Therefore, regardless of the price which they set for their products or the quantity which they are offering, the consumers will still purchase the product. Unlike perfect competition where the price will be guided by the demand and supply of the products, in monopoly, they are the only one firm or individual offering the product, so it is very difficult for the market they serve to do without them. Basically, monopoly is characterized by lack of competition in the market. Competition in the market is normally important since it enhances the welfare of the consumers. A market structure which has competition will be so convenient since the consumers will get the product at a lower price since many companies will be competing to attract more customers hence most of them will lower their price besides, the quality of the product that will be offered to the consumers will be of high quality due to innovation in the company.
In addition to that, monopoly market has only one seller and a large number of buyers for the product. All the output for goods or services is produced by one seller. The products in the monopoly market, however, do not have any close substitute with the product the firm is offering. In a monopoly market, the monopoly enterprise operates hence one cannot differentiate between firm and industry. The monopolist set the price for its own since he or she has control over the price of his or her products. The firm that has the right may also put a major restriction that other firms will see it as a loss to provide such products. Economies of scale and network externalities Economies of scales are the cost advantages that a given firm enjoy because of the size it has on the market as compared to other smaller firms.
This is because as the size of the firm increases, there will be a decrease in the cost of output. Hence the firm will use little capital in its production as compared to other small firms. Secondly, a firm can also enjoy economies of scale due to the bulk buying where they will be given a discount for the product they have bought as compared to the other firms which will buy in low quantities. For instance, social media are more attractive to new users because they are aware that their friends are also using the media. In such a situation, it can be very difficult for a new firm to enter the market when the previous firm had already acquired a large proportion of users.
Consolidation of different firms Consolidation can also be a cause of monopoly. This situation is where companies that were competing against each other decide to come together and form one large company. In such situations, the companies have to be controlled by the antitrust regulators to ensure that the merger does not affect the economy in a negative manner. A patent is a limited property right given by the government to the inventors of a certain product to allow the inventors to share to the public their invention details. The inventors are thus given the right to exclude other firms using the patent invention. The patent provides the inventor the incentives to disclose the invention to the public immediately the invention is made, to be the first person to invent, to make investments in development and bring the invention to the market and to bring innovations by improving on the earlier patent in the market.
During that time other firms cannot enter the market since they don’t have access to the right of production leaving only one firm to be on the market. The patent right is not given to the firm forever, it reaches a time when the patent right expires, and during this time when the patent right has expired, the public is allowed to invent. Thus due to the large capital required to start and run the business, the firm needs to have a large number of customers to enable them to gain profit from their investments. Thus it will be upon the customers to pay for the huge investment of the firm. Once the firm has created a monopoly market, it will be very difficult for new firms to enter the market due to a large amount of capital required to start and run the business and if the firm enters the market, they might not be able to sell their products at the price of the already existing business.
This, in turn, will allow only one firm to enter the market. With the natural monopoly, there will be an increase in output while at the same time the cost of production will keep on declining. The monopolist can also practice price discrimination whereby one product has different prices to customers. There are three types of discrimination (Bergemann, Brooks & Morris, 2015). First-degree price discrimination, this is where the monopoly seller knows the maximum amount that every buyer is willing to pay and then charge all the consumers the exact amount with the intention of gaining more from the consumers. This, in turn, will allow the seller to get the maximum profit as compared to the cost they will use. Second-degree price discrimination, this is where the seller charges the price for goods and services depending on the number of goods that the consumer is demanding.
Power Monopolies are dangerous firms. They have a lot of power bestowed on them, and they can misuse the power by gaining anything they want in the economy. Since they can increase their price to gain vast profit that they want, they can use the profit to better themselves and gain more political influence. They can threaten the economy of the country by restricting other firms to venture into the market and provide goods and services. The high rate of unemployment The economy that has a monopoly market normally experience a high rate of unemployment. This was to help in the reduction of market power for the powerful companies which dominated the market by then. Thus the law helps the government in promoting several competitions in the market.
For instance, if two companies consider entering into the merger, they will be closely monitored by the economist to decide if the merger will affect the economy of the country by reducing its wellbeing. After monitoring, if it is found that the merger will affect the wellbeing of the economy, then the companies can be taken to court to prevent them from the merger. This was a witness in the case of Microsoft in 1994 when they were trying to purchase Intuit. It ensures that the company does not gain more than what is expected from them. The government makes sure the company complies with the regulation by setting the profit which the company is expected to get. By turning some private monopolies into a public enterprise To prevent the regulation of private firms, the government can decide to convert private monopolies into the public enterprise and run it by themselves.
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