How Are Monopolies Achieved

Published Date: 02 Nov 2017

Essay on Monopoly

Group Members

Mohiuddin Abro

Daniyal Abbas Khan

Waleed Chohan

Adeel Usman

Tayyab Ghani

WHAT IT ACTUALLY IS?

A monopoly has many definitions. It can be a company, institute, or an organisation which is the dominant seller of goods and services in the marketplace. According to Alain Anderton, a Monopoly When there is no involvement by the government for regulation, a monopoly company is free to set any price and it commonly chooses the highest level of profit possible. One thing that should be noted is that it is not necessary that a monopoly becomes profitable as compared with the other members. If enough rivals businesses enter, they will compete among themselves and ultimately drive down monopoly power. Some prominent examples of Monopolies are Microsoft in Computer Operating Systems, Major League Baseball and National Football League in United States.

MONOPOLIES’S Main Characteristics

• It is one single seller

• High barriers to entry keep other firms from entering the industry

• There is no second alternative that is available in te market for its product. A monopoly industry can consist of one firm or a number of organisations that operate and make decisions together for their own benefits.

HOW ARE MONOPOLIES ACHIEVED?

Monopolies appear through three basic broad mechanisms –

Through legal action, the state can carry out a decision to make monopolies in the market. Competition can be made illegal. A real-life example of this is in England where prescription drugs are sold by pharmacies in accordance with the law.

Monopolies can also be created by the buying o resources available in a marketplace to create a good or service. For example, An aeroplane company can buy the flying rights to operate from an isolated region to a urban one – e.g From Moscow to Alaska.

Unethical competition practices can also be performed by monopolist companies. A bus coach with a monopoly on a road route may cut down their bus fare when a new challenger comes in the market.

PRICE AND PROFITS IN MONOPOLY

When there is a lack of government involvement and clear laws, monopolists can manipulate the prices and choose to set them whatever they want. For example, they can choose to keep the price of a toothpaste Rs.20 or Rs.40. However, monopolist companies can get a falling demand curve as higher prices will result in lowering demand in the market.

However, firms are careful here not to keep a very unreasonable price as it will lead to less profit. The highest price does not necessarily mean it’s the profit maximising price. For example, a biscuit company might charge Rs.20 for a packet that costs Rs.12 for which sales are 1 million units. A profit is made of Rs.8 per unit – Rs.8 million. But it might be able to sell till 2 million if they slash one unit’s price to Rs.17. This kind of profit generated is more than likely to be abnormal profit – it is higher than normal profit.

Assuming that the firm aims to maximize profits (where MR=MC) we establish a short run equilibrium as shown in the diagram below.

The profit-maximizing output can be sold at price P1 above the average cost AC at output Q1. The firm is making abnormal "monopoly" profits (or economic profits) shown by the yellow shaded area. The area beneath ATC1 shows the total cost of producing output Qm. Total costs equals average total cost multiplied by the output.

Natural monopolies

There are instances where some companies are said to be called Natural monopolies. A monopoly is natural if one firm in the market can make goods or provide services at a lower cost than competing rival firms. A natural monopoly results when amount for making goods are decreasing in the favour of a firm that can also result in bulk production (economies of scale) or in the scope of its products or services (economy of scope). In natural monopoly, a firm owner will likely raise his production costs because he does not have a problem with efficiency and is more interested in profit maximisation.

Talking about economics of scale in marketing, marketing costs like advertising and promotional activities are usually lower per unit sold which results in greater volume in sales. For example, an advertisement’s cost will remain the same no matter how many sales it helps generate. A cost of a shopping catalogue distributed among consumers will remain the same regardless of a consumer ordering an item or not.

Small organisations commonly find problems to raise money for a new investment. Loans that are given out are charged to them at relatively big interest rates because banks realise that small businesses have a big risk of failure as compared to Large businesses. Large organisations have a greater advantage when raising money and will find it cheaper than small companies.

A natural monopoly can also result if having more than one supplier of services and goods would result in an uneconomical duplication of facilities. For example Local electricity systems within cities such as K.E.S.C in Karachi may remain a monopoly through government intervention on purpose to avoid duplicate sets of distribution wires. It is not compulsory that this reasoning will be implemented on other sectors, such as the telecommunications industry, as basic cable and wireless systems provide a choice to the viewers. Also, a natural monopoly would not necessarily result in economic inefficiency.

Market failures can result from costs associated with making market transactions. To the extent consumers and producers incur costs in becoming informed about market opportunities and completing market transactions, markets will not perform efficiently. Regulation to reduce those transactions costs then can improve efficiency. For example, in the auto industry global auto emissions standards can enhance efficiency, as auto producers would not have to produce different models for different states.

As an example, a common problem in markets is the incentive for sellers to shirk on the quality of the goods or services they sell. When quality can only be observed through use, a seller may have an incentive to shirk. As long as a high quality good is more costly to produce than a low-quality good and a consumer cannot tell the difference until after it is purchased, the seller's strategy can be to cut back on quality.

Markets however can resolve some of these problems. For example, If consumers can sully the reputation of the firm by informing other consumers that the firm shirked on quality, consumers will not purchase from that firm.

Source for Natural monopoly -

(http://www.naruc.org/international/Documents/S4%20-%20Hodge.pdf)

Government Intervention in Monopoly

Governments are able to use a number of different policies to attempt to correct market failures caused by monopolies.

Taxes – When firms start earning abnormal profits, the state can use direct action and tax their earnings on these profits, but this will not increase efficiency. As a consequence, No incentives will be given out to monopolist firms to lower their product’s prices.

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