Often in economics there is such a term as "monopoly". What is it, what is its difference from ordinary enterprises and firms? How do such enterprises arise and who controls them? What does a monopoly strive for in contrast to a competitive firm? We will deal with all these issues in order.
Monopoly Features
Monopoly is an enterprise that produces unique products that have no analogues in the market. The main difference of such an organization is full control over the market.
Having no competitors, the monopolist company has the ability to regulate the supply of manufactured products, set a price for it. The monopoly seeks to establish its own rules in the market of its industry.
Such an enterprise, having studied the demand for a product or service, decides to what extent to satisfy the needs of the consumer. If the monopolist increases production, the price will fall. Accordingly, by reducing the release of goods, you can increase the price of it. Unlike a competitive company, the monopoly seeks to produce products in the minimum acceptable quantity.
When varying prices, you need to be careful not to incur losses. Increasing the volume of production and reducing the price of products, you need to calculate its cost. The cost of goods should not be lower than the cost of its manufacture. Unlike a competitive company, the monopoly seeks to maximize the price of products.
The owner of the market always has the opportunity to profit from sales above average due to the fact that the consumer has no choice. The buyer is forced to purchase a product or service at a suggested price without an alternative.
History of occurrence
Monopolies originate from ancient times, from the time of the exchange. Even then, traders understood how to increase profits: eliminate a competitor and offer a small amount of goods. Aristotle considered this a clever business policy for both the ruler and any citizen.
In the Middle Ages, the ruler granted the subject a so-called privilege - the exclusive right to manufacture any product. Monopolies at that time also arose by seizing a certain resource.
Modern market dominance
Monopolization accompanies all economic processes throughout history. The manufacturer at all times sought to seize the market, become a sovereign master and set his own terms. But monopoly acquired modern features only at the end of the nineteenth century.
It was at this time that a close relationship arose between enterprises of this type and the financial crisis. So the company tried to get out of this difficult situation. As a result, at the end of the nineteenth century, a real threat arose for one of the most important components of the economy - competition.
Educational methods
At all times, despite the cardinal differences in situations and conditions, enterprises dominating the market arose according to the same invariable rules.
The beginning on the path to monopolization lies, oddly enough, as it sounds, in competition itself. Wanting to overtake rivals, each company seeks to occupy a leading position in the market and increase profits. In the modern economy, any means of competition is acceptable if they are within the law. Thus, artificial monopolization has become more common these days.
Today, there are several ways to gain power over the market. The first of them, and the oldest one, is the decision of the authorities to assign the company a dominant position in a particular industry, prohibiting other enterprises from occupying niches in a particular segment.
The next method is to supplant the weaker representatives through competition. You can create a cartel. In this case, market participants agree on production volumes and the price of goods.
The most popular method of creating a monopoly today is mergers or acquisitions.
It is also possible to achieve market dominance by owning unique natural resources. In this case, the enterprise automatically becomes a monopoly.
Kinds
Natural monopoly is a company that cannot create competition due to high technological complexity or high construction costs. An example of such enterprises is the railway, water supply and electricity systems.
An artificial monopoly is the result of a merger.
Random - arises as a result of the temporary prevalence of demand over supply. Serves for a narrow circle of buyers.
State monopoly is an organization created by the legislature. Such enterprises are formed to ensure the safety of the population or the management of natural resources. The state establishes the market framework for such a monopoly and creates bodies that will monitor its activities. Examples include Rosneft, Transneft and other similar companies.
Pure monopoly - the presence of one manufacturer of a certain category of goods. This type of inherent lack of competition and product analogues.
To maintain a pure monopoly, conditions are created for its protection from competition. To this end, barriers to entry into this market segment are being established. It could be a patent, license, copyright, or trademark. Such a monopoly is also called closed.
Open - the manufacturer completely owns the market until a competitor appears. This is a temporary phenomenon.
Simple monopoly
Suppose an enterprise is the only manufacturer in its industry. The quantity of goods that it can sell directly depends on the price. The monopolist does not apply an objective approach to pricing. By trial and error, he determines the value of his products that will bring him maximum profit. This monopolist is called a price seeker.
A similar approach is applied in determining the volume of production. If additional sales increase profitability in relation to costs, then output should be increased, and vice versa.
Such a monopoly is called simple and involves the sale of their goods at the same price at any time to each buyer.
Keep in mind that the demand curve for products is decreasing, so sales can be increased only by lowering the price.
So, unlike a competitive firm, a simple monopoly seeks to maximize profits.
Harm to society
As already mentioned, unlike a competitive company, a monopoly seeks to increase profits by setting a constant price that exceeds marginal costs. If there are several companies fighting for the consumer on the market, these two values will coincide.
Thus, a monopoly can have a detrimental effect, acquiring benefits for itself, and damage to society. In addition, insufficient production provokes a deficit.
The lack of competition leads to the fact that the enterprise is not an acute issue of reducing production costs. The monopoly has every opportunity to cover the costs of an unjustifiably inflated management apparatus, outdated technology and an imperfect production structure.
Activity regulation
In the absence of full competition, the economy loses many positive qualities. The presence of monopolies leads to unreasonably high prices and production inefficiencies. As a result, consumers of these products are forced to purchase them at a high cost and inadequate quality.
To protect the rights of buyers, the state applies methods of regulating the activities of monopolies. This does not mean combating the enterprises themselves, but limiting and preventing abuse.
State control methods
Unlike a competitive company, a monopoly seeks to produce fewer products, selling them at a high cost. Measures to regulate the activities of such enterprises are aimed precisely at limiting their power in the market, increasing the volume of output of goods and lowering prices.
Dividing the dominant company into several smaller ones to create a competitive environment is not always justified. A large enterprise has more opportunities to produce quality products at minimal cost.
Each state has its own antitrust program, but all of them, as a rule, are built on a system of prohibition measures. This may be a veto on the acquisition of competitors' shares, on the conclusion of market sharing agreements. A system of penalties for unfair market behavior is also applied. The state may set fixed prices for certain products.
Legislatively formed antitrust authorities that are involved in verification of such manufacturers. To carry out quality control of the activities of natural monopolies, the state nationalizes them.