Essay Sample on Monopoly: Market Structure & Natural Resource Control

Introduction

A monopoly is a market structure where there is a sole seller or producer for goods and services. Entry into a monopolistic market is often restricted by factors like high starting cost, patent, ownership of resources, copyright and government license (Amadeo, 2019). These factors restrict other sellers from entering the market. For instance, a government can monopolise an industry such as electricity that it needs to control. In this market structure, a single entity often owns natural resources to prevent any organisation from producing substitute products and services, which would influence competition (Dhingra & Morrow, 2019). For example, in Saudi Arabia, the government has total control of the oil industry. The government also controls all the resources required to manufacture oil, and this bars any company from entering into the monopolistic sector. Therefore, entities in a monopoly market are price makers, profit maximisers, single sellers and have high barriers to entry because they own the resources.

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Statement of Opinion

Monopolies always disadvantage the consumers in free markets where perfect competition is a necessity. These markets have many buyers and sellers as well as similar products. They give customers alternative choices in case one company produces products and services that do not meet their demands or increases the price of goods and services. In perfect competition, the cost of the products is determined by their demand and supply. This form of a free market is absent in an organisation that owns a monopoly. Since there is no competition, the consumers are forced to purchase the products and seek the services of this company due to the lack of substitute products and services. This market structure manipulates the influence of demand and supply, and it maximises its use to prevent competition. Simply put, a monopolist is the market maker and controls the products available in the market.

Alternate View Points

Various economists believe that monopolists can increase product prices without considering the competitors' actions. In a perfectly competitive market, companies usually lose market share if they raise product prices because the buyers move to other sellers with similar products, but low costs (Pettinger, 2019). It is noteworthy that monopolies have advantages and disadvantages. According to Amadeo (2019), one of the significant benefits of a monopoly is that it ensures consistent delivery of products and services with very high up-front costs. Electric and water utilities are examples. From an economic viewpoint, building new electric plants or dams is very expensive. Therefore, it makes economic sense to monopolise this industry to pay for these costs.

Dhingra & Morrow (2019) viewed that a company can gain reduced average costs in the long-run in a market with high fixed costs, by exploiting the economies of scale. This is significant for organisations that operate in a natural monopoly such as gas network and rail infrastructure. For example, Pettinger (2019) observed that it makes no sense having numerous small firms providing tap water due to their possibility in duplicating infrastructure and investment. The large-scale infrastructure increases the efficiency of having a monopoly in this sector,.

Monopolies have also been argued as bad for the economy because they restrict free trade and prevent the market from establishing prices. In particular, Amadeo (2019) claimed that they set fixed prices since they are single providers of products and services. According to this view, monopolistic companies set fix prices irrespective of the demand because they know customers have no choice. This is true, mainly when there is inelastic demand for products and services. An example is a gasoline. Some consumers could switch to public transport while most cannot.

Monopolies can also lead to loss of innovation. A research conducted by the National Bureau of Economics in 2017 found that most enterprises in the United States have invested less than expected since 2000 as a result of reduced competition (Dhingra & Morrow, 2019). This was true of cable companies that spend little on research and development until satellite dishes and online streaming services interfered with their monopoly.

Real-World Economic Implications

In pure competition, demand is always entirely elastic for each firm. As such, each company can sell its products at the market price to maximise profits by increasing production until marginal cost and price are equal (Dhingra & Morrow, 2019). Nonetheless, due to competition, inefficient organisations are kicked out while effective companies are attracted to the market to produce their products at the minimum average total cost (ATC). Under pure competition, Marginal cost, ATC and price are equal. Since goods ate produced at the lowest ATC possible, a competitive market attains productive efficiency (Amadeo, 2019).

A competitive firm also achieves allocative efficiency because it sells the products at the minimum possible price. The lowest possible price allows many customers to enjoy the product. It also enables the firm to maximise surplus of the consumers (Pettinger, 2019). Unlike perfect competition, a monopolist does not set a state of equilibrium between the price and Minimum ATC. Instead, it sets a balance between marginal revenue (MR) and marginal cost (MC). This state implies that a monopoly does not attain productive efficiency.

Furthermore, a monopolist selects a price on the demand curve when MC equals MR, which is a higher price compared to when the price equals the lowest ATC (Pettinger, 2019). Therefore, the monopoly does not also attain allocative efficiency, implying that many consumers will not enjoy the product as a result of its higher price (Amadeo, 2019). However, those who purchase the products from a monopoly market will enjoy minimum consumer surplus. According to Dhingra & Morrow (2019), an increased price of a monopoly is similar to a private tax that exhibits equal deadweight loss that most taxes exhibit.

Monopoly is also associated with higher prices. Due to lack of competition, a price (P1) of a commodity in a monopolistic company is higher than the price (P) in a competitive market as shown in the figure below. The economic warfare regions under perfect competition are represented by letters E, F, and B. If the market is dominated by a monopoly, the loss of consumer surplus is represented by P, P1, A, and B. At higher price P1, the new area of producer surplus is E, P1, A and C. Therefore, area A, B and C remain as the overall net loss of economic warfare.

Summary of Opinion

If a monopoly occurs, the government can handle it depending on the type. For instance, in a natural monopoly where a sole supplier can offer the product or service at a minimum cost, the government can regulate the prices. This scenario is the case for electricity and natural gases. If the firm attained its monopoly through anticompetitive means, the government could stop it from applying certain business practices that it uses to maintain its monopoly (Dhingra & Morrow, 2019). For instance, Microsoft is banned from doing certain things, but the firm was allowed to charge high prices for its Microsoft Office Software and Windows operating system.

Besides, monopolists can lose their dominance due to technological changes and the complacency of its managers (Amadeo, 2019). Microsoft is a good example of this scenario. Although it maximises profits, the company has been stagnant for a long time due to its inability to compete in new areas like providing software for mobile devices. Its presence is also not common in tablets despite Microsoft being one of the first companies to invest in manufacturing tablet computers (Dhingra & Morrow, 2019). Currently, the firm is spending much money on search, but it does not have a larger market share compared to Google.

Conclusion

A monopoly exists when the market is dominated by a single seller or producer of a product or service. It is characterised by a lack of competition and price restrictions in the industry. Factors like ownership of resources, government license, patent, copyright, and high starting cost restrict the entry of other entities into the market. Monopolies have many disadvantages than advantages to the economy. On the right side, they ensure consistent delivery of products and services with very high up-front costs. On the wrong side, monopoly restricts free trade and prevent the market from establishing prices. It also leads to lack of innovation due to the lack of a competitive market. Monopolies can be addressed depending on the type. In a natural monopoly where a sole supplier can offer the product or service at a minimum cost, the government can regulate the prices. Alternatively, if the firm attained its monopoly through anticompetitive means, the government can stop it from applying certain business practices that it uses to achieve its monopoly.

References

Amadeo, K. (2019, December 27th). The balance. Retrieved from https://www.thebalance.com/monopoly-4-reasons-it-s-bad-and-its-history-3305945

Dhingra, S., & Morrow, J. (2019). Monopolistic competition and optimum product diversity under firm heterogeneity. Journal of Political Economy, 127(1), 196-232. Retrieved from https://www.journals.uchicago.edu/doi/abs/10.1086/700732

Pettinger, P. (2019, September 20th). EconomicsHelp. Retrieved from https://www.economicshelp.org/blog/265/economics/are-monopolies-always-bad/