Monopoly and Monopoly Market: Benefits of a Natural Monopoly - Coursework Example

Monopoly and monopoly market Benefits of a natural monopoly [Pick the Contents Contents 2 Monopoly and monopoly market 3 Monopoly 3 Explanation 4 Characteristics of a monopoly 4 Existence of single seller: 4 Power of market: 4 Industry: 5 Price discrimination: 5 Types of monopoly 5 Government Monopolies 5 Natural monopoly 6 Benefits of a natural monopoly 6 Prevention of waste of resources: 6 Economies of Scale: 7 Efficiency: 8 Reduction in cost: 8 Conclusion 8 Works Cited 9 Monopoly and monopoly market The monopoly and the monopoly market is defined and elaborated along with the factors that cause a monopoly market to come into being. Monopoly Monopoly is a Greek word and means single or alone. It comes into existence when a particular or a venture gains adequate control and leverage of a particular service or a product that it becomes strong enough to dictate terms through which a consumer will gain access. In other words, it exists in circumstances where a particular company, firm or a group of companies or firms owns all or almost the entire share of the market for a particular type of product or service and there is no existence of competition. (Investopedia, 2011) The term "monopolise" defines the process through which a company achieves determinedly a greater share of market than the share which is probable under the circumstances of a perfect competition. Therefore, the lack of competition in the production of such a product of offer such service and even a substitute causes a monopoly. A monopoly frequently causes inflation and inferior quality of products as the company or group has the right to dictate terms for it. Explanation A monopoly must not be confused with the term monopsony. Monopsony is where there exists a single buyer of a service or product but there can be a situation where there is a monopsony charge of a market along with the existence of monopoly as well. The market players of the monopoly market are known as monopolists. The monopolists tend to manufacture fewer goods or generate limited service in order to limit the supply of the goods and services which in return increases the demand and this they offer them at a greater price as compared to perfect competition that results in an abnormal and constant profit throughout. Characteristics of a monopoly The characteristics of a monopoly discriminate it from other market competitions. The main characteristics of monopoly are given below: Existence of single seller: In a market where there is a monopoly, there will be only a single seller who will dominate the market. The lone seller will serve the whole market and the industry, as well, will be same as the seller. Power of market: It is the capability to influence the provisions and circumstances of the trade in order to determine the price of the product. The power of the market rests with the monopolist but the monopoly faces a demand curve which is negatively sloped as its power is confined through the market’s demand side. Industry: The firm that exists in a monopoly constitutes an industry itself as the company is the lone controller. This why there is no discrimination in an industry or a firm in a monopoly market. Price discrimination: This is the most important characteristic of monopoly. The monopolist has the authority to increase or decrease the price of the product or service that he offers and can also alter the quality. A monopolist trades more quantity while he charges a low price for a product in a market which is extremely elastic and trades less quantity in a less elastic market while he charges a higher price. Types of monopoly There can be numerous types of monopolies that take the shape of a market where there is no competition and a lone market player controls the market structure along with the output and price. The most basic two types of monopolies are defined as under. Government Monopolies Occasionally governments may pass such regulations which reserve a particular business, trade, industry, service or product to be generated by the government agencies and due to such regulations, no other private entity has the right to carry on such trade or business. As an example, usually the government has the responsibility and charge of supply of water or to fit the sewerage lines through a city. Therefore, the legal barriers stop other corporations from carrying on such a business or compete with the government. Natural monopoly This is a kind of monopoly that takes place when the industry type makes it impossible, financially, for other companies to carry on or start that particular business. (Kennan, 2010) It can be said that there is a "natural" cause for some industries to be a monopoly. This is because the economies of scale can accommodate a single firm in stead of a number of firms. For example, if there are several companies that are offering electricity supply to the consumers as well as the industry, it would become difficult to have several cables of electricity running through the city. This is why the, mostly, the utility companies have their monopoly. Benefits of a natural monopoly It is considered that the monopoly is harmful for the market as it gets the right to set the price and thus it can control and manipulate the whole market. The price fixation goes into the hands of the monopolist and therefore the consumer can be subjected to a price hike. Conversely, there are several benefits of a natural monopoly which are explained in details below: Prevention of waste of resources: Monopolies usually occur in the industries where there is provision of utilities such as electricity, gas, water and telephone etc. It is presumed that it would be a hectic exercise for two different companies to build a separate water and sewerage system throughout the city because in industries of supply of utilities, there has to be a network which supplies the resources to the whole city and if there would be several companies involved in the supply, it would require huge cost to set up the whole network. In case there is a loss in the market share by a monopolist, due to the authorities of competition which make efforts to split the monopoly, there will be a case that the suppliers of smaller-scale will manufacture at total average cost that is greater than that of the existing monopoly, which will cause wastage of limited resources. (Riley, 2006) Economies of Scale: A natural monopoly will be in a superior position to take advantage of the economies of scale letting to an equilibrium that produces a greater output and a lesser price than a market under perfect competition. The benefits of the economies of scale can be illustrated from the diagram and explanation given below: It can be seen that when the seller is a monopolist, he is able to use the economies of scale to his advantage and in the long run he can lower the marginal costs which makes the equilibrium output D2 and thus the prices of the product are also below the prices that will be offered in perfect competition. (Riley, 2006) Therefore, a natural monopoly can put down any of its rivals by the utilization of the economies of scale on the basis of its cost. Efficiency: In the long run, in case of rapid rate of developments in the technology, firms will be able to make abnormal profits that will tend to diminish their costs and will be able to produce products of better quality for consumers. The monopolist, in the long run will invest marginally more in the development and enhancement as it will have more capital to do so and thus the efficiency will increase and will lower the cost of production. Reduction in cost: A natural monopoly is able to produce enough output and supply it to meet the demand of the market at a cost that is lower than that of the small firms or that in the perfect competition market. (Hirschey, 2009) The fixed cost of the monopoly is much lower than that of the fixed costs of several firms under perfect competition or even under oligopoly. Since the fixed costs are lowered, the marginal total cost of the product is also diminished. Conclusion Even though, monopoly is taken as harmful for the economy as the monopolist can manipulate the market and can raise prices but there are also some advantages that accrue due to the existence of monopoly. Therefore, in the long run, the consumers get goods at a lower price with greater quality as it brings economies of scale to use. Works Cited Hirschey, Mark. Fundamentals of Managerial Economics. 2009. Investopedia. 2011. http://www.investopedia.com/terms/m/monopoly.asp [accessed April 2011]. Kennan, Mark. “Types of Monopolies in Economics.” E-how, 2010. Riley, Geoff. “Monopoly & Economic Efficiency.” Markets & Market Systems , 2006. Read More