Types and Drawbacks of Monopoly - Term Paper Example

 Microeconomics-Monopoly Introduction Monopoly is a hot debated topic in microeconomics because of the wide impacts it can contribute to the economy of a country. It is a condition in which only a single firm controls the entire market without having much competitions for their goods or services. Monopoly may be a ploy usually big organizations are utilizing in order to reduce competition from small firms. In monopolistic markets, it is difficult for small firms to survive because of the immense financial capabilities and other resources of the firm which controls the market. The big organizations may have always huge financial resources which they will utilize to destroy the small firms. The main advantage of a monopolistic firm is that they can fix the prices of their products comfortably in the absence of any kind of competition. The sufferer will be always the consumers since they have not many options left. “In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit” (Stigler Small scale industries may not develop if monopoly exists in the market. Even though monopolist market conditions are legal, in many countries it is legally controlled in order to save the interests of the customers. “In a free-market economic system, people work to make money and companies exist to make profit: individual companies want to make as much profit as possible. Certainly companies would love to be monopolies if this meant that they could make greater profits, as it most certainly would.” (The Choice is Us: Monopolies) Monopoly has different forms like natural, geographic, technological, and government. Some of the monopolies may be better for the public while the other may be harmful. Types of monopoly Natural monopoly An industry is said to be a natural monopoly if it produce a desired output at a lower cost than two or more firms. Examples of natural monopolies are public utilities like railways, telecommunications, water services, electricity, and mail delivery. Most of these utility services were controlled by the government itself in many countries and no private participations are so far reported in these sectors. A natural monopoly and monopoly are entirely different concepts. A natural monopoly describes a firm's cost structure whereas a monopoly explains market share and market power. Most of the natural monopolistic areas need large initial investments and hence small firms may not be able to compete with such natural monopolistic areas. For example consider the case of railways or water supply. It is not easy for small firms to invest huge amounts needed for setting up a public transporting system like railways or public utility like water supply. Most of the governments are controlling such natural monopolistic areas because of the huge investments required. But because of globalization and liberalization policies adopted by most of the governments, even these areas are also considering for private participation by many governments. Monopoly on the other hand shows the market share of an organization compared to the competitors rather than the cost structure. We are considering Microsoft as a monopoly because of the immense market share it have in software industry rather than the initial investment they made for the development of software. Geographic monopoly Geographic monopoly exists when a firm able to prevent others from entering their territory because of geographical reasons. “For example, let's say Nike is the only shoe sold in Denver, because the mountains around prevent other shoe companies to ship in quantities of shoes, while Nike just happens to have a factory in Denver. Nike would then have a geographic monopoly of shoes in Denver, because they are the only one in Denver, due to the geographic landscape.” (What is a geographic monopoly?) Nike was able to avoid competitions from others because of the transportation problems others are experiencing in sending shoes to Denver. If the competitors somehow succeeded in sending the shoes to Denver by air transportation, then they may not be able to send their product at a cheaper rate than Nike because of their increased transportation cost. Most of the shoe companies don’t want to sell their product in Denver like a small market because of lack of access and cost factors and hence Nike was able to maintain their geographic monopoly. The Denver public was the real sufferer since Nike was able to charge their product at will in the absence of competition. Technological monopoly Technological monopoly means the power of technology one firm as over others. For example, Microsoft is one of the best examples for technological monopolies in the world. Some people have doubts whether the Microsoft case is an example for monopoly or not. They argue that Microsoft is not doing anything deliberately to monopolize the market. Microsoft has a larger market share because of their product quality and hence supporters argue that Microsoft cannot be blamed for the monopolistic conditions in the market. But opponents strongly believe that Microsoft has cleverly monopolized the market. They are not allowing any other firms to develop and compete with them and moreover recent reports have shown that they tried to take control of one of their competitors Yahoo to reduce competition. “Microsoft became a monopoly because they were able to create and enforce universal data interaction standards for personal computers. Microsoft did this by creating a series of operating systems (DOS, then Windows), and by defining the kind of machine that could run their OSs.” (Why is Microsoft a Monopoly?) Most of the Intel computers are designed to work well with Microsoft operating systems (Windows) In fact Intel forced to design their microprocessors or computers to suit the needs of Windows operating system because of the immense market share Microsoft has. The power and strength of Microsoft is so huge in the market so that even a big organization like Intel forced to develop custom made processors for Microsoft. The technological dominance of Microsoft over other competitors forced even the chip manufacturers to follow the instructions from Microsoft. Government monopoly Government monopoly is a situation in which the government enjoys the freedom of sole provider of goods or service to the public and competition is prohibited by law in these areas. It is a monopoly created by the government. For example, in many countries, the postal system is run by the government with competition from others prohibited by law. Government usually imposes their monopolies in sensitive areas where the private participation may not be advisable. For example the defense sector or the law and order maintaining departments cannot be privatized because of the possible misuse and other threats it can cause to the safety of the public. Drawbacks of monopoly In a monopolist market the seller may not spend much for the Research and Development (R&D) to innovate product or to incorporate new features to their existing product since they may not experience any challenges from the market. The customer has to be satisfied with the old product even if other non monopolist market may have new advanced products of the same category at a cheaper price. So from customer point of view, monopoly is never a healthy market condition. They are being exploited by the greedy sellers by taking advantages of their monopoly. “The modern concepts on the Theory of Monopoly say that if a monopoly is not safeguarded from competitions by restrictions on government levels, it not only subject to possible competitions but is prone to exploit the consumers and earn huge profits” (Monopoly) “The law of demand says buyers want to buy at the lowest possible price. The law of supply states that sellers want to sell at the highest possible price”(Economic concepts in monopoly) The consumers will always look for lowest possible price when they take any buying decisions. For example suppose a buyer wants to purchase a car in a non monopolistic market. He will analyze the prices of different brands against the utility it is provided and then only he will fix one brand or model for his purchase after a great bargaining with the suppliers. He will try to take as much as discount as possible from the suppliers. On the other hand in a monopolistic market he cannot do the same since the seller has the upper hand in such markets. Conclusion Monopoly is not a healthy market condition as far as the consumers are concerned. The seller always tries to incorporate maximum possible price for his product. In a monopolist market the seller can determine the price because of less competition. In some segments like defence and public utility services, monopoly is a must for the benefit of the public and the nation. But in general monopoly provides an opportunity for the seller to raise the price of his products immensely and hence the public will be suffered. A buyer always favours low prices for the product they are purchasing and it is difficult for them to obtain low prices in market place where monopoly exists. Accumulation of wealth to a particular segment or region is a drawback of monopoly. It is not a healthy economic condition under any circumstances. Such conditions may make economic imbalances and hence the society may face problems because of that. Money acquires its real value only when it is utilized for some positive purposes. Money kept in a cupboard has the value of the paper only. Outline 1. Introduction a. What is monopoly? b. General features of monopoly 2. Different types of monopoly a. Natural monopoly b. Geographical monopoly c. Technological monopoly d. Government monopoly 3. Drawbacks of monopoly 4. Conclusions 5. Outline of the paper 6. Works Cited Works Cited 1. Stigler George J., 2008, Monopoly, Retrieved on May 4, 2009 from 2. Economic Concepts In Monopoly, Retrieved on May 4, 2009 from 3. Monopoly, Retrieved on Retrieved on May 4, 2009 from < http://www.economywatch.com/economics-theory/market-theory/monopoly.html> 4. What is a Geographic Monopoly? Retrieved on May 4, 2009 from 5. The Choice is Us: Monopolies, 2007, Retrieved on May 4, 2009 from 6. Why is Microsoft a Monopoly?, Retrieved on May 4, 2009 from Read More