Causes of a Monopoly Market - Report Example

Name: Professor: Course: Date: Monopoly Market ` Definition: This is a market structure in which there is only one seller or producer for a particular product. What this means is that the single seller or the single producer constitutes the industry that produces that particular good or service that is sold in that market. Monopoly market emerges due to the existence of substantial barriers that restrict entry into the market. This feature gives the seller or the producer the power to control both output and the price. The monopoly have the capacity to determine what level of output to produce as well as the price to charge for each unit of that output. Economic, social or political factors are part of the sources of barriers that restrict entry into the monopoly market. The effect of these barriers is to give the monopoly the powers outlined above. This makes the consumers price takers for the product or service provided by the monopoly. Therefore, the monopoly can charge high prices for a low quantity of output. When this happens, the monopoly is said to portray welfare loss. This results from the comparison between the monopoly and the perfect competition market structure, where price for a given quantity of output is lower than that of the monopoly, given that the output level of the perfect competition is higher than that of the monopoly (Smith &David 345). This is shown in the diagram below: The monopoly charges price Pm for the quantity Qm, while in the perfect competition price Pc is charged for the output Qc. This shows how the monopoly is able to control prices of its output. Causes of a monopoly market Legal monopoly Legal processes lead to emergence of monopolies due to the substantial barriers that those processes create. Legal concerns that cause occurrence of monopolies include patent rights, copyrights and licenses. These processes are backed up by law that have been formulated and implemented to oversee and govern market structures. Patent rights are issued to the firm or company behind the development of a unique product or service that was not available before. Patent rights grant the firm owner the rights to control activities that pertain to that product that the firm develops. The firm therefore owns sole rights to the product or service. This limits the ability of any other firm joining the market to provide a similar good or service. Consequently, the firm has the ability to control what amount it produces and the price it charges for the product or service (Adams, Steve, Periton, and Paul 206). Such powers are only possessed by a monopoly, and patent rights therefore result to emergence of a monopoly through the use of patent rights. Copyright is another aspect that leads to occurrence of monopolies. It happens when rights to written work is accorded to people who develop it. These people become the legal owners of such works and as well control many alterations on them. Any other parties have no rights to do so. Another form of legal control that brings about monopolies is the use of licenses. The government through the relevant agencies controls issue of licenses to firms that want to venture into business or other operations. Legal exclusions by the government are based on the issue of licenses. Firms that the government does not want to venture into the market are denied licenses to do so. This builds up monopolies according to what the government is interested in. Nationalized industry Public goods are provided by the government to the people. Each government agency or corporation deals with a specific line of interest. Examples of such corporations are the post, railway and telecommunication agencies. These agencies are national agencies and are controlled by the government or a private national sector. Entry into these lines of operation is difficult since they require huge amounts of initial capital and the product or service offered is a public in nature. This means that some goods or services offered by the nationalized industry are none-excludable and none-rival and therefore are better provided by a monopoly Richard (Schmalensee, Mark Armstrong, and Robert H. Porter 1004). Local monopoly Development of a unique product or service is the reason behind which a local monopoly occurs. Provision of a unique product or service brings into the market a good or service that did not exist before. The firm behind such developments takes up a greater market share, thereby limiting the chances of success of any other firm that may want to enter. For example, DHL which is an international parcel transporter is a monopoly in the field since it came into the market, because when it did so, no other firm had ventured into such an operation. High cost of entry Entry into monopoly market requires huge capital in order to initiate operations. For this reason, such operations are left to the mighty and able firms who consequently dominate the market. These firms can effectively fix prices for the products and services they offer as well as fix output levels that they provide in the market. Advertising and product differentiation The structure of a market is also affected by the extent to which those who buy from it have some preference for some products than for others. In some industries which practice monopoly, some products are regarded as being identical and this is from their nature of production. A relevant example of such products is the farm crops, in some others the products are differentiated in such a way that the various customers will make their preferences basing on the way they have been differentiated (Eisenach, et al 210). Import restrictions Handling of imports may be left to one firm or just a few that can effectively handle it. Other firms may want to enter, but their capacity to efficiently and effectively do it may be in question. As a result, they may be locked out of the operation leaving a few firms that are characterized by features of a monopoly. Importation needs to be efficient enough and for such reasons, the greater players in that field are monopolies, since the costs involved are also high. Industry ‘standard’ A given firm may dominate the market due to the nature of the product or service they offer. An example of this is the Microsoft Company, where the product offered by the company would be hardly received by the clients if offered by another company when Microsoft is still operational. This locks out other firms from entry into the field that Microsoft has ventured into. Microsoft Company therefore dominates that particular market and is therefore the monopoly in PC products and services that pertain to that field. The company can effectively set prices and as well control that price in the market (Eisenach, et al 217). Natural monopoly When a firm’s average total cost of production is lower than that of one or more other firms, the firm is said to be a natural monopoly. In most cases, the average total cost of natural monopolies is always decreasing. This is caused by economies of scale, which refers to increased efficiency of production as output produced increases. Natural utilities mostly occur in major utilities such as gas, electricity and provision of water. The diagram above shows decreasing average costs, with increase in output. Production efficiency increases relative to average cost and output level. Benefits of a natural monopoly Quality products Presence of a single or few sellers does not rule out availability of competition. As a result, a firm can strive to provide the best quality of products and services in the market. This may consequently be the result of high efficiency of the monopoly compared to the rivals in the same field. This feature gives the monopoly the advantage of producing high quality goods and services that may be too high to match the quality of goods and services from the rivals. Consumers are driven by the motive of wanting to maximize their utility. They go for quality goods and services and can take any price given in the market; provided the utility derived from the product or service is good enough to compensate them for the price they pay (Smith &David 350). . Economies of scale A natural monopoly has the ability to increase efficiency of production as the output level increases. Further, the monopoly can operate at a lower average total cost compared to other firms. This helps in pooling up customers for the natural monopoly. The effect of this whole process is to raise revenues that the monopoly generates and consequently improves profitability of the monopoly. Revenues that generate profits for the firm depend on the price and output produced, as shown in the figure below: Increase in efficiency of production for a natural monopoly increases the general level of output that gets to the consumer. Product pricing Natural monopolies can set their prices at a lower level than the other monopolies or firms. This is more so due to the fact that they can effectively lower their cost of operation in the long run. For this reason, the monopoly can charge the consumers lower prices for their products or services. This benefits the consumers since they can now buy more units of the output using the same unit of money. The diagram below shoes how the monopoly reduces the long run cost of operation and consequently charge lower prices for the goods and services due to the reducing costs of operation. Costs of operation reduce in the long run. This can allow the firm to adjust the prices it charges without adversely affecting its general welfare (Eisenach, et al 230). . Works cited Smith, George David. From Monopoly to Competition: The Transformations of Alcoa, 1888- 1986, New York: Cambridge University Press, 2003. Adams, Steve, Periton, Paul. CIMA Official Learning System Fundamentals of Business Economics Cima Official Learning System, Edition4, Chicago: Butterworth-Heinemann, 2009 . Eisenach, Jeffrey August, Lenard,Thomas M. Progress and Freedom Foundation (U.S.). Competition, innovation, and the Microsoft monopoly: antitrust in the digital marketplace : proceedings of a conference held by the Progress & Freedom Foundation in Washington, DC, February 5, 1998, Chicago: Springer, 1999. N. Gregory Mankiw. Principles of Microeconomics Edition 5, New York: Cengage Learning, 2008. Richard Schmalensee, Mark Armstrong, Porter Robert. Handbook of industrial organization, Volume 3, Handbooks in economics, Handbook of Industrial Organization, Robert D. Willing, 2007. Read More