Advantages of Monopoly Market in Relation to Diamond Business - Example

Running head: Monopoly Name: Course: Institution: Tutor: Date: Table of Contents 1.0. Introduction………………………………………………………………………3 2.0. Background of the Business…………………………………………………………4 3.0. Analysis of diamond Products in relation to the concept of Monopoly……………...5 4.0. Barriers to market entry …………………………………………………………10 5.0. Advantages of Monopoly market in relation to diamond business………….12 6.0. Recommendations…………………………………………………………........13 7.0. Conclusion………………………………………………………………………..14 1.0. Introduction The term monopoly originated from Greek which was used to imply single. Today, the term is used in reference to situations where businesses can only control certain products or services on the market that significantly determine the terms in which other individuals may have access on the products. Companies with monopoly type of business do gain greater market continuously than expected. Monopolies in some occasions are seen to lack competition on the economic market for their goods and services they are offering on the market and they are therefore seen to lack a substitution of goods or the products and service the offer on the normal market competition (Blinder, Alan, Colton, 2001). Monopoly business types should be differentiated from other types like the monophony which is characterized by one buyer of a product or the services is seen in this case. Despite this, monopoly is also on the other hand characterized by its control on some particular sectors of the market. Monopoly also differs from cartel form of oligopoly where several providers act together to coordinate the services, the prices and even the sale of goods. Monopolists are also are distinguished by the way hey produce goods and services. They produce limited goods and do put them on the market at a higher price than under the perfect competition or the normal price which results to the abnormal and sustained profits to the company involved. According to marketing strategies, monopolies can either form naturally or through the vertical and the horizontal merging. Monopoly is not illegal according o the law although certain behaviors can in cases where the business is dominant it can be considered abusive and this can result in the legal sanctions by the law enforcers within that particular environment. Monopoly in his context is a single or a one supplier hat can produce and sell the products with no close substitutes for the goods and the services that are being produced thus fighting hard to maintain its market power on the market unlike in the oligopoly that their theoretical framework revolves around the firms strategies of interaction. The results in monopoly compare price fixing methods across all the market structures, they analyze the impacts of particular structures on the welfare and also plays differently in the variance in the technical demand assumptions in order to assess the consequences on the abstract of the societies model. Monopoly has avariety of structures that is seen as its pivot in the operation, they include; perfect competition, monopolistic competition, the oligopoly and the monopoly where the sole business type supplier produces and sells goods of his own choice (Browning & Browning, 2003). 2.0. Background of the Business When we analyze the concept of monopoly in relation to particular companies operating in the market a good example of this business with good monopoly strategy in the market is the De Beers diamond trading business which has its specialization in selling of diamonds and jewellery is seen to be a best example of monopoly business since diamonds are rare making the business of diamond mining and selling of the products to be monopoly all over the world. Over the last years this business has been successful with increasing number of consumers and demand for diamonds.De Beers and other various companies normally deals with diamond selling, diamond mining, diamond trading as well as industrial diamond manufacturing. The diamond business is very much successful and it an international business carried in four countries thus Botswana, Namibia, South Africa and Canada. Diamond selling business owned by De Beers Company has been known for its monopolistic characteristics throughout the 20th century where by the diamond selling is seen to be dominant in market blocking any other competitors from entering the market (McTaggart, Findlay & Parkin, 1999). 3.0. Analysis of diamond Products in relation to the concept of Monopoly The first characteristic of Monopoly firm is seen to be a single or the sole seller of the products. This actually implies that no any other firm actually has a right to sell the products to the firm. When we analyze this concept in relation to the diamond selling business owned by De Beers diamond trading company it clearly that its products display monopoly characteristics in the market. Given the fact that diamonds are rare in the market it is clear that these products in the market are monopoly since no any other company sells them but only De Beers family companies located in some parts of the world. Most of the diamond trading businesses today are marketed by only one sole company which De beers, putting barriers to the existence of other firms in the market. De Beers diamond trading business tends to enjoy much of the monopoly privileges from the marketing industry which stipulates from the mere fact that diamonds are rare which implies that it is only this company which can decide which other business are allowed to enter into the market.(Milton, 2002). The second characteristic of a monopoly market is the mere fact that monopoly firms have the ability to change and affect the market conditions as they wish. This implies that a monopoly firm has the powers to set and change prices in the market as it desires. This is from the fact that it’s the only seller of the products hence it can change prices as it wishes. This can be analyzed in relation to the diamond market which over the last years the price of diamonds has been steady high making it unaffordable for most of consumers. Since De Beers trading company is the only company selling diamonds in the market it has been invested with monopoly powers hence it affects the market conditions as the company desires as a way of earning huge profits a situation which greatly affects the consumers . Though De Beers diamond trading business through the monopoly invested in its products has the powers to change prices as it desired the monopoly powers, in their market prices are ever controlled by the market demand. They are said to face the negative slope demand curves and not the elastic curves in their markets. Change in price especially the increase in price like in other markets will automatically lead to loss or in the reduction of the number of clients. In most occasions, attempts in the setting of the seller marginal costs that equal to marginal revenue to produce q0. In this case, the best amount that can be produced would be q1 where monopolists do restrict the out put because of the diverge that does exist between the marginal benefit from the sellers perspective view and the marginal benefit from the buyers perspective view. The production beyond the q0 may not be the interest of a sole or monopoly company like the De Beers because of the extra interest it gets. The marginal revenue may curve is therefore less than extra cost of production as shown bellow. Extra costs in this case are therefore be for the interest of the buyers because of any extra they get as shown bellow by the curve of demand bellow that is greater than the extra cost in the production(Blinder, Alan ,Colton , 2001). q0 q1 quantity in another graph in relation to monopoly, the economy of industrial competition that includes monopolized sellers and the prices searchers will be produced at zone b while the consumers will appear to be on the loosing end at point a due to the gain in the x amount of goods monopolized that seem to have greater value than those y amount of competitive goods. In the policy of monopolists, they do restrict the production of goods which a competitive manufacturer would have realistically done under normal circumstances; this indicates that more resources are being used in the competitive industry unlike in the monopoly industry that restricts the production rate (Milton, 2002). Therefore monopoly violates the efficiency in the mixing of the products and now that the marginal rates of the substitution are not equal to the marginal rates of transformation, the economy will then produce a wrong mix in the products. competit ive products In monopoly, their market domination is derived through barriers to the entries which prevent other players or potential business operators from their entry into the market to compete with the existing operators on the market. For example, there are the economic barriers which comprise of the economies of scale whereby the monopolies are associated with the costs declining with the relatively varied products (Milton, 2002). Declining in the costs is seen to give the monopolies a lot of advantages over their potential competitors. Basing on this factor, the monopolies can cut off the their prices bellow that of the new entrants operational costs in to the market due to their capabilities thus helping them to drive other producers of the same products from the market. When we analyze this concept in relation to the diamond selling business it is clear that the monopoly powers vested in De Beers diamond trading business has given it the capability of reducing its market prices of diamonds and jewellery without experiencing any great loss on market and this can thus help them to drive other competitors that are trying to enter the market due to the variation in market products. The reduction of prices will thus help them avail every product to clients at an affordable price lower than that of the competitor that is new on the market and thus attracting more customers in preference to their product prices making it unbearable for the new entrants who will be incapable of maintaining the new prices without encountering a big loss. New entrants may have not stabilized on the market thus unable to subsidize their product prices unless they want to incur losses. In most occasions, new entrants on the market do not have enough financial security on the marketing of their products and therefore making it so risky for them to cut off or down their products to meet the competitive nature or trend on the market prices. The growth of De Beers diamond trading businesses all over the world as well as its monopoly powers and characteristics gives an advantage over other competitors that may appear smaller in its operational market size in regard to the minimum efficient scale. Through this it is clear that the monopoly powers vested in the sale of diamonds by De Beers trading company is very much beneficial given the fact that currently this company is in position of supporting a firm with the minimum efficient scale compared to other smaller company’s on the market which indicate that the other companies are unable to produce at an average cost which is competitive with the dominant industry like De Beers diamond Trading business (Milton, 2002). 4.0. Barriers to market entry The capital requirements is one major barriers to entry displayed by the diamond market industry .This actually implies that the processes of diamond mining and manufacturing requires a big amount of investment in terms of starting capital, the research on the market before the establishment of the business. Diamond mining and production needs a lot of capital to establish and even running its operations which are done especially online. This actually has many small holders to be unable to establish their company thus making only one stabilized company to dominate the market. The development costs like the licensing of the company too are high and this limits other companies from entering the market making only one stabilized company to keep marketing its products without competition from other suppliers. In addition to this, large fixed costs make it difficult for the small holders to maneuver on to the market and grow its roots on the market. This plays a significant role in making De beers trading company the only business selling diamonds due to the costs associated with the production as well as the mining of diamonds. In terms of technological aspects, the De Beers diamond trading company seem to have grown more than any other competitor who may be thinking of entering the market field in relation to the production of their goods and services, therefore the new entrants into the market may not be able to capitalize on this and make up their ways into the market of diamond mining due to their fiscal muscle in the utilization of the available technology. This is seen as important barrier to entry in this market by various competitors that has made diamonds to exist as monopoly products for long period of time. Additionally, large firms like the De Beers are to produce its products at a cheaper cost compared to the several smaller firms hence giving it powers to exist as a monopoly company. Another important barrier displayed by diamond products through its monopolistic characteristics in the market is the technological superiority associated with diamond mining and manufacturing. This has made De beers diamond trading company to develop through its technology hence hindering other firms into the market. Additionally, this technology has aided the better integration and the use of the technology in the production processes where by the new entrants may not have the size or the fiscal muscle in the use of the best technology. Moreover, given the fact that diamonds have no substitutes in the market it clearly gives it more competition in the market giving De Beers company an advantage in its monopoly over other firms. This has led to the demand for the goods to be relatively inelastic available resulting to huge profits. 5.0. Advantages of Monopoly market in relation to diamond business The most important advantage associated with monopoly market is the mere fact that, monopoly market tends to give a company powers to control all the resources that are vital in product production. Through this the diamonds products sold by, De Beers trading company have gained a high market growth making the company to develop even faster than any other companies in other forms of market structures (Capon, 1999). Additionally, the legal barriers associated with this market are very important as it has helped the company to monopolize the market locking out other operators willing to compete in the business with its goods and services like gold and jewellery among others. Moreover, the company has gained control over diamond production, marketing and the selling of the produced products. It is the only company in this case licensed and it thus licenses the selling of the products on the market. De Beers diamond trading business has survived the monopoly on the market by deliberately eliminating other competitors through lobbying where by the officials of the company agree with other authorities and allows it to be the only manufacturers and suppliers of the product on the market. There is also the use of government authorities where by the company management agrees with some of the most decision makers within the government and therefore they end up to licensing De Beers as the only manufacturer and producer of diamonds in the market (Blinder, Alan ,Colton , 2001). 6.0. Recommendations Though De Beers which is a diamond company enjoys the monopoly power invested in it monopoly market it has some drawbacks associated with it. To begin with, monopoly market as discussed earlier on consists of only one seller where in this case De beers being a single seller of diamond in the market experiences downward-sloping curve which means that monopolies always wants to sell more hence to achieve this target De Beers Diamond company faces downward sloping curves as sometimes its products are sold at a lower price than expected hence the marginal revenue the company gets from selling additional units is always less than the price it normally charges. The main reason which causes the downward sloping curve in a monopoly market is the mere fact that in monopoly markets there is no price discrimination which implies that De Beers Diamond Company has no other alternatives of selling its products rather at the stipulated market price only.. Additionally, in this market for a producer to make a lot of profits then it requires that the company manufacture only three units which is not the case for De Beers Diamond Company which trades only in jewellery and diamond something which limits the total expected profits from the company. Production of three units by this market implies that the marginal revenue resulting from the sell of a third product is always used to compensate for the differences in marginal revenues the company gets from selling the first and the second product. Given the fact that monopoly market actually restricts entry of other competitors making it to be the only seller as well as producer then it implies that resources in the competitive industry in normally circumstances tend to be limited. This actually is seen to be a violation of the product mix efficiency as in the case of De Beers diamond Business Company. This is because in such a market the marginal rates of substitution are never equal to the given marginal rates of transformation hence denying the consumers a chance to have a product mix. 7.0. Conclusion In conclusion it can be seen that De Beers diamond Business is Monopoly business which enjoys most of its market power given the fact that it’s the only company in the market selling diamonds and jewellery internationally. Therefore this can be concluded from the evidences that this business tends to display in the market being one of the monopoly companies. The company uses its monopoly power to bar other competitors from entering the market which actually acts as a major obstacle to other businesses who are interested in the diamonds as well as jewellery market. These barriers to market entry actually harm many consumers as well as other competitors interested in the diamond market. The monopoly techniques are also said to have helped De Beers diamond Business to gain a high market growth given the fact this kind of market does not allow new competitors in the market hence enabling it to earn huge amounts of profits company into other markets that their new entry competitors. According to other companies interested in this sale of diamonds they argue that De Beers Business Company is very discriminative in releasing market information making it hard for other organizations to enter the market. This information acts as a basic barrier for other businesses entering the markets since the information can be used by other competitors to enter the market hence taking an advantage over De beers diamond company .This therefore shows how monopolized the company is and how it enjoys its market power when compared to the other forms of market despite having some disadvantages it’s the best market which different companies prefers to be due to its lump sum profits associated with it. References Milton, F. (2002). Monopoly and the Social Responsibility of Business and Labor" (paperback). Capitalism and Freedom (40th anniversary edition ed.). The University of Chicago Press. pp. 208  Blinder, A., Alan, B and Colton, L. G. (June 2001). "11: Monopoly" (paperback). Microeconomics: Principles and Policy. Thomson South- Western. pp. 212 Browning, E. K. and Browning, J. M. (2003), Microeconomy Theory and Applications, Scott. United States: Foresman and Company, Glenview Capon, T. (1999). Diamond News and Analysis (Excerpts of presentation).Chicago: University of Chicago McTaggart, D., Findlay, C. and Parkin, M. 1999, Microeconomics, 3rd edn, Addison Wesley Longman Australia Pty Ltd, Melbourne. Read More