MONOPOLY

Monopoly



Monopoly

A monopoly is a firm that is the sole seller of a good or a service in a market. This absence of competition allows the monopoly freely to set its price in such a way as to extract a maximum profit from its sales. Becoming a monopoly constitutes the ideal situation for any profit-maximizing enterprise. (Werden 2008 p. 514)

The welfare implications of monopolies diverge according to the time horizon considered. In the short run, monopoly-pricing power is incontestably harmful to consumers. In the long run, and under certain conditions, monopolies can be socially beneficial because of their propensity to innovate. (Waterson 2007 p.45)

The existence of monopolies poses difficult problems of regulation for authorities. Lawmakers must encourage some monopolies, restrict the market power of others, and simply outlaw still others. The globalization of markets renders even more arduous the implementation of a policy toward national monopolies. (Silberston 2006 p.511)

Sources of Monopolies

A monopoly can have six different sources. First, a company may have exclusive property rights to a natural resource, a process of production, or an invention. Thus, a patent or a copyright confers on its holders a long legal monopoly on the exploitation of an invention or a creation.

Second, the public authorities may grant a firm an exclusive right to sell a good or a service, such as water distribution in a city. Third, a monopoly may arise from the dynamics of competitive markets, characterized by a process of natural selection that leads to the progressive elimination of less profitable companies. (Singer 2008 p.75) The result of this process can be a monopoly, when a company eliminates all its rivals, or a quasi-monopoly. The latter occurs when one very large company dominates the market even though a number of small companies manage to survive. Microsoft, a U.S. corporation, is a quasi-monopoly worldwide. (John 2006 p.49)

Fourth, a monopoly may develop from the conditions of production. One speaks then about a natural monopoly. A natural monopoly exists when, due to its origin, manufacturing, or marketing costs, the average total cost of a good decreases with the quantity produced. The production of the good by a single firm is then less expensive than its production by several. Natural monopolies are frequent in markets requiring a network of infrastructure, such as railways. The fifth source of monopoly is an agreement by competitors to function collectively like a monopoly. They then form a cartel. The cartel fixes the selling price and allocates a production quota among its members. Recently, the global producers of vitamins cartelized the world market. Professions' (such as lawyers') controlling the entry of new members can also have regulating powers that make these professions similar to a cartel. (Leibenstein 2005 p.15)

Finally, a necessary but not sufficient condition for the existence of a monopoly is the existence of entry barriers, which prevent or dissuade other firms from offering the same good. The large profits of a monopoly normally arouse the greed of firms that would like to enter its ...