Monday, July 18, 2016

Monopoly

A Monopoly is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service, or is the sole provider of a good or service in an industry. This potentially allows that company to become powerful enough to prevent competitors from entering the marketplace, leading to Limited Consumer Choice, Higher Prices and Limited Response to Customer Concerns.
Many times when a Government determines that an unfair monopoly is in place, it can step in enforce Anti-Trust laws, which can penalise companies monetarily or even force the break up of the company.
Monopolies can form for a variety of reasons, as following
If a firm has exclusive ownership of a scarce resource.
Governments may grant a firm monopoly status for some period of time. The reasoning behind such Monopolies is to give innovators some time to recoup, what are often large Research & Development costs.
Producers may have patents over designs, or copyright over ideas, characters, images, sounds or names giving them exclusive rights to sell the good or service.
Monopolies are thus characterised by a Lack of Economic Competition to produce goods or service, a Lack of Viable Substitute Goods, and the possibility of High Monopoly Price well above the firm's marginal cost that leads to High Monopoly Profit.

Key Characteristics of Monopoly Market Structure


Lack of Competition

A Monopoly is a single seller of a good or service for which substitutes are not readily available. Hence it faces little or no competition in it's industry.

Monopoly Firm as the Price Maker

As the Monopoly firm has full control of the market, it is able to set the price and supply and the terms of exchange of it's goods independently without any interference. This characteristics makes it Price Maker.

Profit Maximizer

A Monopoly has full control both over the quantity produced and the price charged, hence it acts as a Profit Maximizer and is able to change the supply and price of a good or service to generate profits. It can find the level of output that maximises it's profit by determining the point at which it's marginal revenue equals to it's marginal cost.

Super Normal Profits in the Long Run

Monopolies can make Super Normal Profits in the long run. In general, the level of profits depends upon the degree of competition in the market, which for a pure Monopoly is zero. With no close substitutes, the Monopoly can derive Super Normal Profits.

High Barriers to Entry & Exit

Legal rights, Intellectual property rights, patents and copyrights give Monopolies exclusive control of the production and selling of certain goods.