What is monopolization and how does it affect the economy?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

In the economy, there are a fairly large number of different processes that affect its development and course. One of them is monopolization. This phenomenon has both positive and negative features, and must be monitored and regulated in order to avoid significant negative consequences. So what is monopolization, what is its essence and what is the impact?

Definition of concept

To understand the question "what is monopolization", it is necessary to understand that the market of perfect competition is characterized by the homogeneity of the goods offered, a large number of producers, freedom of trade and information. This situation is theoretically ideal and is taken as a model, but does not occur in reality. Its complete opposite is the establishment of a monopoly. That is, the market (or its separate direction) is occupied by one or several large companies that set the pricing policy, regulateproduction volumes, etc. This is the process of monopolization. It covers, as a rule, one branch of the economy. For example, in the countries of the post-Soviet space, almost everywhere there is a monopoly in housing and communal services. The monopolization of the industry in this case is characterized by the fact that only one company provides electricity to the population and enterprises, gas - the second, water - the third, etc. The consumer does not have the opportunity to choose a supplier, there is no price competition, etc.

Negative facts

The problems of market monopolization directly follow from the definition of the concept itself. These include the following:

• Low level or complete absence of competition slows down the development process, significantly reduces the need for product improvement and modernization.
• A monopolist can independently set the price of his product, regardless of the capabilities of the consumer, which violates the price equilibrium.
• Difficulty entering the market of new enterprises with similar products.

Positives

What is monopolization in terms of impact on the economy? It cannot be said that this process has an exclusively negative impact, since there are several arguments in its favor. For example:

• A large manufacturer (or a combination of several) has a fairly wide financial and technical capabilities for research, development and implementationnew technologies to reduce production costs.
• Monopolist companies, due to their scale, are more resistant to market fluctuations in the industry or the entire market, to financial and economic crises, etc.

Consequences

When there is monopolization, there is usually a net loss to society. This is expressed in the fact that producers can increase prices for goods and services almost without limit, regardless of changes in costs, and the consumer is forced to purchase them on established conditions. Since the income of the buyer does not increase, the volume of purchased products decreases, which means that the level of productivity of the entire industry also falls. Despite the fact that the monopolist receives unreasonably high profits, the whole society as a whole loses from this process. In addition, the consequences follow from the negative aspects listed above.

How to recognize?

What is monopolization from a practical point of view? In different countries and industries, the value by which the level of competition is determined varies significantly. Theoretically, it is believed that if a third of the industry is occupied by the products of one manufacturer, half by three companies (manufacturers or service providers), and five cover more than 60%, then there is a low level of competition. A market is recognized as monopolized if the total number of enterprises is no more than ten. For calculation, the Harfindel-Hirschman index is usually used, based on the indicators of the total number of firms and their shares in the industry as a percentage. The task of determining the level of monopolization and the degree of competition usually rests with the state, since this process significantly affects the economy and the development of not only a particular industry, but the entire country as a whole, as well as, as a result, the standard of living of the population.

Government intervention

The presence and level of monopolization in the country's economy is regulated at the legislative level. Economic measures applied to maintain competition and prevent monopoly and its negative impact include:

• Support, finance or provide incentives to manufacturers of substitute goods, scarce products, etc.
• Attracting investments in monopolized industries, including foreign ones, as well as assistance in their entry into the market
• Initiating and funding research and development activities to develop a low-competition industry.

Administrative government measures include:

• Control the creation, mergers, acquisitions, etc. of manufacturing companies.
• Forced demonopolization (separation, crushing).
• Pen alties, administrative and criminal liability for attempts to monopolize the industry.

The most complex and well-developed system of struggle is considered to be introduced in the USA. However, in recent years, Russia has also come to grips with resolving the issue of market monopolization, including the adoption of the Law on Competition, and the creation of a special committee to work in thisdirection.