Business studies study module

A monopoly is a market structure in which only one firm produces a commodity which has no close substitutes.

Some of the features in this market structure are;

  • One seller or producer; supplying the entire market with a product that has no close substitute consumers therefore have no option but to use the commodity from the monopolist to satisfy their need.
  • Many unorganised buyers; in the market the buyers compete for the commodity supplied the monopoly firm.
  • The monopoly firm is the industry; because it supplies the entire market, the firms supply curve is also the market supply curve, and the demand curve of the firm is also the market demand curve.
  • Entry into the market is closed; such barriers are either put the firm or they result from advantages enjoyed the monopoly firm e.g. protection the government.
  • Huge promotional and selling costs; are incurred in order to expand the market base and to maintain the existing market. This also helps to keep away potential competitors.
  • The monopoly firm is a price maker or a price giver; the firm determines the price at which it will sell its output in the market. It can therefore increase or reduce the price of its commodity, depending on the profit it desires to make.
  • Price Discrimination is may be possible;This is a situation where the firm charges different prices for same commodity in different markets.

Price discrimination may be facilitated conditions such as;

  • Consumers being in different markets such that it is difficult for one to buy the product in the market where it is cheaper.
  • The production of the commodity is in the hands of a monopolist.
  • Market separation.

Market separation may be based on the following factors;

  • Geographical; Goods may be sold at different prices in different markets.
  • Income; Seller may charge different prices for his/her products to different categories of consumers depending on their income.
  • Time; a firm may sell the same commodity at a higher price during the peak period and lower the price during the off peak period.

Sources of monopoly power

  • Control of an important input in production; A firm may control a strategic input or the entire raw materials used in the production of a commodity. Such a firm will easily acquire monopoly not selling the raw materials to potential competitors.
  • Ownership of production rights;Where the right to production or ownership of commodity i.e. patent rights, copyrights and royalties belong to one person or firm, then, that creates a monopoly. Similarly if the government gives licence to produce a commodity to one firm, then this will constitute a monopoly.
  • Internal economies of scale; The existence of internal economies of scale that enable a firm to reduce its production costs to the level that other firms cannot will force these other firms out of business leaving the firm as a monopoly.
  • Size of the market; where the market is rather small and can only be supplied profitably one firm.
  • Additional costs other firms;A firm may enjoy monopoly position in a particular area if other firms have to incur additional costs such as transport in order to sell in the area. These additional costs may increase the prices of the commodity to the level that it becomes less attractive hence giving the local firm monopoly status.
  • Where a group of firms combine to act as one;Some firms may voluntarily combine/amalgamate or work together for the purpose of controlling the market of their Examples are cartels
  • Restrictive practices;A firm may engage in restrictive practices in order to force other firms of business and therefore be left as a monopoly. Such practices may include limit pricing i.e. where a firm sells its products at a very low price to drive away competitors.
  • Financial factors; where the initial capital outlay required is very large, therepreventing other firms from entering the market.
  • Government Policy ;Where the government establishes a firm and gives it monopoly power to produce and sell ‘cheaply’

Advantages of monopoly

  • A monopoly is able to provide better working conditions to employees because of the high profits realised
  • In some monopolies, high standards of services/goods are offered
  • Monopolies always enjoy economies of scale. This may help the consumer in that the goods supplied a monopoly will bear lower prices.
  • A monopolist may use the extra profit earned to carry out research and thus produce higher quality goods and services.
  • The consumer is protected in that essential services such as water and power supply is not left to private businesses who would exploit the consumers.

Disadvantages of monopoly

  • A monopolist can control output so as to charge high prices
  • Consumers lack freedom of choice in that the product produced a monopoly has no substitute
  • Low quality products may be availed to consumers due to lack of competition.

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