The essence and main indicators of monopoly power

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

Indicators of monopoly power indicate that a company has the ability to influence the cost of its products by changing the quantity of goods sold on the market. At the same time, its degree is rather relative if there is not one, but several manufacturers of similar goods on the market at once.

Sources or factors

For a company in the market supply, the following indicators of monopoly power can be distinguished:

• a large share of the organization in the market supply;
• the absence of any full-fledged substitutes for a product that is produced by a company with monopoly power.

In addition, an indicator can be called a slight elasticity of demand for the goods of this organization.

Such indicators of monopoly power indicate that the company can set the highest cost of its own products, without being embarrassed by any limiting factors.

Oligopoly

This is a special market structure in which the vast majority of sales are carried out by just a few large organizations, each of which has a direct opportunity to provideimpact on market value. Its characteristic features include the following factors:

• there are several dominant organizations in the market;
• companies have sufficiently large market shares, that is, they have indicators of monopoly power over value;
• the demand curve of each such organization is characterized by a "falling" character;
• firms are closely interconnected and interdependent;
• there are many obstacles for new companies to enter the market;
• no possibility of normal demand assessment;
• unable to determine MR;
• there are implications of the interconnectedness.

Types and types of behavior

Due to the uncertainty of market behavior, a huge number of the most diverse oligopoly models appear, which are divided into formats of non-cooperative or cooperative behavior.

When it comes to non-cooperative behavior, each individual seller can completely independently solve the problems of determining the cost, as well as the total output of a particular product. With cooperative behavior, all companies that have indicators of monopoly power in the market solve similar issues together.

There are several types of behavior.

Cartel agreement

Conspiracy is a certain form of oligopolistic behavior that ultimately leads to the formation of so-called cartels, that is, groupsfirms coordinating different decisions about the volume and cost of certain products as if they were a single organization with indicators of monopoly power in the market.

Defining a single price allows you to maximize the revenue of each individual member of this cartel, but at the same time, along with an increase in price, there is a mandatory decrease in the volume of production. When concluding such an agreement, each company, trying to maximize its profits, quite often begins to violate the agreement, secretly from others, gradually reducing the cost of its products, which ultimately leads to the destruction of the emerging cartels.

Besides the fact that monopoly power indicators include many different factors, which are quite difficult to prevent, there are several other ways to exclude the possibility of collusion. In particular, this concerns the provision of the following conditions:

• differences in costs and demand;
• a large number of companies in the industry;
• emergence of a sudden downturn in business activity;
• the opportunity for new entrants to enter the industry.

Among other things, it is worth noting the fact that companies themselves can prevent collusion by carrying out fraud based on a hidden cost reduction based on the principle of price discrimination of marketable products.

Price Leadership

Leadership in price or howit is also called tacit collusion, is an agreement that is concluded between several oligopolists and indicates the establishment of a certain value for their products. The main point here is that various organizations in this area are guided by those prices that are determined by a single leader company. At the same time, accordingly, in the overwhelming majority of cases, the organization that is the largest in its particular field is chosen as the leader.

Regardless of how various industry organizations are classified as indicators of monopoly power, the tactics of a leader in price adjustments can be as follows:

• changes in prices periodically if there are significant changes in costs;
• impending price revision tentatively announced via media;
• price leader does not always choose the highest possible price.

Price containment

This practice provides for the establishment of a minimum cost of products, which creates serious obstacles for any other companies to start participating in the market. At the same time, it is worth noting the fact that firms may even give up any profit for a certain time only in order to exclude the introduction of a competing organization into the market.

The mechanism of this practice is extremely simple. Initially, companies that have indicators of the monopoly power of the manufacturer estimate the possible average minimum costs of the future competitor, andthen they simply put the cost of their products one level lower.

Cost Plus

However, it is worth noting that the cape must be of the appropriate volume in order to fully cover the AFC, and at the same time provide a normal profit.

Perfect competition

Under perfect competition, it is envisaged the creation of such a market structure in which there is a huge number of different companies engaged in the production and sale of homogeneous products, as a result of which no one has any indicators of the monopoly power of the company. At the same time, the entry or exit of any new market participants is not limited by anything, and the share of each individual organization in the total volume is extremely insignificant, and therefore cannot have any serious impact on the market value of products. At the same time, on the contrary, each individual participant is directly dependent on the elements of market forces and is a price taker.

Monopoly

A certain company has all the basic indicators of monopoly power - it resists the largest number of buyers, and at the same time is the only manufacturer of a product that does not have anyapproximate substitute products. This model has several characteristic features:

• company is the only manufacturer of certain products;
• the main indicator of monopoly power is that the product being sold is completely unique, since there are no substitutes for it;
• entry to the market is in every possible way limited by the monopolist to all sorts of insurmountable barriers that can be created artificially or be natural;
• the producer has all the indicators of the concentration of monopoly power, since he controls the market supply and the cost of this product.

In other words, the monopolist is the sole setter of value, that is, he sets a certain price, and after that the buyer must determine how much of this product is available to him. At the same time, one must correctly understand that in the vast majority of cases he cannot set it too high, because with growth, demand also decreases.

Examples of organizations that have indicators of market monopoly power include various public utility companies such as water supply companies, gas and electric companies, as well as transportation companies and all kinds of communication lines. In this case, all kinds of licenses and patents act as artificial barriers, which provide some firms with the exclusive right to work in a certain market.

Monopolist competition

Today, a fairly large number of manufacturers offer similar, but not absolutely identical products, as a result of which a monopoly can no longer be formed so easily. Indicators of monopoly power are still present, but at the same time, there are heterogeneous goods on the market, which already somewhat reduces the influence of each of the producers.

The conditions of perfect competition include the production of standardized products, while monopolistic competition includes the production of differentiated products, and first of all, this refers to the quality of the product or service, which allows the consumer to receive certain price preferences. It is also worth noting that products can be differentiated by the terms of service after purchase, by the intensity of advertising used, by proximity to consumers and a number of other important factors.

Thus, companies operating in the market of monopolistic competition not only compete with each other by establishing a certain value, but also by differentiating their services and products, which reduces their indicators of monopoly power.

The Lerner Index and others clearly reflect this dependence, because each individual company in such conditions has a certain monopoly power over its own products. That is, it has the ability to independently increase or decrease the value depending on certain actions on the part of competitors, but at the same time, this power is directly limited by what is on the market.manufacturers producing similar products. Among other things, one should not forget that monopolistic markets provide for the presence, in addition to medium and small companies, of fairly large market representatives.

This market model provides for a constant desire on the part of its participants to expand their own area of preferences by making their products as individualized as possible. First of all, this is done through the use of trademarks, as well as any names and an extensive advertising campaign that make it possible to clearly highlight the differences between several types of commercial products.

Main differences

If we talk about the difference between perfect polypoly and monopolistic competition, when many companies have fairly high levels of monopoly power, we can distinguish several main features:

• in a perfect market, heterogeneous rather than homogeneous goods are sold;
• There is no full transparency for market participants, and their actions are far from always subject to economic principles;
• companies are trying to expand their area of preference as much as possible, constantly individualizing their own products;
• there is difficulty in gaining market access for any new sellers due to preference.

Features of an oligopoly

If there are not so many competitors, and only a certain numbercompanies dominate in a certain area, this model is called an oligopoly. Examples of classic oligopolies include the "big three" in the United States, which include well-known organizations such as Ford, General Motors and Chrysler.

Oligopoly can produce not only homogeneous, but also differentiated goods. In the overwhelming majority of cases, the predominance of homogeneity is found in markets where the sale of semi-finished products and all kinds of raw materials is widespread, that is, the markets for oil, steel, ore, cement and other similar products, while differentiation is characteristic of consumer goods markets, where indicators (indices) monopoly power are not so high.

A small number of companies contribute to the fact that they enter into various monopolistic agreements related to the establishment of certain prices, as well as the division or distribution of markets and other ways to impose restrictions on competition. It has long been proven that competition in such markets directly depends on the level of concentration of production, so the number of companies plays a decisive role here.

It is also worth noting the fact that a fairly important role in the nature of competitive relations in this market is given to the volume and structure of various information about competitors, as well as the main conditions of demand, which is available to each of the participants. If such information is insignificant, then this contributes to the more competitive behavior of each company.

Differences

MainThe difference between an oligopolistic market and a form of perfect competition is the price dynamics present here. In this case, each company has a fairly high indicator of Lerner's monopoly power, that is, marginal costs are below the monopoly price, and each organization has the ability to independently set the cost of its products, minimally succumbing to the influence of its competitors and the market as a whole.

In a perfect market, the cost of goods fluctuates continuously and unsystematically, as it directly depends on fluctuations in supply and demand, while an oligopoly often provides for a fairly stable price fixing, and changes here are a rather rare occurrence.

As mentioned above, the so-called leadership in prices is typical, when the cost of a particular group of goods is dictated by only one company, while it is followed by other oligopolists who have some kind of monopoly power. Essence, indicators - measurements of these factors are constantly carried out, because each of the organizations is trying to develop and take a leading position in this form.

At the same time, the market is difficult to access for any new entrants, and if the oligopolists have entered into an agreement regarding cost, then competition begins to gradually shift towards advertising, quality and individualization.

Types of competition

Non-price competition provides for promotion to the firsta plan for higher reliability at a lower "cost of consumption", a more modern design and many other factors. Thus, people are most often willing to overpay for reliable and proven Japanese technology instead of buying domestic products.

It is also worth noting that non-price methods of competition include the provision of a large number of services, the accounting of old delivered products in the form of a down payment for new goods, and many others. Reduced metal consumption, energy consumption, environmental damage and a host of other improved consumer properties over the past few decades have come forward significantly in the field of non-price advantages of a particular product.

Of course, the most powerful way of conducting non-price competition at all times has been advertising, the role of which today is much higher compared to what it was just a few decades ago. With the help of advertising, each company can not only convey to the direct consumer the necessary information regarding certain consumer properties of its own products, but also creates confidence in its policy, trying to form the image of a kind of “good citizen” of the state on the market of which it operates.

Among the illegal methods of non-price competition, an industrial character stands out, the release of goods that outwardly do not differ from original products, but are much worse in quality, the acquisition of samples for their subsequent copying, as well as active poachingspecialists with some production secrets.

Thus, competition is carried out by a variety of methods, each of which has its own characteristics and degree of effectiveness.