What Factors Cause a Monopoly Market - Example

Running Header: Define and Explain What Factors Cause a Monopoly Market Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Introduction Markets are characterized by good and services offered. There exist different types of markets. Competition is considered one of the main aspects shaping a particular market. Businesses enter a particular market with an aim of profit maximization. Regulations from the government are also a determinant of what kind of market will prevail within a business environment. There exists a perfect market and a monopolistic market. A monopoly market has its disadvantages and advantages as further explained in this essay. As indicated by Timothy and Peter (1990, p. 531), a monopoly market refers to a market system whereby one supplier produces and sells products and services; in some instances there exists single sellers with no closes substitutes and this is referred to as a pure monopoly. On the other hand there may be a number of sellers within a particular industry as well as very many close substitutes; this is what is referred to as a monopolistic competition. A monopoly market has a varying characteristics; single vendor i.e. One vendor of goods and services producing all the out put within the market. The other characteristic is a firm possessing a huge market power; being able to have an impact on the terms and conditions, this enables a firm to set the prices unlike in perfect competition whereby prices are imposed by the market. In a monopolistic market, firms become industries making no difference between firms and industries within that market. In a monopoly market there exist price discrimination as a monopolist can make changes in the quality and price of a product or a service depending on the elasticity of the market. In a monopoly market a firm experiences a demand curve that slopes downwards. The prices impacts on the quantity sold mainly due to lack of perfect substitutes (Bill 2000, p. 143). Monopoly market has varying forms of differentiation, this includes the differentiation of physical products; this is where the firms in a monopolistic competition makes use of different sizes, designs, shapes, colors, functioning and other main features in order to create a differentiation in their products, a good example for this case are electronics such as computers as they can easily be differentiated physically. The other form of differentiation in a monopoly market is the market differentiation; this is whereby firms distinguish their products by having a classifiable packaging as well as promotional proficiencies. For example packaged foodstuff can easily be differentiated through their packaging. Human capital differentiation is the creation of variation through the skills of employees within a firm. Lastly, the monopolies create a differentiation through unique distribution methods such as online business or e-commerce (Adam 1999, p. 22). There are various factors that may cause a market to adopt a monopolistic nature this includes entry barriers; they act as impediment to potential e competitors to enter the market. These barriers are:-economic barriers such as the economies of scale; involve large cost of starting a business giving monopolies a great advantage over would be competitors, in monopolies firms are placed in a better position to their prices lower than new starters driving them out of the business (Ishani 2011).Capital requirements for example in the production processes that require big investments of beginning capital or expenses related to large research as well as development, limits many firms from entering an industry thus creating a monopoly market. When some firms are superior technologically they create a monopoly as they are able to use the best technology in the production process of their products; when newcomers do not have the muscle to use any technology available to them, they are kept away from an industry. A good example of such industry is the broadcasting and computer industry. When there are no goods to substitute; an absence of close substitutes makes a demand for that particular product or service inelastic therefore, enabling monopolies to develop and to get high profits (Steve 2004). Monopolistic competition (Robert 1998, p.175). According to Prasty (2007, p.97) monopoly power is in some cases experienced when a firm is able to control all the resources vital for the production of a product or even a service. Control of natural resources gives a firm advantage over other firms interested in joining the industry. Externalities derived from networks; this is the case when a person’s use of a particular product has an effect on the value of that product to many other people; this is referred to as the network effect. It is clear that there is a direct relationship between the number of people using a product and the demand of the product. When more and more people are using a product it is very likely that any other person is also likely to use that product. This creates market power with a good example being the Microsoft operating system used in computers. Other factors contributing to the existence of a monopoly market are legal barriers; legal rights give an opportunity to have a monopoly in certain goods. This includes the intellectual property rights such as patents and copyrights. Property right may encourage a firm to have single control over the materials essential in production of goods and services. Thus forming a monopoly market whereby only that firm or individual who has the property rights is able to produce and market the products and services. The other main factor of monopolizing a market is the actions carried out knowingly; such actions may include lobbying, collusion as well as using force to eliminate competitors within a particular industry (Libly 2008, p.530). Peter and Daniel ( 2003,p.223)asserts that A natural monopoly occurs when a firm has an experience in increase of returns over crucial returns; when an average production of goods and services makes a decline throughout the relevant product demanded; the relevant product demand refers to where average cost curve lies below the demand curve. Short-run equilibrium of the firm under monopolistic competition (Roger 2008, p. 320) According to Timothy and Peter (1990, p.531), monopolistic competition may yield some advantages which include:- creation of diversity in choice and utility through differentiation, a good example is when an individual buyer is able to make comparison of where to shop for clothing in a street where there are several vendors of the same clothing that he or she prefers. In a monopolistic market there is an advantage of lack of significant entry barriers; this makes a market competitive. There is a dynamical efficiency in terms of adoption of modern processes of production; this enables retailers to develop modern ways to attract as well as to keep their customers. In a monopolistic market there is no big risk of over production of services and products, especially when it is a single firm involved. When there is enough capital for research a monopolistic market is able to carry out accurate and effective research for new products and services as no other competitors have the capability of joining the industry. A company or an individual in a single monopoly market is able to regulate the prices of the products and services to a level which is more profitable. For example when a particular product likes operating system whereby Microsoft is seen to be the leading provider, it is easy for it to set is own manageable prices. A natural monopolistic gives individuals and firms control of the entire market. The various industries likely to have a monopolistic nature are: - radio stations, clothing industry, computers, frozen food, banks and jewelry (Fredric, Agnes & John 2010, p. 197). Conclusion A monopoly market can be as a result of the government restrictions or it may just occur naturally, it is evident that monopolistic market which in other term may be referred to as imperfect competition has merits and demerits. The long run effects of a monopolistic market are almost similar to those of perfect market though there exists a main difference in that, a monopolistic market produces mostly heterogeneous goods as well as involving non-price competition. There is a need for regulations in natural monopolies in order to necessitate prevention of market exploitation as well as anti consumer associations. The governments’ provision of utilities such as power, railway and water is a show of the importance of strict government regulations on the public utilities. Monopolistic competition, to conclude, a monopolized market there are perceptions that there are no price differences among different competitors as well as enabling a producer to have control over prices. There is need for regulations on monopoly markets from them government. References Adam, D T 1999, ‘Unnatural monopoly: Critical moments in the development of the bell system monopoly’, The GATO Journal, vol.. 14, no, 2, pp. 22-29. Bill, G 2000, ‘Testing for monopoly rents in the market’, Journal of Economic Studies, vol. 27, no. 3, pp. 142-156. Fredric, P, Agnes, V & John, M 2010, Monopolistic competition, Cambridge University Press,United Kingdom. Ishani, C 2011, ‘What causes natural monopoly’, viewed 27 April 2011, < http://www.buzzle.com/articles/what is-a-natural-monopoly.html Libly, R 2008, Principals of microeconoimics, Flat World knowledge Publishers, New York Peter, Z & Daniel, H 2003, The end of natural monopoly: deregulation and competition in the electric power industry, Routlege Publishers, Unite Kingdom Prasty, S 2007, Managerial economics, Cengage Publishers, United Kingdom Robert, M 1998, Monopolistic competition and macroeconomic theory, Cambridge University Press, United Kingdom. Roger, A 2008, Macroeconoimics,Cengage learning United Kingdom. Steve, N & Ben, J 2004, The monopolistic competition revolution in retrospect, Cambridge University Press, United Kingdom. Timothy, F B & Peter, C R 1990, ‘Entry in monopoly market’, Economic Studies, vol. 57, no. 4, pp. 531-539. . Read More