Factors Affecting Monopoly Market - Essay Example

?The market in which organisations operate is characterised by various factors. Some of the factors that characterise the market include the following: product type, control over the price of the product, number of competitors as well as barriers to entry into the market. In some instances, the demand of certain products characterises that nature of completion that exists as well as products offered. These factors shape the structure of the market and in some cases, there can only be a single player offering a particular product or service in the whole market which can be defined as a monopoly market. This mainly depends on the type of the product or service offered. As such, this essay seeks to explain different factors that cause a monopoly market. It also seeks to discuss the benefits of a natural monopoly in the market with regards to the type of products offered. A monopoly market can be defined as a market environment where only one single supplier operates in that particular market and there is no close substitute to the products or services offered (Roos, 2008). A monopoly usually exists in electricity as well as postal services industry. In such kinds of industries, the government has power to control them to protect the interests of the consumers. A good example of a natural monopoly is Australia Post which offers different postal services as well as stationary to different customers. This industry is regulated by the government and it is responsible for setting prices for different products offered. In this case, it can be noted that the government is responsible for creating the monopoly in the postal industry so as to safeguard the interests of the people at large. Usually, confidential documents are conveyed to different destinations inside as well as outside the country hence there is need for this industry to be regulated by responsible authorities to avoid irregularities in handling different postal orders. In the event that some orders have been lost, it becomes easier to trace them given that there will be only a single player in the industry with clearly defined channels of delivering different postal orders. The other factor that may also contribute to the growth of the monopolist market is that this is a service industry which ought to meet the needs and interests of the people at a subsidised rate whereby the price of services offered will be determined by the responsible authorities. If there are many players in this particular industry, the competition that will arise can cause the prices to increase such that they will expensive to many people. The other aim is to maintain the quality whereby there will be few players in the industry. In most cases, it is the government which creates a monopoly market to satisfy the different needs of different consumers. There will be laws that are meant to guide the provision of certain products and services to the customers. A natural monopoly is usually regulated by the government to ensure that the industry conforms to the expected standards of operation. In some cases, a monopoly market can be caused by rising factors of production if it is a manufacturing industry. Information about some of the factors that give rise to a monopoly market can be viewed at < http://www.referenceforbusiness.com/encyclopedia/Clo-Con/Competition.html >. If the factors of production are very high, some players in the industry will be eliminated and only big organisations that are able to reap economies of scale from their operations are able to survive in that market which creates a monopoly. If other players are not able to meet the operational costs, the result is that they fold their business and only established organisations can continue to operate. The other factor that may cause a monopoly market is that certain products and services need to be regulated and controlled so that they conform to the expected standards by the regulatory authorities. In some cases, only one company will have great control of the supply of all the required material in manufacturing of a particular product. Given such a scenario, where there is no any other organisation with the power to access the materials needed, only one company will end up operating in that particular market which gives rise to a monopoly. However, there are different benefits of a natural monopoly. The main benefit of natural monopoly is that the single player in the market has the power to control the price of the product or service offered. Usually, under a government regulated monopoly, the essence is to safeguard the interests of the consumers such that they are not taken for granted by the different firms operating in the same industry whereby they can overcharge the different products and services which should be accessed at a reasonable price (Roos, 2008). In the case of postal services being regulated by the government, measures will be put in place to ensure that the consumers are not abused by various actors in the industry. Under normal circumstances, the government put measures to protect the interests of the consumers in certain cases where the products or services offered are considered as basic to human life hence the need to regulate them such that they can be affordable to the majority of people regardless of their levels of income. The government can set the price below the cost because the product is very important to the buyers who cannot afford to pay the full cost (Kotler & Armstrong, 2004). Usually, the government permits the company to set rates that will yield a fair return while the company continues to operate viably. The main benefit of a government regulated monopoly is that the consumers are cushioned from exorbitant prices that may be charged by the other greedy firms. The other benefit is the existence of barriers to entry into the market by the other firms which may not meet the standard expectations of the products offered. In some markets such as defence, railroad transport as well as electricity, production needs a huge capital injection that can be raised by only one big firm in the market under the assistance of the government which entails that it will be difficult for other small actors to penetrate the market (Roos, 2008). In order to ensure that quality is maintained in such kinds of products or services offered, there is need to regulate the market such that smaller industries that may end up offering substandard products and services are kept at bay. In some markets such as electricity supply and railroad transport, it is possible to minimise the operational costs in the long run especially at a very large output level. It is difficult for a new supplier to start with a very large output level which is an added advantage to the established firms to continue offering quality products and services that meet the expected standards. As such, the law prevents unqualified people from entering certain markets for the benefits of the majority of people whose interests are represented by the government. This is also a benefit to the single player in the market as the firm can continue gaining profits as a result of the fact that there are few players in the same industry. A monopolist may also keep the price of the products and services low to discourage the potential entrants into the industry from penetrating the market. The other benefit to the monopolist is that the suppliers demand is exactly the same as the market demand because the monopoly supplier is the only supplier in the market (Roos, 2008). In other words, there are limited chances of producing excessive products that may end up failing to attract buyers which can impact negatively on the operations of the organisation. Since the monopolist controls the whole industry, the demand curve is downward sloping which entails that the monopolist can increase price by minimising the output (Roos, 2008). As shown in fig 1 below, if the price of electricity increases, the consumers try to save electricity and demand less electricity. For instance, if the price is $85, only 5000 units will be demanded by the consumers and if the price is lowered say to $20, about 20 000 units will be demanded by the consumers. Basically, there is upward and downward movement along the demand curve depending on the price charged by the monopolist. Fig 1 Demand curve for a monopolist Source: The monopolist can also maximise the profits where it will supply an output level where marginal cost (MC) equals marginal revenue (MR) (Roos, 2008). As illustrated in fig 2 below, it can be noted that where the MC curve intersects with the MR curve, the monopolist will be in a position to maximise profits and remain viable in the market. Fig 2 Monopoly profit maximisation Source: Over and above, it can be noted that there are various factors that cause a monopoly market such as government regulation. There are also several benefits to the monopolist as well as consumers of a natural monopoly. The monopolist can enjoy operating in a competitive free environment which can enable it to maximise profits while the interests of the customers will be safeguarded such that they are not abused by other unscrupulous operators in the market. References Benassy, JP 1988, ‘The Objective Demand Curve in General Equilibrium with Price Makers,’ The Economic Journal, Vol. 98, No. 390, Supplement: Conference Papers. (1988), pp. 37-49, viewed 20 April, 2011, Kotler, P & Armstrong G 2004, Principles of Marketing, Pearson Education International, NJ. Monopoly profit maximisation, viewed 20 April, 2011, http://faculty.lebow.drexel.edu/McCainR//top/Prin/txt/Monch/mon18.html > Reference for business, Encyclopaedia for business, 2nd Edition, viewed 20 April, 2011, Roos, A 2008, Economics: An introduction, Heinemann, JB. Read More

 

Read More