Monopoly: Market Structures And Market Power

1808 Words8 Pages
Monopoly Various definitions of a monopoly exist throughout the theory of economics, although composed differently; they all bring a person to the same conclusion, monopoly is market power. In economics, a monopoly is defined by Dominick Salvatore (2007), as “the form of market organization in which a single firm sells a product for which there are no close substitutes” (p. 331). Market Structures Market structures are characterized by how they are organized; this is primarily based on the amount of competition in a particular industry. Competition exists assuming each market houses a number of different buyers and sellers. The more competition in each market denotes less market control. Competition between firms lies within four categories.…show more content…
The goods and/or services produced by a monopolist firm have no close substitute. As mentioned above, a monopoly exists when the market is controlled by a single producer. A monopoly is the complete opposite of perfect competition as they do not have to compete with anyone else in their industry. “The output of the monopolist, is the total industry output” (Webster, 2003, p. 332). Market Power. A monopoly is defined by its market power. Monopolies are known to dominate and maintain exclusive control over its particular market. Even though a monopoly has market power, they are still somewhat limited by market demand. Having market power gives a firm the ability to charge higher than normal prices without losing all of its customers. Sources of Monopoly Power In general, a monopoly by one company possesses the power to create barriers to entry for competing companies in a particular market. Also, once a company has achieved a loyal following, it then becomes easy for that company to maintain control of the market. This leads to the elimination of potential competition. Barriers to entry, according to the Organization for Economic Co-operation and Development (OECD) (2007) are “impediments that make it more difficult for a firm to enter a market” (pg. 1). The main types of these barriers are economic, natural, legal and…show more content…
Economic barriers consist of economies of scale, technological superiority, and undifferentiated products. Economies of scale. Economies of scale refer “to the phenomenon where the average costs per unit of output decrease with the increase in the scale or magnitude of the output being produced by a firm” (OECD, Glossary of statistical terms, 2003). In some markets, the profits for high volumes of goods are exaggerated. Large companies are often able to under-cut competitors’ prices, drive them out of the market, and then raise prices again. Consequently, this increased volume increases profit, allowing such companies an even greater power. Technological superiority. As the production scale of a company increases they become better equipped to employ the use of superior technology, such as specialized labor or machines, which results in greater efficiency. No substitutes. A monopolistic firm provides a good or service to the public in which there are no close substitutes. The demand for the good produced by the monopoly is inelastic enabling the monopoly to raise their price thereby receiving a higher profit. Control of natural

More about Monopoly: Market Structures And Market Power

Open Document