production methods in order to encourage innovation; these patents may afford their holders a degree of monopoly power during the 17-year life of the patent. Suppose there are 12 firms, each operating at the scale shown by ATC1 (average total cost) in Figure 10.1 “Economies of Scale Lead to Natural Monopoly”. A firm that expanded its scale of operation to achieve an average total cost curve such as ATC2 could produce 240 units of output at a lower cost than could the smaller firms producing 20 units each.

The U.S. Department of Transportation has broad responsibilities for the safety of travel for railroads while the U.S. Department of Energy is responsible for the oil and natural gas industries. The Monopoly board game was the brainchild of Charles B. Darrow, an unemployed heating engineer who sold the concept of the game to Parker Brothers in 1935. Sunk costs are those which cannot be retrieved in the case a firm shuts down. These are costs that are essential for the firm, like advertising costs, but cannot be recovered. The greater the cost of establishing a new business in an industry, the more difficult it is to enter that industry.

Magie used the Landlord’s Game to promote a remedy for such exploitation—namely, the single tax on property owners, a leading social issue among those who criticized land speculation as a cause of economic injustice. Conversely, a company that dominates a sector or industry can use its advantage to create artificial scarcities, fix prices, and provide low-quality products. Consumers must trust that a monopoly operates ethically due to limited or unavailable substitutes in the market. Monopolies typically reap the benefit of economies of scale, the ability to produce mass quantities at lower costs per unit. Companies become monopolies by controlling the entire supply chain, from production to sales through vertical integration, or buying competing companies in the market through horizontal integration, becoming the sole producer.

Before then, homemade versions of a similar game had circulated in many parts of the United States. Most were based on the Landlord’s Game, a board game designed and patented by Lizzie G. Magie in 1904. Notably, the version Magie originated did not involve the concept of a monopoly; for her, the point of the game was to illustrate the potential exploitation of tenants by greedy landlords.

There are three conditions that must be present for a company to engage in successful price discrimination. First, the company must have market power.[51] Second, the company must be able to sort customers according to their willingness to pay for the good.[52] Third, the firm must be able to prevent resell. A pure monopoly is a single seller in a market or sector with high barriers to entry such as significant startup costs whose product has no substitutes.

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. Hence, they find it difficult to capture market share for the product and service that they offer. When it is said that the production of a certain commodity has become efficient, it means that the firm does not have to spend large amounts on the cost of production.

  1. For instance, multiple utility companies wouldn’t be feasible since there would need to be many distribution networks such as sewer lines, electricity poles, and water pipes for each competitor.
  2. Due to this phenomenon, the output generated by a monopolist is large, with lesser input cost.
  3. Another important basis for monopoly power consists of special privileges granted to some business firms by government agencies.
  4. In Boston, Red Sox baseball tickets can only be resold legally to the team.
  5. The inability to prevent resale is the largest obstacle to successful price discrimination.[47] Companies have, however, developed numerous methods to prevent resale.
  6. A natural monopoly develops in reliance on unique raw materials, technology, or specialization.

Even though this type of monopoly is allowed to exist, the barriers for potential rivals to enter the market can be high. Some of the most common examples of natural monopolies include utilities and railroads. One of the benefits of natural monopolies comes from the use of an industry’s limited resources efficiently to offer the lowest unit price to consumers. They can serve a good purpose when a single company can supply a product or service at a lower cost than anyone else, and at a volume that can service an entire market. Monopoly and competition, basic factors in the structure of economic markets. In economics, monopoly and competition signify certain complex relations among firms in an industry.

Characteristics of a monopoly

But the industry is heavily regulated to ensure that consumers get fair pricing and proper services. The natural monopoly of a single large producer is also the most economically efficient way to produce a good or service in question. This is not due to large-scale fixed assets or investments but can be the result of the simple first-mover advantage, increasing returns to centralizing information and decision-making, or network effects. An example is electricity transmission where once a grid is set up to deliver electric power to all of the homes in a community, putting in a second, redundant grid to compete makes little sense.

What Is a Monopoly? Types, Regulations, and Impact on Markets

Economists have identified a number of conditions that, individually or in combination, can lead to domination of a market by a single firm and create barriers that prevent the entry of new firms. As was the case when we discussed perfect competition in the previous chapter, the assumptions of the monopoly model are define monopoly rather strong. In assuming there is one firm in a market, we assume there are no other firms producing goods or services that could be considered part of the same market as that of the monopoly firm. In assuming blocked entry, we assume, for reasons we will discuss below, that no other firm can enter that market.

Natural monopoly

If a particular firm owns all of an input required for the production of a particular good or service, then it could emerge as the only producer of that good or service. A firm that sets or picks price based on its output decision is called a price setter. We shall see in the next chapter that monopolies are not the only firms that have this power; however, the absence of rivals in monopoly gives it much more price-setting power. It arises when a monopolist has such significant market power that it can restrict its output while increasing the price above the competitive level without losing customers.[82] This type is less concerned by the Commission than other types.

In a general equilibrium context, a good is a specific concept including geographical and time-related characteristics. Most studies of market structure relax a little their definition of a good, allowing for more flexibility in the identification of substitute goods. Consumers who suspect a company is violating antitrust laws can contact the Antitrust Division https://1investing.in/ or Federal Trade Commission at the federal level. A local company operating within one state can be investigated by the Attorney General of the state. Congress to limit «trusts,» a precursor to the monopoly, or groups of companies that colluded to fix prices. This act dismantled monopolies including Standard Oil Company and the American Tobacco Company.

There are no close substitutes for the good or service a monopoly produces. Not only does a monopoly firm have the market to itself, but it also need not worry about other firms entering. In the case of monopoly, entry by potential rivals is prohibitively difficult.

By cutting its price below the minimum average total cost of the smaller plants, the larger firm could drive the smaller ones out of business. In this situation, the industry demand is not large enough to support more than one firm. If another firm attempted to enter the industry, the natural monopolist would always be able to undersell it.