What is a Monopoly ?: Definition, Characteristics, Factors That Cause It, How It Works and MORE

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What is a Monopoly? Basically, it is a market structure in which there is only a single supplier of a particular good or service. In short, it refers to the fact that only one company dominates the entire supply market.

For this reason, in this article we dedicate ourselves to explain in depth: what is a monopoly, we will mention its characteristics, the factors causing it, its operation, and we culminate in developing other types of imperfect competition.

What is a Monopoly?

As mentioned above, a monopoly is nothing more than the extreme case of imperfect competition. This is because it is the only company that caters to the entire market for a product or service in particular.

In addition to the previous text, we must highlight one aspect in particular. And it is that, the monopoly it has no close substitutes. Briefly, this means that it is difficult to find a product or service that meets that same need.

A simple example could be, the water supply in a locality is only offered by a single company. Therefore, if you want to have this service, you must hire that single company.

For this reason, it is clear that a monopoly company makes the decision to increase the price of a product or service. In competitive markets, companies cannot or must raise their prices as they lose customers.

However, the monopolist, like the one we mentioned in the previous example, can raise the prices of his service and will still continue to maintain customers. The reason for this is that they have no alternative but to continue with the service.

In a market with imperfect competition, the number of companies that offer a specific product or service is small. This gives them the possibility of influencing their prices.

On what does it depend that a monopolist increases more or less the prices of its products or services?

Well, the answer to this question will depend on the possibility that there are products that to some extent can be substitutes. Returning to the example of the water supply, we can say that the monopolist has a lot of power to increase them.

This is because it is difficult for the inhabitants of that town to find a substitute that provides the same service. Now, although there is a single company that allows travel by train, some travelers have the possibility of finding substitutes traveling by plane, bus or car.

But, when this train company provides and offers a service that allows traveling at 200km / h, it will be difficult to find a substitute or competition. This will allow you raise or increase the price of your services to interested travelers.

Monopoly Characteristics

Once completed with the development of the meaning of this structure, we continue to mention some characteristics of a monopoly. Also, in order to recognize this type of structure in particular, we list its main characteristics:

  • The product or seller has the ability to influence the market price and quantity.
  • There are no substitute goods.
  • Only one single product / vendor is present.
  • The entry barriers are very large and they can be of various types.
  • It does not face competitors in the market.
  • It has market power.
  • The company has the ability to decide the amount it places on the market, taking into account its effects on profits.
  • In a monopoly, the quantity produced is better and the price is higher than in the case of perfect competition.

It is important to mention that entry barriers are mainly technological, legal or related to natural resources. On the other hand, economies of scale cannot be confused with characteristics of monopolies.

Thanks to economies of scale, a monopoly is created. However, a monopoly does not necessarily have or possess economies of scale.

Monopoly Conditions

However, before continuing, it is important to highlight that, for a monopoly to exist, certain conditions must be met in a given market. For this reason, we have created a list where only some of them are captured. Attentive!

  1. That there are no economic substitute goods. In short, that customers do not have the option of choosing another similar product or service.
  2. That there is a single marketer or products.
  3. The existence of barriers that prevent eventual competitors from entering the market.
  4. That the monopolist has essential specialized information.
  5. That there is control over the essential goods for the commercialization of the product or service by a single instance.

Monopoly Causative Factors

The monopoly is a market structure in which there is only one single supplier of a particular good or service. Likewise, this structure has various factors that can explain its existence. Attentive to the following list.

  • First of all, we have the existence of economies of scale.
  • Also, technological superiority.
  • In turn, the control of a resource or productive factor.
  • And finally, regulation is included. An example of this could be: the patent, or barriers to entry by regulation.

Inefficiency because of Monopoly

When there is a monopoly, the quantity that is produced is less, and the price that is placed is higher than in the case of perfect competition. This directly benefits the monopolist who has more profits, but hurts consumers.

However, this aspect it is not enough to claim that this structure is inefficient. Since, so far, we only refer to the transfer of benefits, and assessing this particular point can become subjective.

When a monopolist produces less than perfect competition, there are different levels of production. In them, there are individuals willing to pay for a unit more than it costs the monopoly to produce it.

Thus, if the monopolist can sell additional units without having to lower the price of those it previously sold, there is the possibility of improvement in the Pareto sense. Briefly, increase someone’s well-being without harming others.

Functioning

Now, one of the key questions when talking about monopoly is What price will the monopolist want to set? Well, simple, it is evident that if the monopolist has the possibility of placing the price he wants, he will choose the one that allows him get the most profit possible.

But… Do you mean that the monopolist will set the highest possible price? Not necessarily. It is important to note that even if there are no close substitutes, if the price is high, customers will buy less.

For this reason, the company or company must carry out the respective analysis and make a decision. The same, you can choose the price you want, but you must remember that the higher the price, the fewer products or services you will sell. So your income will decrease.

The monopolist must study the demand, and choose the price with which he considers that he will generate more profits.

Without a doubt, and to culminate, the price set by the monopolist will be much higher that the one who arrives when you are in perfect competition. Also, you will choose point M on a graph instead of point C.

Other types of imperfect competition

Well, to end this report, it is important for us to include this point. It refers to the different types of imperfect competition that are found. Among these types, we can distinguish the following, pay attention to the following text and table:

  1. Monopoly.
  2. Oligopoly.
  3. Monopolistic Competition.
  4. Monopsony.
  5. Oligopsony.

However, it should be noted that each of these 5 (five) types of imperfectly competing market comprise totally different characteristics, functions and objectives. For this reason, in the table that is about to be displayed, we have placed a series of columns.

This with the purpose that the reader may understand each of them in a simpler way. Also, it is quite common for these concepts or terms to be confused or poorly understood. Therefore, in each column we place:

  • In the first column, you can see the market structure, that is: monopoly, oligopoly, monopolistic competition, monopsony, oligopsony.
  • The next column shows the number of suppliers and the degree of product differentiation of these 5 (five) imperfectly competitive market structures.
  • We continually have the degree of control over the price.
  • And, finally, the last column is destined for some examples of imperfectly competing market rates.
Market structure Number of bidders and degree of product differentiation Degree of Control over Price Examples
Monopoly A single bidder, there are no substitute products Full Drinking water services monopoly (unregulated)
Oligopoly Few suppliers with homogeneous or differentiated products Any Vehicle manufacturing (differentiated) or chemical products manufacturing (undifferentiated)
Monopolistic Competition Many bidders with different products Any Fast food
Monopsony Single plaintiff Full Public work
Oligopsony Few plaintiffs Any Large distributors

To end our writing, we invite you to help us share the information.

See you soon!

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