Monopoly

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A monopoly represents one of the most extreme market structures in economics, characterized by a single seller dominating an entire industry without meaningful competition.

How it works

How the practice works.

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Types of monopolies

• Pure Monopoly: One company has complete control over a product's supply, with no similar alternatives and significant obstacles for others to enter the market.
• Natural Monopoly: One company can deliver a product or service more effectively than several companies could.
• Public Monopoly: Government-controlled organizations that provide necessary services, such as water and electricity.
• Monopolistic competition: This market structure includes many sellers who offer different products and have some level of market influence.

Characteristics of a monopoly

• Single producer or seller supplying the entire market demand.
• No close substitutes or comparable product for consumers.
• High barriers to entry prevent competitors from entering the market.
• Price maker ability allows monopolist to set market prices.
• Downward-sloping demand curve, monopolist face the entire market demand curve.

Monopoly process

Operate differently from competitive markets:

Profit maximization mechanism

Monopolists maximize profits by producing at the quantity where marginal revenue (MR) equals marginal cost (MC).

Maximization process:

• Determining the output level where MR=MC.
• Setting the price according to what consumers are willing to pay for that quantity.
• Earning economic profits in the long run due to barriers preventing competitor entry.

Price Discrimination Strategies

Charging different prices to different customers for the same product:

• First-degree: Charging each customer their maximum willingness to pay.
• Second-degree: Pricing varies by quantity purchased.
• Third-degree: Segmenting markets based on characteristics like age, location, or time of purchase.

Barriers to entry

• Legal barriers: Patents, copyrights, and government licenses.
• Control of material resources: Owning key inputs such as mines, transport, etc.
• Economics of scale: Large fixed costs make single-firm production most efficient, such as utility companies.
• Network effects: Value increases with more users.
• Deliberate exclusionary practices: Predatory pricing or exclusive contracts.

Why it is a problem

Economists identify several significant problems with monopoly power:

Higher prices and reduced output

Monopolists typically charge higher prices and produce less output than would occur in competitive markets.

Deadweight welfare loss

Reduce output creates a deadweight loss, a reduction in total economic welfare not transferred to any party. This represents the value that could have been created if not for the monopolies restrictions of output.

Reduced consumer surplus

Convert consumer surplus (the difference between what consumers are willing to pay and what they actually pay) into producer profits.

Productive inefficiency

Without pressure, monopolies may lack incentives to:

• Minimize costs.
• innovate or improve product quality.
• Operate at minimum efficient scale.

Potential for abuse of power

• Paying suppliers less.
• Lowering wages for workers.
• Influencing political processes through lobbying.

Examples

• U.S. Steel (1900)
• Standard Oil (1900)
• American Tobacco (1890-1907)
• The American Telephone and Telegraph Company (AT&T) controlled telecommunications in America until 1982.
• De Beers Group had 90% market share in 1980 and 29% as of 2022.
• Nvidia uses its market leader position to mislead consumers and threaten media.
• Ticketmaster is often referred to as a monopoly of live events.