Unlike a competitive firm, a monopoly seeks Definition of concepts, similarities and differences

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:55

Often in the economy there is such a term as "monopoly". What is it, how does it differ 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 questions in order.

Features of monopoly

Monopoly is an enterprise that produces unique products that have no analogues on the market. The main difference of such an organization is complete control over the sales market.

Without competitors, a monopoly firm has the ability to regulate the volume of supply of manufactured products, set the 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 on its own how much to satisfy the needs of the consumer. If the monopolist increases output, the price will fall. Accordingly, by decreasingthe release of goods, you can increase the price of it. Unlike a competitive firm, a monopoly strives to produce products in the minimum allowable quantity.

When varying the price, 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 the product should not be lower than the cost of its manufacture. Unlike a competitive firm, a monopoly seeks to maximize the price of its 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 the offered price, having no alternative.

History of occurrence

Monopolies originate from ancient times, since the emergence of the exchange. Even then, merchants understood how to increase profits: eliminate a competitor and offer a small amount of goods. Aristotle considered this a smart economic policy for both the ruler and any citizen.

In the Middle Ages, the ruler gave the subject the so-called privilege - the exclusive right to produce any product. Monopolies at this 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 take over the market, become a sovereign master and set his own conditions. But modern features of monopoly acquired only at the endnineteenth century.

It was at this time that there was a close connection between these types of businesses and the financial crisis. So firms tried to get out of this difficult situation. As a result, at the end of the nineteenth century, there was a real threat to one of the most important components of the economy - competition.

Educational Methods

At all times, despite the fundamental differences in situations and conditions, enterprises that dominate the market arose according to the same invariable rules.

The beginning of the path to monopolization lies, strange as it may sound, in competition itself. Wishing to overtake rivals, each company seeks to take a leading position in the market and increase profits. In today's economy, any form of competition is acceptable as long as it is within the law. Thus, artificial monopolization has become more common these days.

Today, there are several ways to acquire market power. The first of these, and the oldest, is the decision of the authorities to assign a dominant position to a firm in a certain industry, forbidding other enterprises to occupy niches in a particular segment.

The next method is to force out the weaker representatives with the help of competition. You can create a cartel. In this case, market participants agree on production volumes and prices for goods.

The most popular method of creating a monopoly today is a merger or acquisition.

Alsodominance in the market can be achieved by owning unique natural resources. In this case, the enterprise automatically becomes a monopoly.

Views

A natural monopoly is a firm that cannot compete due to high technological complexity or high construction costs. Examples of such enterprises are the railway, water and electricity systems.

An artificial monopoly is the result of a merger between firms.

Random - occurs as a result of a temporary predominance of demand over supply. Serves for a narrow circle of buyers.

State monopoly - 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 framework of the market for such a monopoly and creates bodies that will control its activities. Examples are Rosneft, Transneft and other similar companies.

Pure monopoly - the presence of one producer of a certain category of goods. This type is characterized by the absence of competition and analogues of products.

To maintain a pure monopoly, conditions are created to protect it from the emergence of competition. To this end, barriers are being set to enter this market segment. This could be a patent, license, copyright, or trademark. Such a monopoly is also called closed.

Open - the manufacturer fully owns the market until it appearscompetitor. This is temporary.

Simple Monopoly

Let's say the company 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 cost of his products, which will bring him the maximum profit. This monopolist is called a price finder.

A similar approach is used in determining the volume of production. If additional sales increase profitability relative to costs, then output should be increased, and vice versa.

Such a monopoly is called simple and involves the sale of its goods at the same price at any time to each buyer.

Be aware that the demand curve for products is decreasing, so sales can only be increased 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 firm, a monopoly seeks to increase profits by setting a constant price that exceeds marginal cost. If there are several companies in the market fighting for the consumer, these two values will coincide.

Thus, a monopoly can have a harmful effect, acquiring benefits for itself, and damage to society. In addition, insufficient production volume provokesthe occurrence of a shortage.

The lack of competition leads to the fact that the enterprise does not have an acute issue of reducing production costs. The monopoly has every opportunity to cover the costs of an unnecessarily bloated administrative apparatus, outdated technology and an imperfect production structure.

Regulation of activity

In the absence of full-fledged competition, the economy loses many positive qualities. The presence of monopolies leads to unreasonable overpricing and inefficient production. As a result, consumers of these products are forced to purchase them at 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 the fight against the enterprises themselves, but the limitation and prevention of abuses.

Methods of state control

Unlike a competitive firm, a monopoly tends to produce less output, selling it 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 production of goods and reducing prices.

The division of a 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 anti-monopoly program, but all of them, as a rule, are built on a system of prohibitive measures. This may be a veto on the acquisition of shares of competitors,for the conclusion of agreements on the division of the market. There is also a system of pen alties for dishonest behavior in the market. The government can set fixed prices for certain products.

Antimonopoly authorities are formed by law to check such manufacturers. To exercise quality control over the activities of natural monopolies, the state nationalizes them.