Monopolies in These Days - Term Paper Example

 Monopolies in These Days Introduction Monopoly is a term mainly associated with the business circle. It is one of the important economic terms in microeconomics because of the impacts it can cause to the market and economy of a country. Monopoly is a market condition in which only a single firm was able to controls the entire market without much competitions from competitors. Every big organization tries to monopolize the market in order to conserve their business interests. They may have immense financial and other resources to keep their supremacy in the market. Small firms which offer feeble challenges would be forced for merger or acquisition by the big firms. Monopolistic firms can control the market and the price of a product in the market. Poor consumers forced to purchase products for higher prices because of the lack of availability of substitute products. “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, 2007) Monopoly has different forms like natural monopoly, near monopoly, oligopoly, legal monopoly, governmental monopoly, etc. This paper briefly explains various aspects related to monopoly. Monopoly Monopoly is a business strategy big organizations are trying to achieve in order to reduce competition from small firms. For example, Microsoft is one of the best examples at present for a monopolistic firm. The operating system market almost all over the world is monopolized by the Microsoft’s Windows products at present. Even though Linux like free software are available in the market, Microsoft was able to monopolize the global software market. “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, 2008). It is not healthy for a country’s economy if somebody was able to monopolize the market. Small scale industries which are the core segment of economic development of a country may not develop if monopoly exists in the market. In the consumer’s point of view, competition among product manufacturers or service providers is better for them in getting good quality products for cheaper prices. Monopoly completely avoids the possibility of competition and hence the customer forced to pay more prices for products they purchase. A huge part of Monopoly is accumulation of wealth. Money, in order to be considered “money”, must be acceptable, divisible, and have a store of value (Economic concepts in monopoly, n. d.) When monopoly exists in the market, the economic transactions would be less. In other words, the monopolistic firms accumulate the whole wealth and the economic transactions may depend on their willingness to spend money. Accumulation of wealth to a particular region is not a healthy economic condition. Such money accumulation to a particular segment of the society may cause economic imbalances in the society. A society would be free of problems only when social equality or economic equality attain by the society. Thus monopoly can cause economic as well as social problems. Money is meant for spending and only when it spends it acquires its real value. Otherwise it has value on papers only. “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, n. d.). Monopoly may retard the research and development process. Monopoly helps the seller to sell his products as per their will and they may spend less for the research and development process. Thus the invention of new products may not take place in a monopolistic market. A seller may be forced to spend money for R&D only when he feels that his products are not moving well in the market or his product experiencing stiff competition. Thus the monopoly is definitely a drawback for the buyer because of unavailability of new products. “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, n. d.). These two views are always conflicting and hence either of the two may suffer at a given period of time. When the price increases the seller will benefit from that whereas when the price decreases, the buyers will be the beneficiary. The consumers will always look for lowest possible price when they take any buying decisions. For example consider the operating system market at present. Most of the personal computers and application software available at present are compatible only with the Windows operating system which forces the users to go for Windows operating system at any cost even if free operating system software like Linux is available. On the other hand if Linux was compatible with all the available application software at present and was able to perform as easy as Windows, people would definitely go after Linux in place of Windows. Thus the monopoly has left the customer with no choice at all. Natural monopoly In some cases monopoly occurs quite naturally. In a natural monopoly, one firm can meet most of the demands of the public at an affordable cost. If an industry produces a desired output at a lower cost than two or more firms, it can be referred as natural monopoly. Examples of natural monopolies are public utilities like railways, telecommunications, water services, electricity, mail delivery etc. The above services were controlled by the public agencies earlier and hence the exploitation or the price hikes were not there even though they enjoy natural monopoly. On the other hand at present, in many countries even the above sectors are opened for private participation because of globalization and liberalization policies adopted by many countries. Natural monopoly describes a firm's cost structure whereas a monopoly explains market share and market power. Natural monopolistic areas need large initial investments. For example consider the case of railways or telecommunications. 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 telecommunications. Near monopoly Near monopoly is similar to monopoly in many ways. The only difference between monopoly and near monopoly is that in near monopoly, there are more options for the consumers, but some other factors prevent them from going for the other options available. For example, consider an internet cafe at a remote rural area. If other internet cafes are distant, say around 60 kilometers away, the rural people would go for their nearest internet café alone even if it is expensive. Thus the rural internet café mentioned above enjoys a near monopoly. “Tesco, the UK's largest supermarket giant, has been accused of having a near monopoly in the Highland city of Inverness. The city currently has three stores and a fourth is planned in the Holm area. Business leaders in Inverness said the number of large Tesco stores had contributed to the closure of about 20 small shops in the city centre” (BBC News, 2006). Monopoly power Monopoly power is the extent to which the monopolistic firm was able to set the price of their product. “A monopoly power is defined as the ability of a business to control a price within its relevant product market or its geographic market or to exclude a competitor from doing business within its relevant product market or geographic market. It is only necessary to prove the business had the "power" to raise prices or exclude competitors” (FreeAdvice, 2009). If the monopoly of the firm was too dominant, then the power of the firm in market activities would be immense. On the other hand if some small competitions are there, the monopolistic firm may not try to exploit the market fully or their power would be less. Oligopolies ‘Oligopoly is a situation where there are few sellers for a product or service. The members of an oligopoly change the nature of a free market.  While they can't dictate price and availability like a monopoly can, they often turn into friendly competitors, since it is in all the members' interest to maintain a stable market and profitable prices’ (Hannaford, 2007). The consortium of Oil and Petroleum Exporting Countries (OPEC) is one of the best examples of oligopoly. Oil producing countries are less in the world which made them capable of controlling the price of crude oil worldwide. When the demand becomes less they will reduce the production of the oil whereas when the demand increases they will increase the price of the oil in order to achieve more profits. For example, because of global financial crisis, the demand for oil has come down drastically it was around $ 30 per barrel few months before. At the same time a couple of years before, the price of crude oil per barrel was around $ 150 because of high demand. Thus oligopoly helps the firms to adjust the price of their product to attain more profit. Legal monopoly Legal monopoly or statutory monopoly is an economic phenomenon in which a single firm controls the market with the help of the government. Unlike monopoly or natural monopoly, here the firms are getting the full support of the government. “A legal monopoly is set up in the beginning as a perceived best option for both government and its citizens. For example, AT&T operated as a legal monopoly until 1982 because it was deemed vital to have cheap and reliable service for everyone” (Legal Monopoly, 2009). A legal monopoly is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic constituency. Air India is the official air carrier as far as India is concerned and the government of India has allowed legal monopoly to Air India before the globalization and liberalization has allowed other private carriers to operate from India to abroad. Government sponsored monopoly and the proper role of government Government sponsored monopoly is a monopoly created by the government. It 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. For example, in many countries, electric power distribution system and the postal system is run by the government. 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. Conclusion Monopoly is a healthy market condition for the sellers; but it is not so for the consumers. The seller always want to maximize the price of their product whereas the buyer always looking for cheaper prices. Legal monopoly or governmental monopoly is always good for the public since the government’s motto would always to provide better services at affordable prices. In other words, governments are not motivated by the profit making by exploiting their own public. Accumulation of wealth to a particular segment or region is a drawback of monopoly. Monopoly may make economic imbalances and hence the country may face social and economic problems because of that. References 1. BBC News. January 17. 2006. “Tesco Accused of 'Near Monopoly”. 08 November 2009. 2. “Economic Concepts In Monopoly”. 08 November 2009. 3. FreeAdvice. 2009. “What is a monopoly power under the sherman act?”. 08 November 2009. 4. Hannaford, Steve. 2007. “Defining the new Oligopoly”. 08 November 2009. 5. “Legal Monopoly”. 2009. Investopedia. 08 November 2009. 6. “Monopoly”. n. d. 08 November 2009. < http://www.economywatch.com/economics-theory/market-theory/monopoly.html> 7. Stigler, George J. 2008. “Monopoly”. 08 November 2009. 8. The Choice is Us: Monopolies. 2007. 08 November 2009. Read More