Causes that Lead to Monopoly - Essay Example

Monopoly is an economic environment where commodities or services are supplied by a single company or producer in a market in which there are no other competitors who supply the same commodities or services. The company or producer who supplies the goods or services is generally in a position to determine the price and to regulate it and there would be no possibility for the competitors to enter the market. In order to enjoy the status of monopoly in an industry or market, the producer should be in a position to influence the resources that are required in the production of specific goods (Peterson, Monopoly, 2005). The producer should have the necessary infrastructure that includes technology and other requirements which enable them to produce the specific goods or services and sell them at a reasonable price. This situation can be construed as a natural monopoly because the competitors cannot produce such commodities with patented technological capability, which they cannot acquire. The producer will have an exclusive control over a patent with regard to the manufacturing process of a specific product. Moreover, a company may be granted a right to produce a commodity or service by the government (Peterson, Monopoly, 2005). Monopoly bestows upon a producer an exclusive possession of the market. Since, the producer controls the production it is possible for him to reduce production and increase prices with the sole aim of maximizing profits. Monopoly exists whenever the market has barriers to prevent the entry of competitors. The government creates such barriers in the case of natural monopolies. Further, the government itself provides some specific services or goods through local governmental bodies or franchises the same to a company and it regulates the production and prices of goods or services. Moreover, patents also create barriers in the market (Monopoly, 2003). Technological advancement or the necessity to use a particular variety of machinery to produce commodities also serves to discourage competitors. Furthermore, large scale production and integrated operations enhance efficiency, and cost effective measures reduces prices. Adopting such measures will be beneficial to companies to cut down costs and provide goods to the consumers at reduced rates. Monopoly arises when a company indulges in anticompetitive activities which create barriers to trade (Monopoly, 2003). In order to avoid abuse of the status of monopoly and to protect the consumers from monopolistic behaviour of companies, most nations have created legislations to maintain the spirit of competition. Antitrust laws of the US are said to be the oldest of such legislative frame works that had been formulated in order to control monopoly. In the UK, the public utility law had become a part of the common law, which governs natural monopolies. Furthermore, company mergers and acquisitions are prohibited under antitrust law because these practices create barriers to competition in the market (Monopoly, 2003). During the advent of capitalistic expansion, kings had generally granted monopolies to traders on several commodities, for instance, the import of tea to England. As a result, the traders enjoyed exclusive rights over such commodities and were therefore in a position to fix the prices at much higher rates and this enabled them to make huge profits. At present, governments grant monopolies in the areas of public utilities such as electricity, gas etc (Monopoly, 2000). The abuse of a dominant position by virtue of monopolies is being governed by the government through its various bodies, which ensure the fixation of price for specific commodities. In this manner a balance is maintained. In some situations monopoly had resulted from competition, for instance, the newspaper market in most of the US cities, where there is no possibility of the existence of competition (Monopoly, 2000). Monopoly exists where the control of production and supply of goods or services is vested with a single company or companies acting in concert. In a market of monopoly, prices of goods or services will be higher and there will be an absence of consumer care due to the absence of competition. The US had enacted antitrust laws in the late nineteenth century and early twentieth century. However, the restricted policies of monopolistic trade still exist and this can be attributed to patents, short supply of specific essential materials and huge production costs in some areas of production, which result in reduced competition (MONOPOLY, 2003). Services operated by the government can be called public monopolies. Services regulated by government such as the post offices, which ensures the delivery of utilities at affordable prices also fall under this category. In public monopolies the disadvantages that result from private monopolies are averted. Moreover, monopsony is a form of monopoly where a dominant position is enjoyed by a company or companies acting in a concerted manner. However, monopsony is less common than monopoly (MONOPOLY, 2003). In a market of monopoly, there will be enormous profits, which will be far in excess of the profits necessary to run the business by a company. In addition, there will be no real pressure to reduce prices. Thus under a monopoly prices are always higher and supplies lower than that of obtaining in a perfect competition market. This is because the monopolist producer enjoys exclusive power derived from the situation that the demand for its products in not purely elastic and this results in an environment in which the sale of goods does not reduce to any significant extent whenever the price is increased (Monopoly, 1998). This situation is not suitable for a perfect competitor, because any price hike by such a person would result in the curtailment of sales. Hence, the extent of monopoly power enjoyed by a company or producer can be calculated by the inelasticity of demand for its products. If the inelastic demand is more then the company can hike its prices without a corresponding reduction in sales. Under monopoly the prices will be higher than marginal cost. Monopoly is inefficient due to the fact that despite the fact that some consumers attribute a greater value to an item than its production cost, they would desist from buying that item (Monopoly, 1998). Moreover, the absence of potential competitors in the market would make the company unmindful of the requirements of customers to the extent that it may fail to control its production costs in a competitive spirit. The result of this would be a further increase in the price of the goods. Thus most nations restrict monopolies to avert these harmful practices and to prevent the abuse of dominant position in a particular industry (Monopoly, 1998). Any firm, irrespective of the fact, whether it is a monopoly company or a competitive firm is subject to two forces, namely, demand for the product that it manufactures or the service that it provides and the expenditure it has to incur in order to manufacture that product or provide that service. Successful operation of the business requires a maximization of profits (Peterson, Monopoly, 2005). The principal difference between a competitive firm and a monopolistic firm is that the latter is far more influential in comparison to the former in respect of determining the price to be paid for that commodity (Peterson, Monopoly, 2005). From the perspective of the consumer and society at large, monopoly is far less desirable in comparison to competition. In general, monopoly results in goods that are not only fewer in number but also cost more. Moreover, monopoly involves price discrimination or variation in cost for the same product or service on the basis of market segment (Peterson, Monopoly, 2005). Since time immemorial, economic monopolies have been extant and till the advent of the new age, it was common for terrible scarcities to exist. Ancient and medieval ages were witness to a number of such resource scarcities and the extreme dearth of resources precluded competition on several occasions. This situation was the cause for the existence of medieval guilds or merchant associations that determined the output, specified the terms and conditions for embarking on any particular trade and controlled the selling price or commodities and the wages to be paid to workers (Peterson, Monopoly, 2005). In the late Renaissance period, monopoly became a favourite tool of the monarchs to raise money in order to maintain their armies, courts and life ­– styles. The methodology adopted was to bestow monopoly rights on persons who had found favour with the monarch. In return such persons had to make good a considerable amount of the profits to the sovereign. Moreover, several European powers granted such rights to private trading companies, in order to bring about discovery and economic exploitation of new nations (Peterson, Monopoly, 2005). Due to the large number of abuses that resulted from the granting of such monopolies, the English Parliament, enacted the Statute of Monopolies in 1624, which drastically curbed the crown’s power to form private monopolies in domestic trade, but companies like the East India Company that had been constituted for the express purpose of colonizing other parts of the world were exempted from this statute (Peterson, Monopoly, 2005). The UK had implemented two major legal processes in the early nineteenth century to contain monopolistic trade practices. The first process involved the prohibiting of private concerts that restricted trade through the English common law. According to the principles of common law private agreements or companies acting in a concerted manner with monopolistic objectives that restrict trade are prohibited. This stance of common law was significant in the legislation of the UK and the USA. The other process was the continuation of large scale production, which had resulted from the industrial revolution, duly incorporating the ideology of the British philosopher and economist Adam Smith on private property, markets, and the true spirit of competition. These measures played a major role in shaping the economic scenario in the first half of the nineteenth century. There were number of business establishments in most of the industries but most of them were small in size (Peterson, 2005). Subsequently, in the late nineteenth century, the behaviour of a free competitive economic order brought about many changes. Most industrial nations including Britain and the United States had witnessed the proliferation of giant firms, which had influenced their economy. To some extent this was a result of the methods of empire – building. John D. Rockefeller, the American entrepreneur, was the most important of the major competitors of the US business world. The emergence of giant companies was due to the sophistication of technology. These giant companies were able to meet the demands in many markets. Although there was no monopoly, oligopoly or the concentration of production amongst a few entities prevailed (Peterson, 2005). The emergence of gigantic industries and monopolies continued into the twentieth century. The market response in the US and Europe, to this situation was different. This tendency left Europe with two solutions. First, nations have to nationalise major industries that lack competition, or, second, giant firms would have to be permitted to arrive at price agreements among themselves. The second option led to the formation of cartels and the national governments were constrained to monitor their activities (Peterson, 2005). The US had made efforts to restrain monopolies from the late nineteenth century and implemented the antitrust laws in order to restrict the emergence of monopolies in industries. The national courts began to initiate economic order by requiring the firms in major industries to incorporate competitive conditions. In areas of natural monopolies, the government of the US initiated measures through which private ownership was permitted in those sectors, particularly in the production and supply of power, public transportation and communications. The government organizations became regulators of price fixing and the scope of services and the Interstate Commerce Commission, the Federal Communications Commission and the Federal Power Commission are some important examples of such organizations (Peterson, 2005). References Monopoly. (1998). Retrieved June 2, 2007, from In The Penguin Dictionary of Economics: http://www.xreferplus.com/entry/445826 Monopoly. (2000). Retrieved June 2, 2007, from In The Blackwell Dictionary of Sociology: http://www.xreferplus.com/entry/724122 Monopoly. (2003). Retrieved June 2, 2007, from In Britannica Concise Encyclopedia : http://www.xreferplus.com/entry/5850989 MONOPOLY. (2003). Retrieved June 2, 2007, from In Dictionary of Finance and Investment Terms, Barrons: http://www.xreferplus.com/entry/5121882 Peterson, W. C. (2005). Monopoly. Microsoft® Encarta® 2006 [DVD] . Redmond, WA: Microsoft Corporation, 2005. . Peterson, W. C. (2005). Monopoly. Microsoft Encarta 2006 [DVD] . Microsoft Corporation. Read More