Monopolies - LeFonch

What are Monopolies?

A monopoly is when a single firm controls a large portion of the market.
Any changes in price made by them have significant effects on the entire market.
This allows the firm to somewhat manipulate the market price.
There are various types of monopolies.

Clarification

Monopolies and monopolistic companies are not the same.
Monopolistic companies are very popular but monopolies are a distortion of the market.
Monopolistic firms get their name from how each firm has a very small monopoly for its specific brand of product, as all products are slightly differentiated.

Single/One dominant firm
Unique product (no close substitutes)
Extremely high barriers to entry (difficult for firms to enter and exit the market)
Dominant market power = control over price
Depends on how narrowly the industry is defined

In practical terms, it counts as a monopoly if you control more than 25% of a market.
If a company that controls more than 25% of the market, the changes affect the entire industry.
For example price changes or cuts in production would affect everyone else.

A market can also be controlled by two companies, being called a duopoly, however that functions closer to an oligopoly.
Oligopolies are characterized by a few large firms that are highly interdependent on each other controlling most of the market.

The possibility to get high profits.
Due to having control over the market, it allows firms set the price to the highest the consumer is willing to pay.
Consumer choice is limited.

Examples

In reality, a monopoly is measured by market share dominance rather than the number of firms.
This is more useful, as a market might have many small firms but be dominated by a single large firm.

A monopoly that can produce enough output to cover the entire needs of a market while still experiencing economies of scale.
Its average costs will therefore be lower than those of two or more firms in the market.

At times, a natural monopoly is preferred.
When economies of scale make it impractical for multiple firms to participate, a natural monopoly is preferable.
Water and electricity supplies and bus lines are common examples of natural monopolies.

Natural monopolies often have high barriers of entry, due to the start up costs for infrastructure (high fixed costs).
Due to their very high fixed costs, natural monopolies tend to only make enough to sustain themselves.
When multiple firms are competing at once, it becomes very difficult, if not impossible to make normal profit, eventually resulting firms leaving the market until only one is left.
Typically natural monopolies are managed by the government and occur with utilities or public goods.

Typically firms start small with limited expertise.
Monopolists have the ability to charge a lower price than newcomers.
- - Firms have advantages when size increases.
  - Their unit costs of production fall as they grow larger.

Only enough revenue and economies of scale to support one firm.
Natural monopolies are often government regulated, as it isn't practical to have separate networks in the same region and it is more efficient to have a monopoly.
Government regulation also aims to avoid the possible exploitation of customers.

Patents, copyright, licenses, government grants and rights to a single firm (postal services, oil drilling) etc.
The need for government licensing makes it difficult for other firms to enter the market.

Customers may be loyal to a certain firm due to marketing.
- For example Hoover, Luxaflex, Kleenex and Band-Aid are so popular that their brand names are often used to refer to the products themselves.

A monopolist can charge lower costs due to economies of scale.
Therefore, they can lower their price to suffocate upcoming competitors. Their generally large size and savings allows them to endure the lower price, while their competitor cannot.
Alternatively monopolies can buy off competition.

In duopolies and oligopolies, highly interdependent firms are motivated to work together, which is known as collusion.

A cartel is an agreement between companies, generally to try to limit production and fix prices.
A group of firms working together to function as a monopoly.
Cartels are considered illegal in most places due to being an anti-competitive practice. Most cartels members usually face hefty fines.
Cartels can lead to the exploitation of consumers and increased prices.

Only one diagram.
The singular firm is the market.
The cost curves are exactly the same (AC, MC).
Demand curve slopes downward.
The key difference between a monopoly diagram and a perfect competition diagram is that monopolies are able to set their price.

Unlike monopolistic and perfect competition, monopolies are able to make abnormal profit in the long run.
This is because it is very difficult for other firms to enter or leave the market, which means that even if other firms would notice that there is abnormal profit to be made, they wouldn't bother to or couldn't enter the market.