The History And Background Of Monopoly Economics Essay

1.0 Introduction

Microeconomic is a person, household, firm, or industry as an economy’s units in this specific science of economic behavior. Contrast to macroeconomics, the study of the aggregate economy. Primarily concerned with factors affecting individual economic choices, factor changes effect on the individual decision makers, how their choices are synchronized by markets, and how prices and demand project in individual markets. Theory of demand, theory of the firm, and production demand for labor and other factors are the main subjects covered under microeconomics.

For this assignment, I need to elucidate monopoly and its characteristic. Other than that, I need to differentiate the features of perfect competition, monopolistic competition, oligopoly, and monopoly.

To accomplish the task, I need to find references, information and answers from either the books from library or from the internet.

2.0 Monopoly

2.1 Definition of Monopoly

Monopoly is a market structure in which there is a single seller and large number of buyers and selling products that have no close substitution and have a high entry and exit barrier. For the purpose of regulation, monopoly power exists when single firm controls 25% or more of a particular market.

2.2 Characteristic of Monopoly

A monopoly is a firm that is the sole seller in its market.

Many Buyers

High barriers of entry

Product is unique

Advertising is not necessary

Monopolist can control price or quantity but not both

For an example to the characteristic above, Jabatan Bekalan Air Malaysia is a monopoly firm in Malaysia. It is the sole seller in the market. This is due to the firm is the only supplier of domestic water to the citizen. Therefore, the product is unique and causes buyers and users to use their products because it is an essentials need. Moreover, there are no other firms that can provide this product. Advertising is also not necessary for Jabatan Bekalan Air Malaysia because it has become a common sense that in Malaysia, we can only get water supply from them. Advertising in monopoly market is depending on the products sold. If the products are luxurious products or even tourism market, then the monopoly needs some advertising on their product. Jabatan Bekalan Air Malaysia can also control the price or quantity of their products but they couldn’t control both of it together.

It faces a downward-sloping demand curve for its product.

Like a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal.

Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.

A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus.

A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.

2.3 Natural Monopoly

Natural monopolies include public utilities, such as gas and electricity suppliers. Such enterprises require large volume of modal and huge investments, and it is hard for others to duplicate the products. Due to the importance of it towards the society, it has become legal. In exchange for the right to conduct business without competition, they’re regulated. Therefore, they must follow the controlled price from the government and they can’t simply charge whatever price they want. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.

2.4 Legal Monopoly

A legal monopoly is that a company gets an exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years. During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. An example of a company that enjoyed a patent-based legal monopoly is Casino in Genting Highlands, which for years held exclusive ownership of having a legal casino in Malaysia. Casino in Genting Highlands provide a legal gamble place for the people without competition, in other words, it enjoyed a monopolistic position in Malaysia.

2.5 Example of Monopoly Firm

Monopoly can be form due to many circumstances, for example:

A firm that has an exclusive ownership of scarce resource, such as Linux owning the Unix-like computer operating system, it has monopoly power over this resource and it is the only firm that can exploit it.

Governments may grant a firm monopoly status, such as with the Post Malaysia Berhad, which was given monopoly status back to the early 1800s with the establishment of postal services first in the Straits Settlements (Penang, Malacca and Singapore) and gradually, it covered the whole Malaya by early 20th century.

2.6 Monopoly Graph

Super-normal profits

Monopolies can maintain super-normal profits in the long-run. As with all firms, profits are maximized when Marginal Cost is equal to Marginal Revenue. Generally, the level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero. At profit maximization, Marginal Cost is equal to Marginal Revenue, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC).

With no close substitutes, the monopolist can derive super-normal profits, area PABC.

A monopolist with no substitutes would be able to derive the greatest monopoly power.

2.7 Conclusion

Overall, monopoly is a market structure that provides unique product to various buyers that conquers the whole market so that they can maintain super-normal profits in the long-run.

3.0 Differences between the features of Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly

3.1 Table of Market Structure

In Economics, market structure is the inter connected characteristic of a market, such as level and forms of competition, product differentiation, ease of entry and exit from the market, and the number and relative strength of sellers and buyer among them.

Market structure

Examples

Number of producer

Type of product

Good and Services

Barriers to entry

Non-price competition

Perfect Competition

Parts of agriculture are reasonably close

Many

Standardized

Homogenous

Low

None

Monopoly

Public utilities

One

Unique product

Difficult to substitute

Very High

Advertising

Monopolistic Competition

Retail trade

Many

Differentiated

Homogenous

Low

Advertising and product differentiation

Oligopoly

Computer, oil, steel

Few

Standard or differentiated

Homogenous

High

Advertising and product differentiation

3.2 Perfect Competition

A perfect competition is a free entry and exit to industry. It is a standardized type of product and it provides homogeneous products like Coca-Cola. It has large numbers of buyers and seller. Other than Coca-Cola, there are other products like Pepsi, Sprite, 7-up and many more. Therefore, no individual seller can influence the price of the product. Sellers like Coca-Cola are price takers as they have to accept the market price. Profit is maximizing when marginal revenue equal with the marginal cost. It can make profits in short run but the profit will equal zero when it comes to long run.

3.3 Monopoly

A monopoly has a high barrier for a company to enter the industry. It is a unique type of product and it is a one seller to many buyers in the market. It provides unique goods to the buyer. For example, Jabatan Bekalan Air Malaysia is the only industry that provides water supply to the whole country. This is because water is an essential need for every citizens of Malaysia. Monopoly is a price setter. The max profit is when marginal revenue is equal to marginal cost. For this, long-run profits can be positive and it will cause inefficient outcome resulting dead weight loss.

3.4 Monopolistic Competition

A monopolistic competition is a differentiated type of product and many firms selling products that are similar but not identical. It has low legal barrier entry to the industry. For example, Popular is a bookstore that sells books and stationeries. It is a firm that competing for the same group of customers. For the product wise, each firms like Popular and MPH, their product is at least slightly different from each other. Rather than being a price taker, each firm faces downward-sloping demand curve. It is also a price setter for monopolistic competition. The max profit is when marginal revenue is equal to marginal cost. It can make profit in the short-run where the long-run profits are equal to zero. The inefficient outcome will results in dead weight loss.

3.5 Oligopoly

Oligopoly is an industry that controlled by small number of large firms. It is either a differentiated or standard type of product. It is also has a high barrier to enter the industry. For example, DIGI Telecommunication is one of it. It is a mobile service provider with there is only a few in Malaysia. The products could be highly differentiated by branding or homogeneous. It is also a non-price competition. There are 3 types of strategy for this that is Cournot, Stackelberg and Bertrand. Oligopoly is always max profit when marginal cost is equal to marginal revenue.

3.6 Conclusion

Overall, we can see that there are a lot of differences in these four market structures. Each types of market provide different types of products and resulting different result in long-run and short-run.

4.0 Conclusion

In this task, I’ve learn on how the market is made up of the certain factors like the number of firms operating, the nature of the product being produced, the level of profit, the degree of monopoly that each firm enjoys, the firms’ behavior, the pricing strategy, the level of output and the efficiency of the market and the entry and exit into the market. All these factors are collectively called as the market structure.