Have you heard the term “monopoly” used when people are talking about companies and markets and thought to yourself, “What is that?”. Accordingly, this article will go over what a monopoly is and the different types and impacts it has on the markets and economies of countries.
What is a monopoly?
A monopoly is a market structure in which a single seller or producer is in an authoritative position in an industry or a sector. They are not accepted in markets as they can smother other competition. From an antitrust perspective, a company controlling 25% or more of the market has isdeemed a monopoly.
Different types of monopolies:
- The Pure Monopoly: A pure monopoly is a single seller in a market with high barriers to entry, such as high startup costs. Ex: Microsoft Corporation.
- Monopolistic Competition: This is when there are multiple sellers in an industry with similar substitutes.
- The Natural Monopoly: A natural monopoly develops in reliance on unique raw materials, technology, and specialization. Ex: Companies that have patents.
- Public Monopolies: They provide essential services and goods, such as the utility industry, as only one company commonly supplies energy or water to a region. The monopoly is allowed and heavily regulated by government districts.
Pros and Cons of a monopoly:
Pros:
- Stability of Prices: With no competition, there is no possibility of price wars.
- The ability to scale up: A company that holds a monopoly on a certain type of product may be able to produce mass quantities of that product at lower costs per unit.
- Budgets for research and development: Monopolies are more likely to feel safe investing in research and development. This can lead to new products and manufacturing efficiencies that may benefit consumers..
Cons:
- Increased prices: When a single firm serves as the price maker for an entire industry, prices typically rise. If there is a pure monopoly within an industry, the higher the consumer's average price of goods and services.
- Inferior products: Monopolistic firms have minimal incentive to improve the quality of the goods and services they provide.
- Price discrimination: A monopolistic company may find it easy to discriminate, where they charge different prices for different consumers.
How a monopoly ends:
In most democracies, such as the United States, governments have broken up monopolies because companies lack interest in meeting with customer’s interests. One of the famous examples of a monopoly dissolving was the breakup of At&T. It was agreed on in 1982 and took effect in 1984.
Conclusion:
A monopoly is a single producer which dominates the market and swiftly wipes out its competition. It can decide price changes and creates barriers. Henceforth, antitrust legislation has been implemented to limit monopolies, showing just how powerful and destructive they can be.
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