Monopoly is the opposite to perfect competition. It exists when there is only one supplier for a particular product and there are no close substitutes for that product. The firm has complete control over prices because this firm has no competitor to compete with.
In simple in is defined as,
Monopoly is a situation in the market where only one seller offering a product or service to the entire customers.
This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale, barriers to entry, or governmental regulation). In such an industry structure,
the producer will often produce a volume that is less than the amount which would maximize social welfare.
Explanation:
Monopoly, therefore, indicates a case where:
Conditions of Monopoly Power:
The main conditions which give rise to monopoly are various. They are called collectively, "Barriers to Entry". These barriers block the entry of new firms into the industry and thus create monopoly. The main essentials of monopoly power are as follows:
In simple in is defined as,
Monopoly is a situation in the market where only one seller offering a product or service to the entire customers.
This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale, barriers to entry, or governmental regulation). In such an industry structure,
the producer will often produce a volume that is less than the amount which would maximize social welfare.
Explanation:
Monopoly, therefore, indicates a case where:
- There is only a single seller of a product or service in the market.
- The goods produced by a sole seller has not close substitutes.
- The entry of new firms into the industry is effectively barred by legal or natural barriers.
- The firm being the sole supplier of a product constitutes industry. Firm and industry thus have single identity. Or we can say monopoly is a single firm identity.
- The single seller affects no other seller by its own action in the market. The other sellers too cannot affect the price and output of the monopolist.
- The demand curve facing the monopolist is negatively sloped. The monopolist being the only seller of the commodity in the market can increase the total sale by lowering the price and if, he raises the price, he would not lose all his sale. The demand curve facing a monopolist is less than perfectly elastic, i.e., . it slopes downward from left to right.
Conditions of Monopoly Power:
The main conditions which give rise to monopoly are various. They are called collectively, "Barriers to Entry". These barriers block the entry of new firms into the industry and thus create monopoly. The main essentials of monopoly power are as follows:
- Ownership of essential raw material. If a firm owns or controls the entire supply of an essential raw material used in the production of a commodity, it then creates a monopoly by keeping away the competitors out of the industry.
For example, 'De Bears Company' of South Africa has a monopoly over the supply of diamonds. - Patent and research. In order to encourage research for the creation of a new product, the government gives patent and copyrights to the inventors. The exclusive rights granted to an inventor to produce and control a product blocks the entry of new firms producing the same commodity. The inventor, thus, enjoys the monopoly position for the life of the patent.
- State ownership. If a government itself owns arid operates a business, a monopoly is then established. For instance; Railways, Electricity, are controlled and operated by the Government. State, thus, has monopoly in Electricity, Railways, etc.
- Public utilities. In order to avoid cut throat competition and waste of resources, a government grants exclusive rights to a corporation to engage itself in public utility services. For instance; gas supply in the country, if given to more than one firms, will lead to unnecessary wastage of resources. So it is given to one firm to produce and distribute it to the consumers. The government, however, controls the prices and the rates to be charged by the company.
- Economies of scale. If a firm using modern technology and heavy investment enjoys the increasing returns to scale, it will produce goods at low unit cost. The new firms being unable to reap the economies enjoyed by the existing firm will not enter the industry. The big firm will continue controlling the entire supply of a commodity in the market.
- Unfair competition. If a firm or a few firms form a unified business organization, they then possess sufficient economic power, to eliminate the entry of would be firms in the industry. The firm or some firms joining together adopt price cutting tactics, put pressure on resource, suppliers, pay higher wages to the skilled workers, etc., and thus try to bankrupt the competitors. If they are successful in their mission, unfair competition can give rise to monopoly.
Monopoly Regulations:
A monopolist, being the sole supplier creates some undesirable aspects in the market:
- Monopoly leads to concentration of price and output of wealth which is against the spirit of equality in the society.
- The monopoly price of a good is usually higher than that prevailing under competition. The consumer has to pay higher prices for the products.
- Monopoly is an inefficient type of market structure.
- A monopoly firm does not bother to improve the quality of the product as there is no effective threat of the new firms to enter into the industry.
- A monopoly firm exploits the workers and pays them less wages.
In order to check and control the ill effects of monopoly, a number of steps are taken by the government to regulate monopolies.
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