Microeconomics: Monopoly - Essay Example

Saad Al-Kuwari  Fall - Econ 202-002  Dr. Martin H. Sabo  Microeconomics: Monopoly Introduction Monopoly is a prominent microeconomic topic which is gaining grounds in this extremely competitive globalized market. It is a market condition in which a single firm controls avoids all types of competition and controls the entire market activities. In monopolistic markets, a single firm fixes the prices of the products and therefore they can exploit the market maximum. “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). Microsoft is one of the popular examples of monopoly. It should be noted that Microsoft can charge any prices to their operating system software such as Windows 7 since no other organization has the power and capabilities to challenge the monopoly of Microsoft in the market. Smaller firms may find extreme difficulties in surviving in monopolistic markets. Usually, the monopolistic firm will acquire smaller firms in order to avoid the possibility of even small competition. In short, monopoly is a good market condition for the organization, but for the customers, it is an unfavorable market condition. Based on the nature of monopoly, it can be classified into different categories such as technological monopoly, natural monopoly, near monopoly, oligopoly, legal monopoly, governmental monopoly, etc. This paper analyses various types of monopoly and its essential characteristics. Types of Monopoly Technological monopoly refers to the ability of a firm in dominate global market because of its technological excellence. Microsoft is the best example for this category. No other firms in the world was able to challenge Microsoft’s superior technologies in operating system market. Even though Apple and Linux raised some challenges, they failed miserably in defeating Microsoft. Microsoft did so many things to establish their technological monopoly. They established a strategic collaboration with up Intel to use Windows operating system in their PCs. In a natural monopoly, one firm can meet most of the demands of the public at an affordable cost. For example, public utility services like railways, telecommunications, water services, electricity, mail delivery etc are considered as natural monopolies because of the nature of such activities. It should be noted that majority of these services are operated by the government and therefore public may get these services at an affordable rate. In fact natural monopoly is the only monopolistic condition in which public faces less exploitation. The important difference between Natural monopoly and other forms of monopoly is that natural monopoly describes a firms cost structure whereas other monopolies explain market share and market power. Moreover, Natural monopoly requires more investments than other forms of monopolies. For example, it is difficult for smaller firms to build and operate railway transportation facilities across a country because of the huge expenses and expertise needed for it. Near monopoly has many similarities with normal monopoly. As the name indicates, in near monopoly, the customers may get more options than in normal monopoly since the firm has not achieved absolute monopolistic power yet. For example, suppose an entrepreneur has opened a supermarket in a heavily populated remote area. The entrepreneur can enjoy monopoly because of the non-availability of any competitors in the immediate vicinity. “Tesco, the UKs largest supermarket giant, has been accused of having a near monopoly in the Highland city of Inverness. The number of large Tesco stores had contributed to the closure of about 20 small shops in the city centre” (BBC News). “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 cant 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). Oil and Petroleum Exporting Countries (OPEC) is often cited as the best example for oligopoly. Oil resources are getting decreased day by day and based on that the monopolistic power of OPEC is increasing. It should be noted that Gulf countries are the prominent oil exporting countries in the world and they form a consortium in the name of OPEC to exploit the market as much as possible. They produce more petroleum products when the demand goes high and produce less when the demand comes down. Thus, OPEC is controlling the market price of petroleum products in the world. “A legal monopoly is set up in the beginning as a perceived best option for both government and its citizens”  (Legal Monopoly). Legal or statutory monopoly is an unusual market phenomenon in which the firm gets support from the government. Government support some kind of legal monopoly because of the risk involved in the venture. AT & T in America and Air India in India were some of the examples of legal monopoly before the intrusion of privatization polices. Now these firms cannot be said as legal monopolies since private companies operate in airline and telecommunication industries extensively nowadays with the help of the governments. 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. Characteristics of monopoly The ability of a monopolistic firm in fixing the price can be studied with the help of following diagram. (Economics help) It is evident from the above graph that when Marginal Revenue (MR) = Marginal Cost (MC), a monopolistic firm will get maximum profit. In other words, a monopolistic firm would always try to controls the output by equating Marginal Revenue (MR) and Marginal Cost (MC). It is also evident from the figure that in a monopolistic market the Price would be greater than the Marginal Cost (P>MC). This is because of the absence of any competition in the market. Profit of a firm depends on the difference between Average Revenue AR (Price) and Average Cost (AC). The increased gap between AR and AC clearly suggests that in a monopolistic market, the profit of the firms will be maximum. “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). It is impossible to conserve the interests of the buyers and the sellers in a monopolistic market. In other words, the interests of both the buyers and sellers will never go in parallel direction and it will travel in entirely opposite directions. Since no options available for the consumers for bargaining in monopolistic markets, they will be forced to purchase things at the offered price itself. For example, suppose Benz happens to be only automobile supplier in a country. People in that country may force to buy Benz cars without any bargaining. On the other suppose, BMW or Toyota has entered the same market. Benz may no longer enjoy the monopoly and they will reduce the prices of their vehicles automatically. Moreover, the buyers will get more bargaining option in such circumstances. Posner (1999) has pointed out that “monopoly enables the sellers to capture much of the extra value which otherwise accrue to consumers. Moreover the effect of charging a monopoly price is to transfer wealth from consumers of the product to the owners of the product selling it” (Posner, p.4). It is not necessary for the seller to spend too much for research and developments or advertisements in a monopolist market. There are many complaints about the quality of Microsoft ‘s products. This is because of the fact that Microsoft can sell any of its products at a higher rate and they don’t want to bother much about the development of new products because of the absence of any competition. It should be noted that Nokia enjoyed some kind of monopoly in cellphone market until recent times. However, they failed to develop new products needed for the present era. Apple and Samsung introduced touch screen smart phones such as iPhone and Galaxy S2 and currently Nokia is also trying hard to develop innovative products. In other words, competition forced Nokia to spend more money for research and developments which is good for the consumers. In a monopolistic market, consumers may not get such innovative products. “Money, in order to be considered “money”, must be acceptable, divisible, and have a store of value” (Economic concepts in monopoly). Many people have the illusion that money is meant for saving rather than spending. In fact money will get its true value only when it is exchanged for purchasing something. When currencies are stored in cupboards, it has only paper value. In monopolistic market, the monopolistic firm will keep a substantial portion of wealth under their control and therefore transactions of money may come down. No country can develop properly if the wealth is accumulated under the control of some particular firm alone and the money available for economic activities becomes less. Conclusions To conclude, monopoly is a market condition in which a single firm enjoys full control over the market. There are different types of monopoly such as natural monopoly, oligopoly, near monopoly, legal monopoly, government sponsored monopoly etc. Monopoly is a good market situation for the sellers whereas for buyers, it is not so. Severe exploitation of the buyers may take place in monopolistic markets. In monopolistic markets, sellers have upper hand whereas in normal markets buyers have upper hand. The spending of firms in monopolistic market would be extremely less compared to other markets whereas the profit of monopolistic firms would be extremely higher than that of other firms. Suggested areas of further research Some firms are still able to maintain their monopolistic power in the market even though globalization, privatization, liberalization like revolutionary policies are implemented in majority of the countries. It should be researched further. Monopoly is not good for the buyers, but it is good for the sellers. In other words, the interests of the sellers and the buyers cannot be safeguarded at the same time in monopolistic markets. It is necessary to investigate further about the possibilities of increasing the bargaining power of the sellers further in monopolistic markets. Works Cited 1. BBC News. January 17. 2006. “Tesco Accused of Near Monopoly”. Web. 17 November 2011. 2. “Economics Help. Diagram of Monopoly”. Web. 17 November 2011 3. “Economic Concepts In Monopoly”. Web. 17 November 2011 4. Hannaford, Steve. “Defining the new Oligopoly”. 2007. Web. 17 November 2011. 5. “Legal Monopoly”. 2009. Web. 17 November 2011. 6. Posner Richard A, “Natural Monopoly and Its Regulation”. 1999. Publisher: Cato Institute; 30th edition (April 1999) 7. Stigler, George J. “Monopoly”.2008. Web. 17 November 2011. Read More