What is monopoly market structure?
In the monopoly market, there is only one firm that produces a product with no close substitutes.
So, a monopoly firm controls the supply of the whole market and so that it has monopoly power to control the market price. Hence, a monopolistic market is a non-competitive market.
The Greek words “monos” (single) and “polein” (to sell) are the origin of the word “monopoly.” The Landlord’s Game, created in 1904 by Elizabeth Magie Phillips (or Lizzie Magie), featured Monopoly for the first time. The monopoly board game that most students still play today was inspired by this game.
The four market structures are perfect competition, monopolistic competition, oligopoly, and monopoly.
You may be interested into read more,
Monopoly market structure characteristics
The following are the characteristics of a monopolistic market
1. Only single supplier in the market. So, market supply is determined by this firm.
2. There is a higher level of entry and exit barriers in monopolistic market. As results of the higher level of entry and exit barriers, new firms cannot enter to the monopoly market. So, existing company have a monopoly power. There are two major types of factors that can block a firm from entering industry. They are Natural (Structural) Barriers to Entry and Artificial (Strategic) Barriers to Entry. Economies of scale, network effect, high research and development costs are the types of natural barriers to entry. Legal costs, patents and licenses costs are the type of artificial barriers to entry. To read more about, “barriers of entry and exit for market structures”, kindly click here.
3. A monopoly is a profit maximizer. There is no competition and monopoly firm has complete power to decide the market price. So, it decides the market price higher than the competitive market price and maximize the profit in short run as well and long run. This will be clearly explained in the following graph.
You may be interested into read more,
4. A monopoly firm sells a unique product.
5. There are no close substitutes available in the market.There can be price discrimination in the monopoly market. Because there is no competition and monopoly firm has complete power to decide the market price. So, it can charge different prices from the different groups consumers.
Types of Monopoly
The different types of monopolies are discussed as follows
Simple monopoly: In a simple monopoly, single price is charged from the buyers. Here, all the consumers are the price takers.
Natural monopoly: A natural monopoly requires specialized technologies or scarce raw materials to produce its goods. In order to limit competition, the monopolist corporation in this case uses its patents and copyright. Additionally, these businesses typically offer public services (such as electricity, gas, etc.), follow laws, and spend a lot on R&D and innovation.
Pure monopoly: The monopoly market structure with no close substitutes is called as the pure monopoly. Further, there is a higher initial cost for enter the pure monopoly market and so that competitors are discouraged.
Legal monopoly: A firm with a legal monopoly reserves the right to manufacture a product through the use of a patent, trademark, or copyright. The monopolist is the sole supplier in the market since it invented the particular good (or method). Patents provide businesses time to recover the high expenses of research and development.
Public or industrial monopoly: The government set up this type of monopolies to supply important products and services.
Examples of monopoly
Monopoly graph shows supernormal profit (economic profit), dead weight loss and economically efficient output level of a monopoly firm. A monopoly firm earns economic profit in short run as well as long run. So, monopoly graph for short run and long run can be presented as follows.
Following is a single price monopoly graph at its profit maximization output level.
In the above graph, the average revenue (AR) curve equals to demand (D) curve. The marginal revenue (MR) curve has been graphed as it is lower than the average revenue curve. The marginal cost curve has been labeled MC curve which is initially decreasing and after its minimum point, increasing. The long-run average cost curve has been labeled as the LRACwhich shows the unit per cost of each output level.
Profit maximizing single price monopoly graph
According to the above graph, in point E, MR=MC. At the point E, this monopoly firm earn the maximum profit.The point where MR =MC can be considered as the profit maximization point or loss minimization point. Profit maximization can occur at the over-capacity, efficient scale level, or under-capacity.
In this example, this monopolistic firm operates at the point Q1. (Where MR= MC). So, the price level equals P1 where the relevant price to Q1 production is. So, this monopolistic firm produces at the excess capacity in other words produces a lower amount of output than the optimum amount of output.
As presented in above monopoly graph, this firm earns a supernormal profit (economic profit). Supernormal or abnormal profit means, the amount of the profit that exceeds the normal profit. Normal profit means a minimum level of profit is needed to keep the firm ongoing. It occurs when the average revenue equals to average income (AR = ATC). This monopolistic firm can earn normal profit at the Q2 output level. But currently firm produces a Q1 output level. So, supernormal profit equals BCAP1 rectangular.
You may be interested into read more,
Economically efficient output level on monopoly graph
At the point A of monopoly graph, price is higher than the marginal cost (MC). The fact that monopoly prices are higher than marginal costs shows that the monopoly solution violates a fundamental requirement for economic efficiency, according to which the price system must force decision-makers to weigh all of the advantages and disadvantages of their options. Consumers must deal with prices that are equal to marginal costs in order to be efficient. Consumers will consume less of a monopoly firm’s good or service than is economically necessary since the firm charges a price higher than its marginal cost.
In the above monopoly graph in point “D”, price equals to the marginal cost. So, at point “D”, this firm can produce the economically efficient output level (Q2). In other words, this is the output level of this firm, if it was in a perfect competitive market structure. At this output level, company earns zero economic profit. Because average revenue (AR) equals to the average cost (AC).
Dead weight loss on monopoly graph
As we discussed above, this firm produce less than economically efficient output level. So, there is a dead weight loss (DWL). Dead weight loss in monopoly means, lost of the social wellbeing as a result of not producing economically efficient output level. In above monopoly graph, DWL equals to BDE area.
consumer surplus on monopoly graph
consumer surplus on monopoly graph equals to BP1P3 area.
Advantages of Monopoly
Although monopolies are an extreme result of free markets, we cannot exactly say that there are always failures in monopolies. Monopolist firms can earn higher profits than in competitive markets. Thereby they can invest them in research and development to improve the quality of products. It may cause for the uplift of consumer welfare as well as firms can maintain cash reserves. So that they can use them in difficult times. Thus, monopolist firms are able to take the benefit of increasing economies of scale and therefore consumers have the opportunity to buy goods and services at a lower cost. And also government encouraged the innovations and investments. Because productions under patents can easily be carried out in monopolist economies.
What are the causes of rise of monopoly market?
Economies of scale: A monopoly can decrease their average cost of producing for a unit when the production capacity is increasing. In this situation, the existing monopoly firm can produce goods and services at a lower cost than a new firm can and it blocks the entrance of new firms.
Network effect: The network effect says that when there are a larger number of participants, it can add a higher value to a business organization. So, existing monopoly firm always comprises these kinds of network effects but newcomers usually do not have them.
High research and development costs: Research and development is very important to introduce new products, to improve the quality, to introduce new products and so on. Well-established monopoly firms can spend sufficient funds on these factors. So, new firms should have the financial capability to compete with existing firms.
Legal Costs: To enter some kinds of industries, newcomers have to pass a legal process. For that, they have to spend time, money, and effort. As an example, they have to pay for lawyers, registration fees, and so on. But existing firms do not have to pay such costs and so existing firms have a monopoly.
Patents and licenses cost: These barriers are created by the government of a country. Patents mean the exclusive right for producing goods or services for a certain period. Licenses are government-granted recommendations to do some activity. Both of patents and licenses reduce the competition while improving the quality of the goods and services.
Why would the government intervene in the case of a monopoly?
When it considers a monopoly market, it is very important to understand the matters where government intervention is needed. Since a monopolist producer has the unique benefit of monopoly power, they can drive out newcomers to the industry via price variances. Hence he is a price maker. In addition to that, they tend to produce law-quality goods at a very low cost for profit-maximizing. If there is no government intervention, companies can exploit monopoly power by charging high prices from consumers and paying low wages to the workers. So it is unfair. Therefore, the government should regulate those monopolies reducing or removing barriers of entry to the markets for other firms to compete.
What are examples of government intervention in a monopoly?
When we turn to the history of the US economy, Stacker has listed 15 companies that were prosecuted by the USA government in connection with violations of monopoly rules. Sherman Act of 1890 which was one of the major federal antitrust legislation is a good action for banning those bad monopoly practices.
1. An example of a monopoly in the USA was Standard Oil Company: 1911. This company controlled the every part of the oil business. Hence they pushed out the competition using aggressive pricing. The government has broken this into 34 separate companies.
2. Swift & Co. 1905 was another case that the US government intervened. This company was a major beef packing firm and followed very rude control in the industry when doing their pricing. The suppliers and competitors who refused to cooperate with them were blacklisted. The Act of Pure Food and Drug and Meat Inspection Act stopped these activities.
3. Not only them, the cases relevant to other companies such as American Tobacco: 1911, Kodak: 1921, Alcoa: 1945, etc. can be called as the cases which the government invention was. Hence, this evidence clearly shows that even capitalist economies such as the USA have justified government intervention is needed to control certain cases in monopolies.
Examples of failed government intervention
1. But one hand, government intervention may cause to lower efficiency of monopolies. If the government regulation for monopolies is too tough, it will discourage the firms. For example, if the government charges higher taxes or exerts too many political influences on firms, production may be inefficient. Thus, even though the government interferes with the firms, if they do not give sufficient incentives, firms are also discouraged. It may cause to loss of the service supplied by the firms for consumers than before the government intervention.
2. Another matter is government intervention harms the choice of individuals. As an example, US health care service is under government intervention. The government has limited the individuals’ preference of choosing private insurers and doctors.
3. Not only that but also government failures may cause negative impacts on firms. If there are internal failures such as financial or political problems, governments become weak and it is hard to monitor firms properly. According to that, here also we can see a controversial situation. Because government badly affected to the firms in monopoly market in some cases.