The term monopoly refers to a situation in which a single person or organization is the only supplier of a particular commodity or service. In order for a monopoly to exist, there must be a lack of competition in the production of the good or offering of the service, as well as a lack of legitimate alternatives to the product or service. Essentially, a person or business holding a monopoly becomes “the only game in town.” To explore this concept, consider the following monopoly definition. There are no products (or services) that match the offerings of the monopolist firm. The absence of close substitutes makes the demand for monopolist products relatively inelastic. The demand is inelastic when it does not change much with a change in the price of the product.
Types of Monopolies
It is one in which different prices are charged for the same product for different customers. Public monopolies are created when the government nationalizes certain industries to serve the interest of the people. Monopolies that first enter a market have access to resources that it may choose to keep for itself. Due to this, these scarce but essential resources are made unavailable to the potential entrants. In 1982, AT&T, which had telephone lines that reached nearly every home and business in the U.S., was forced to divest itself of 22 local exchange service companies, which were the main barrier to competition. Congress to limit trusts, a precursor to monopolies or groups of companies that conspired to fix prices.
This is because if a competitor too decides to charge the same price for the commodity, the competitor will face losses as the cost of production for the monopolist is far lower than the competitor’s cost of production. A monopoly is characterized by a single company supplying a good or service, a lack of competition within the market, and no similar substitutes for the product being sold. Monopolies can dictate price changes and create barriers for competitors to enter the marketplace. Standard Oil was created by John D. Rockefeller in 1882, and by 1890, Standard Oil controlled 88 percent of all refined oil production, refinement, transportation, and marking in the U.S. The company’s control of oil production rose to 91 percent by the turn of the century, as it engaged in what were later deemed unfair business practices to prevent other companies from entering the oil market. The U.S. Department of Justice sued Standard Oil for its monopoly, citing both discriminatory and unfair practices as two of the sources of its power.
- Antitrust legislation is in place to restrict monopolies, ensuring that one business or group of businesses cannot control a market and use that control to exploit consumers.
- Barriers to entry are low, and the competing companies differentiate themselves through pricing and marketing efforts.
- Price fixing is an agreement among competitors to raise, lower, maintain, or stabilize prices or price levels.
- What amount of actual total profits—however maximum they would be in the given cost-revenue situation—will be earned by the monopolist in this equilibrium position?
Sunk costs are those which cannot be retrieved in the case a firm shuts down. These are costs that are essential for the firm, like advertising costs, but cannot be recovered. A federal district judge ruled in 1998 that Microsoft was to be broken into two technology companies, but the decision was later reversed on appeal by a higher court. Microsoft was free to maintain its operating system, application development, and marketing methods.
- Going forward, any action made against manufacturing monopolies would need to be taken by states individually, as opposed to escalating the case to the federal level.
- All the major chapters in the American story, from Indigenous beginnings to the present day.
- Such a barrier is generally measurable by the extent to which established sellers can persistently elevate their selling prices above minimal average costs without attracting new sellers.
- As a result, American Sugar had a 98 percent monopoly over the nation’s sugar refining market.
- The monopolist firm (price maker) may or may not charge the same price from all its consumers.
Moreover, competitors are discouraged from entering the market often due to high initial costs. Several writers addressed the perceived weaknesses of monopoly money in the 1980s. Besides, he gains from write the meaning of monopoly the usual economies, resulting from large-scale production.
What Is a Monopoly? Types, Regulations, and Impact on Markets
The single firm, being the sole supplier, becomes synonymous with the industry. This implies that the difference between a firm and an industry ceases to exist in the case of a monopoly. The new entrants have to face several challenges while trying to enter a monopolist market.
The monopolist firm (price maker) may or may not charge the same price from all its consumers. The consumers (price takers) have to accept the prices set by the firm unless the government intervenes to impose a maximum price. A monopoly is a market where one firm (or manufacturer) is the sole supplier of certain goods or services.
A local company operating within one state can be investigated by the Attorney General of that state. Price fixing is an agreement among competitors to raise, lower, maintain, or stabilize prices or price levels. Antitrust laws require that each company establish prices and other competitive terms independently, without consulting a competitor.
Social Monopolies
The search giant faces a potential breakup after a federal judge ruled last year that Mountain View, Ca.-based Google illegally maintained a monopoly in online search. The monopoly in the provision of social media services by big US tech could be shaken up. Meta boss Mark Zuckerberg has taken the witness stand in a landmark antitrust trial to defend his company against allegations that his company operates a social media monopoly.
Monopolist’s Demand Curve and Marginal Revenue
Under monopoly conditions, too, there is bound to be interaction between the forces of demand and supply. However, the difference is that supply is not free to adjust itself to demand. A monopolist is the sole producer of his product, which has no closely competing substitutes. In other words, the cross-elasticity of demand between the product of the monopolist and the product of the closest rival must be very low i.e. the product of a rival cannot take the place of the monopolised product.
Each player starts with $1,500, as distributed and managed by the game’s designated banker. For instance, the company has developed “Terminator” seeds, which worked to sterilize farmers’ plants so that they would be incapable of producing seeds in the future. This way, the farmers have to buy more seeds each year, rather than re-planting from their own crops. Monsanto has actually prosecuted farmers for using Monsanto seeds that they obtained from neighboring farms. We spend a lot of time researching and writing our articles and strive to provide accurate, up-to-date content. However, our research is meant to aid your own, and we are not acting as licensed professionals.
Such challenges include high startup costs, specialized technologies, high government restrictions, complex business contracts, restricted purchase of raw materials, etc. Monopoly is derived from the words “monos” (single) and “polein” (to sell) of Greek. Monopoly was first depicted in The Landlord’s Game, which was invented by Elizabeth Magie Phillips (or Lizzie Magie) in 1904. This game inspired the monopoly board game that is played by most students today. With the existence of a large monopoly, the risk of a potential entrant going out of businesses always looms. Hence, these potential entrants hesitate when it comes to taking a risk that could cost them too much.
The most consequential monopoly breakup in U.S. history was that of AT&T. After controlling the nation’s telephone service for decades as a government-supported monopoly, AT&T fell to antitrust laws. Public monopolies, such as the utility industry, provide essential services and goods. The monopoly is allowed and heavily regulated by government municipalities. In colloquial speech and writing, counterfeit money is sometimes called Monopoly money for rhetorical effect to indicate its worthlessness, and, in the case of poor counterfeits, its fake appearance. The phrase Monopoly money has other, unrelated, uses which predate the board game and which are worth noting here.
House of Representatives claimed that the record company BMI was handing out Monopoly money to get airplay. The witness invoked the game, suggesting that the money was thrown around “indiscriminately” like play money. The term was used again in a Congressional hearing in 1976, this time to describe the scrip used for the food-stamps welfare program. The Herfindahl-Hirschman index indicates the competition or the market concentration of an industry. It is obtained by squaring the size of the different firms in the industry and summing the resulting numbers. Lower HHI indicates more competition, while a higher one indicates less or no competition (i.e., monopoly).