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Monopoly and, basic factors in the structure of economic. In, monopoly and competition signify certain complex relations among firms in an industry. A monopoly implies an possession of a market by a supplier of a product or a service for which there is no substitute. In this situation the supplier is able to determine the of the product without fear of competition from other sources or through substitute products. It is generally assumed that a monopolist will choose a price that maximizes. Types of structuresCompetition is directly influenced by the means through which companies produce and distribute their products.
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Different industries have different market structures—that is, different market characteristics that determine the relations of sellers to one another, of sellers to buyers, and so forth. Aspects of market structure that underlie the competitive landscape are: (1) the degree of concentration of sellers in an industry, (2) the degree of product differentiation, and (3) the ease or difficulty with which new sellers can enter the industry. Concentration of sellersSeller concentration refers to the number of sellers in an industry together with their comparative shares of industry sales. When the number of sellers is quite large, and each seller’s share of the market is so small that in practice he cannot, by changing his selling price or output, perceptibly influence the market share or income of any competing seller, economists speak of atomistic competition. A more common situation is that of, in which the number of sellers is so few that the market share of each is large enough for even a modest change in price or output by one seller to have a perceptible effect on the market shares or incomes of rival sellers and to cause them to react to the change. In a broader sense, oligopoly exists in any industry in which at least some sellers have large shares of the market, even though there may be an additional number of small sellers. When a single seller supplies the entire output of an industry, and thus can determine his selling price and output without concern for the reactions of rival sellers, a single-firm monopoly exists.
The structure of a market is also affected by the extent to which those who buy from it prefer some products to others. In some industries the products are regarded as identical by their buyers—as, for example, basic farm crops. In others the products are in some way so that various buyers prefer various products. Notably, the is a subjective one; the buyers’ preferences may have little to do with differences in the products but are related to, brand names, and distinctive designs. The degree of product differentiation as registered in the strength of buyer preferences ranges from slight to fairly large, tending to be greatest among infrequently purchased consumer goods and “prestige goods,” particularly those purchased as gifts. Get exclusive access to content from our 1768 First Edition with your subscription.Ease of entryIndustries vary with respect to the ease with which new sellers can enter them. The consist of the advantages that sellers already established in an industry have over the potential entrant.
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. The barriers may exist because costs for established sellers are lower than they would be for new entrants, or because the established sellers can command higher prices from buyers who prefer their products to those of potential entrants. The economics of the industry also may be such that new entrants would have to be able to command a substantial share of the market before they could operate profitably.
The effective height of these barriers varies. One may distinguish three rough degrees of difficulty in entering an industry: blockaded entry, which allows established sellers to set monopolistic prices, if they wish, without attracting entry; impeded entry, which allows established sellers to raise their selling prices above minimal average costs, but not as high as a monopolist’s price, without attracting new sellers; and easy entry, which does not permit established sellers to raise their prices at all above minimal average costs without attracting new entrants. Market conduct and performanceIt is helpful to distinguish the related ideas of market conduct and market performance. Market conduct refers to the price and other market policies pursued by sellers, in terms both of their aims and of the way in which they coordinate their decisions and make them mutually compatible. Market performance refers to the end results of these policies—the relationship of selling price to costs, the size of output, the of production, progressiveness in techniques and products, and so forth.The arguments in favour of monopolies are largely concerned with of scale in production. For example, proponents assert that in large-scale, operations, efficiency is raised and production costs are reduced; that by avoiding wasteful competition, monopolies can rationalize activities and eliminate excess capacity; and that by providing a degree of future certainty, monopolies make possible meaningful long-term planning and rational and development decisions.
Against these are the arguments that, because of its power over the marketplace, the monopoly is likely to exploit the consumer by restricting production and variety or by charging higher prices in order to extract excess profits; in fact, the lack of competition may eliminate incentives for efficient operations, with the result that the are not used in the most economical manner.
.A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in which one or a few entities have and therefore interact with their customers (monopoly or oligopoly), or suppliers (monopsony) in ways that distort the market.
Monopolies can be established by a government, form, or form by integration. In many jurisdictions, restrict monopolies due to government concerns over potential adverse effects. Holding a dominant position or a monopoly in a market is often not illegal in itself, however certain categories of behavior can be considered abusive and therefore incur legal sanctions when business is dominant. A or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic., and are sometimes used as examples of government-granted monopolies.
The government may also reserve the venture for itself, thus forming a, for example with a. Monopolies may be occurring due to limited competition because the industry is resource intensive and requires substantial to operate (e.g., certain railroad systems). The price of monopoly is upon every occasion the highest which can be got. The, or the price of, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which it is supposed they will consent to give; the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.: 56.Monopoly, besides, is a great enemy to good management.: 127– Adam Smith (1776),According to the standard model, in which a monopolist sets a single price for all consumers, the monopolist will sell a lesser quantity of goods at a higher price than would companies. Because the monopolist ultimately forgoes transactions with consumers who value the product or service more than its price, monopoly pricing creates a referring to potential gains that went neither to the monopolist nor to consumers. Given the presence of this deadweight loss, the combined surplus (or wealth) for the monopolist and consumers is necessarily less than the total surplus obtained by consumers by perfect competition.
Where efficiency is defined by the total gains from trade, the monopoly setting is less than perfect competition.It is often argued that monopolies tend to become less efficient and less innovative over time, becoming 'complacent', because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of psychological efficiency can increase a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen when a market's are low.
It might also be because of the availability in the longer term of substitutes in other markets. For example, a monopoly, while worth a great deal during the late 18th century, was worth much less during the late 19th century because of the introduction of as a substitute.
Contrary to, monopolists do not try to sell items for the highest possible price, nor do they try to maximize profit per unit, but rather they try to maximize total profit. Natural monopoly. Main article:A natural monopoly is an organization that experiences over the relevant range of output and relatively high fixed costs.
A natural monopoly occurs where the average cost of production 'declines throughout the relevant range of product demand'. The relevant range of product demand is where the average cost curve is below the demand curve. When this situation occurs, it is always cheaper for one large company to supply the market than multiple smaller companies; in fact, absent government intervention in such markets, will naturally evolve into a monopoly. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly.
Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic. Fragmenting such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies are government regulations and public ownership.
Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.To reduce prices and increase output, regulators often use average cost pricing. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve. This pricing scheme eliminates any positive economic profits since price equals average cost. Average-cost pricing is not perfect. Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies.
Average-cost pricing does also have some disadvantages. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price is less than the marginal cost (which is the output quantity for a perfectly competitive and allocatively efficient market).Government-granted monopoly. Main article:A government-granted monopoly (also called a ' monopoly') is a form of, in which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity.
Monopoly may be granted explicitly, as when potential competitors are excluded from the market by a specific, or implicitly, such as when the requirements of an administrative can only be fulfilled by a single market player, or through some other legal or procedural mechanism, such as,. Monopolist shutdown rule A monopolist should shut down when price is less than average variable cost for every output level – in other words where the demand curve is entirely below the average variable cost curve. Under these circumstances at the profit maximum level of output (MR = MC) average revenue would be less than average variable costs and the monopolists would be better off shutting down in the short term. Breaking up monopolies.
Main article:In a free market, monopolies can be ended at any time by new competition, breakaway businesses, or consumers seeking alternatives. In a highly regulated market environment a government will often either regulate the monopoly, convert it into a publicly owned monopoly environment, or forcibly fragment it (see )., often being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned. (AT&T) and are often cited as examples of the breakup of a private monopoly by government. Standard Oil never achieved monopoly status, a consequence of existing in a market open to competition for the duration of its existence.
The, later AT&T, was protected from competition first by the, and later by a series of agreements between AT&T and the Federal Government. In 1984, decades after having been granted monopoly power by force of law, AT&T was broken up into various components, who were able to compete effectively in the long distance phone market. A 1902 anti-monopoly cartoon depicts the challenges that monopolies may create for workers.The law regulating dominance in the European Union is governed by Article 102 of the which aims at enhancing the consumer's welfare and also the efficiency of allocation of resources by protecting competition on the downstream market. The existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share company's price increases.
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Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices (i.e. Pricing high just because you are the only one around.) It may also be noted that it is illegal to try to obtain a monopoly, by practices of buying out the competition, or equal practices. If one occurs naturally, such as a competitor going out of business, or lack of competition, it is not illegal until such time as the monopoly holder abuses the power.Establishing dominance First it is necessary to determine whether a company is dominant, or whether it behaves 'to an appreciable extent independently of its competitors, customers and ultimately of its consumer'.
Establishing dominance is a two-stage test. The first thing to consider is market definition which is one of the crucial factors of the test. It includes relevant product market and relevant geographic market.Relevant product market As the definition of the market is of a matter of interchangeability, if the goods or services are regarded as interchangeable then they are within the same product market. For example, in the case of United Brands v Commission, it was argued in this case that bananas and other fresh fruit were in the same product market and later on dominance was found because the special features of the banana made it could only be interchangeable with other fresh fruits in a limited extent and other and is only exposed to their competition in a way that is hardly perceptible.
The demand substitutability of the goods and services will help in defining the product market and it can be access by the ‘hypothetical monopolist’ test or the ‘SSNIP’ test. Relevant geographic market It is necessary to define it because some goods can only be supplied within a narrow area due to technical, practical or legal reasons and this may help to indicate which undertakings impose a competitive constraint on the other undertakings in question. Since some goods are too expensive to transport where it might not be economic to sell them to distant markets in relation to their value, therefore the cost of transporting is a crucial factor here. Other factors might be legal controls which restricts an undertaking in a Member States from exporting goods or services to another.Market definition may be difficult to measure but is important because if it is defined too broadly, the undertaking may be more likely to be found dominant and if it is defined too narrowly, the less likely that it will be found dominant.Market shares As with collusive conduct, market shares are determined with reference to the particular market in which the company and product in question is sold.
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It does not in itself determine whether an undertaking is dominant but work as an indicator of the states of the existing competition within the market. The (HHI) is sometimes used to assess how competitive an industry is. It sums up the squares of the individual market shares of all of the competitors within the market.
The lower the total, the less concentrated the market and the higher the total, the more concentrated the market. In the US, the state that a post-merger HHI below 1000 is viewed as not concentrated while HHIs above that will provoke further review.By European Union law, very large market shares raise a presumption that a company is dominant, which may be rebuttable. A market share of 100% may be very rare but it is still possible to be found and in fact it has been identified in some cases, for instance the AAMS v Commission case. Undertakings possessing market share that is lower than 100% but over 90% had also been found dominant, for example, Microsoft v Commission case. In the AKZO v Commission case, the undertaking is presumed to be dominant if it has a market share of 50%. There are also findings of dominance that are below a market share of 50%, for instance, United Brands v Commission, it only possessed a market share of 40% to 45% and still to be found dominant with other factors. The lowest yet market share of a company considered 'dominant' in the EU was 39.7%.If a company has a dominant position, then there is a special responsibility not to allow its conduct to impair competition on the common market however these will all falls away if it is not dominant.When considering whether an undertaking is dominant, it involves a combination of factors.
Each of them cannot be taken separately as if they are, they will not be as determinative as they are when they are combined together. Also, in cases where an undertaking has previously been found dominant, it is still necessary to redefine the market and make a whole new analysis of the conditions of competition based on the available evidence at the appropriate time.
Other related factors According to the Guidance, there are three more issues that must be examined. They are actual competitors that relates to the market position of the dominant undertaking and its competitors, potential competitors that concerns the expansion and entry and lastly the countervailing buyer power. Actual CompetitorsMarket share may be a valuable source of information regarding the market structure and the market position when it comes to accessing it. The dynamics of the market and the extent to which the goods and services differentiated are relevant in this area. Potential CompetitorsIt concerns with the competition that would come from other undertakings which are not yet operating in the market but will enter it in the future.
So, market shares may not be useful in accessing the competitive pressure that is exerted on an undertaking in this area. The potential entry by new firms and expansions by an undertaking must be taken into account, therefore the barriers to entry and barriers to expansion is an important factor here. Countervailing buyer powerCompetitive constraints may not always come from actual or potential competitors. Sometimes, it may also come from powerful customers who have sufficient bargaining strength which come from its size or its commercial significance for a dominant firm. Types of abuses There are three main types of abuses which are exploitative abuse, exclusionary abuse and single market abuse.
Exploitative abuseIt arises when a monopolist has such significant market power that it can restrict its output while increasing the price above the competitive level without losing customers. This type is less concerned by the Commission than other types. Exclusionary abuseThis is most concerned about by the Commissions because it is capable of causing long- term consumer damage and is more likely to prevent the development of competition. An example of it is exclusive dealing agreements.
Single market abuseIt arises when a dominant undertaking carrying out excess pricing which would not only have an exploitative effect but also prevent parallel imports and limits intra- brand competition. Examples of abuses. or undercutting. and.
andDespite wide agreement that the above constitute abusive practices, there is some debate about whether there needs to be a causal connection between the dominant position of a company and its actual abusive conduct. Furthermore, there has been some consideration of what happens when a company merely attempts to abuse its dominant position.To provide a more specific example, economic and philosophical scholar Adam Smith cites that trade to the East India Company has, for the most part, been subjected to an exclusive company such as that of the English or Dutch. Monopolies such as these are generally established against the nation in which they arose out of. The profound economist goes on to state how there are two types of monopolies. The first type of monopoly is one which tends to always attract to the particular trade where the monopoly was conceived, a greater proportion of the stock of the society than what would go to that trade originally. The second type of monopoly tends to occasionally attract stock towards the particular trade where it was conceived, and sometimes repel it from that trade depending on varying circumstances.
Rich countries tended to repel while poorer countries were attracted to this. For example, The Dutch company would dispose of any excess goods not taken to the market in order to preserve their monopoly while the English sold more goods for better prices. Both of these tendencies were extremely destructive as can be seen in Adam Smith's writings. Historical monopolies Origin The term 'monopoly' first appears in 's.
Aristotle describes 's cornering of the market in as a monopoly ( μονοπώλιον). Another early reference to the concept of “monopoly” in a commercial sense appears in of the (2nd century C.E.), regarding the purchasing of agricultural goods from a dealer who has a monopoly on the produce (chapter 5; 4). The meaning and understanding of the English word 'monopoly' has changed over the years.
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Monopolies of resources Salt. The of this article is because it may show. In particular, there may be a strong bias in favor of. Please see the discussion on the. Please do not remove this message until the issue is resolved.
( June 2017)According to professor, laws against monopolies cause more harm than good, but unnecessary monopolies should be countered by removing and other that upholds monopolies.A monopoly can seldom be established within a country without overt and covert government assistance in the form of a tariff or some other device. It is close to impossible to do so on a world scale. The diamond monopoly is the only one we know of that appears to have succeeded (and even De Beers are protected by various laws against so called 'illicit' diamond trade). – In a world of, international cartels would disappear even more quickly.
— Milton Friedman, p. 53–54However, professor Steve H. Hanke believes that although private monopolies are more efficient than public ones, often by a factor of two, sometimes private natural monopolies, such as local water distribution, should be regulated (not prohibited) by, e.g., price auctions.Thomas DiLorenzo asserts, however, that during the early days of utility companies where there was little regulation, there were no natural monopolies and there was competition. Only when companies realized that they could gain power through government did monopolies begin to form., Bianchi and Moser find historical evidence that monopolies which are protected by patent laws may have adverse effects on the creation of innovation in an economy. They argue that under certain circumstances, compulsory licensing – which allows governments to license patents without the consent of patent-owners – may be effective in promoting invention by increasing the threat of competition in fields with low pre-existing levels of competition.See also.
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