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.

Monopoly by merger

Gaining market control from acquisitions and mergers.

Technological monopoly

Exclusive patent rights on a product or process preventing competition.

Geographic monopoly

A single company dominates a specific geographic area.

Government monopoly

State controlled companies.

Monopolistic competition

This market structure includes many sellers who offer different products and have some level of market influence.

Key characteristics

• Single producer

The market consists of only one company supplying the entire market demand.

• No close substitutes

Consumers have no alternative products that can satisfy the same need.

• High barriers to entry

Significant obstacles prevent competitors from entering the market.

• Legal barriers

Patents, copyrights, government licenses.

• Control of essential resources

Owning key manufacturing processes or mining operations

• Economies of scale

Large fixed costs make single firm production most efficient.

• Network effects:

Value increases with more users.

• Deliberate exclusionary practices:

Predatory pricing or exclusive contracts.

• Price maker ability

The monopolist can set prices rather than accept market prices.

• Downward-sloping demand curve

Unlike competitive firms, monopolists face the entire market demand curve.

• Price discrimination strategies

• 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.

Monopoly process

Profit maximization

Primary objective is to increase the wealth of the owner or the shareholders of the firm by increasing the net profits.

Maximization process:

• Adjusting production so marginal costs equals marginal revenue.(MC = MR)
• 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.

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

• American Tobacco (1890-1907).
• Anheuser-Busch InBev (AB InBev) was created in 2008 from the merger of the two largest beer companies, Anheuser-Busch and InBev. 1.88 billion hectolitres produced globally (one hectoliter equals 100 liters or 26.5 gallons U.S.). AB InBev accounting for 506 million hectoliters, more than double the production of the second largest company, Heineken.
• Carnegie Steel Company (1900).
• De Beers Group:

Established by Cecil Rhodes in 1888.They have faced numerous allegations throughout its history. He purchased the remaining mines and diamonds from other companies, nearly 85% of the diamond market fell into the hands of Da Beers Group. It began to lose its control in the 1950s when new mines were discovered in other parts of the world. They are responsible for 30% of diamond sales globally and have been accused of limiting the supply of diamonds to manipulate its prices.

• Google.
• Luxottica.
• Microsoft Windows
• Nvidia uses its market leader position to mislead consumers and threaten media.
• Standard Oil (1900).
• The American Telephone and Telegraph Company (AT&T) controlled telecommunications in America until 1982.
• Ticketmaster is often referred to as a monopoly of live events.
• Tyson Foods.
• Yoshida Kogyo KabushikiKaisha (YKK) founded in 1934, currently controls 90% of the zipper market and is rarely accused of being a monopoly.