Monopolies
Written by Togzhan Batyrbekova
A monopoly is a situation where a large firm/company occupies most of the market for a particular good or service. An example of a monopoly is the Google search engine.
A pure monopoly is a firm that is the only seller in a market. It has complete control in a market. In a pure monopoly:
There is one supplier, which means there are no alternatives or substitutes for a good in a monopoly.
There is no competition because there is only one firm supplying the product.
The quality of the products can be bad because there is no competition.
There is less consumer choice because only one firm makes all the products.
The firm determines the price. Because it is the only supplier, the firm can set any price they like because there are no substitutes to which consumers could switch if the prices are too high.
There are high barriers to entry. In other words, new firms cannot enter a market because they can't compete with the monopoly. These barriers to entry (such as a high entry cost) are called natural, but can also be boosted by the monopoly developing strategies designed to protect their position in the market such as predatory pricing which makes it hard for other firms to compete with the monopoly. In this case, the barriers to entry are called artificial.
This will result in abnormal profits, as monopolies are able to set any prices they like and can prevent competitors from entering a market
However, pure monopolies rarely exist in the real world - but there are still non-pure monopolies in the world. Monopolies will still have some features of pure monopolies. In a monopoly:
There is low competition, as a big part of a market is occupied by one firm.
There are higher prices. This happens because they control a big part of the market and therefore determine a big part of the supply. They can therefore change the amount they supply to control the market price via the price mechanism. So, if they wanted to raise the price, they would decrease the amount they supply, which would have a big impact on the total supply of that product (decreasing it), which would also decrease the price
The quality may be lower because there aren’t many firms to compete with for profit, so there is less incentive for higher quality in order to differentiate.
There can be less choice for consumers because there are fewer firms producing a good and competing with each other.
There are barriers to entry, both natural and artificial.
