Definition of monopoly as a market structure
As an important characteristic of economy, a monopoly exists when a market is dominated by a single firm. This monopolistic firm produces the entire output of the market. However there is no competition in this market structure as well as there is no substitute good available. This dominant firm is in a position to fix whatever price and output they wish.
In reality, it is almost impossible to see such an industry like this which only a single firm completely controls and dominates the market. So if it is expected to define this situation legally, Monopoly is when a single firm controls at least 25 % of the industry's output (Hobday 2001, pg.43). Therefore it is possible to see more than one monopolist in a particular industry. A monopolist company may have a monopoly on certain types of goods but this does not mean that they have a monopoly on goods in general.(Sloman 2001, p.129)
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There are many barriers to prevent the entry of newcomers. So as long as they stop new firms joining the market, monopolists maintain their position in the market. There are various forms of these barriers. For example, when a firm produce a product or a service, they apply and get the copyright and patent for their good, so this will legally block other firms copying these products or services. They may have to face to have restrictive agreements with suppliers or marketing outlets (Hobday 2001, pg.43).
Sometimes when the market is small, it may not support more than one firm. If the cost of the product which is provided by the monopolist, is getting lower and this is a satisfaction for whole market, then the market may not be able to support one more firm. Even it would support more than one firm, it is really hard to survive for the newcomer with a very large scale start. Because the monopolist already experiencing the economies of scale, it can just reduce the price of their goods below the cost of the new entrant and drive the new comer out of business. (Sloman 2001, p.129)
For an another barrier, 'An established monopoly is likely to have developed specialised production and marketing skills'(Sloman 2001, p.130). They are likely to invest with heavy expenditure on advertising. However new firms could not be able to afford this.
After the barriers to the entry, I must state about product differentiation in this particular market structure. The product that a monoply produce are unique in type or they are often the only one priducing such item. They restrict other firms producing these by implemnting legal rights such as patent or copyright.
There are three types of Monopoly such as; Local Monopolies, Statutory Monopolies and Natural Monopolies. As it is understood by it's name, this type of monopoly exists when it is in local character. For example local kebab shop may have a monopoly in the local neighbourhood. As the second type of Monopoly, Statutory Monopolies are based on Acts of Parliament. The nationalised industries could be a good example for Statutory Monopolies. The third type of Monopoly is Natural Monopolies. These are monopolies which are in industries where the economies of scale come true. Thus the optimum size of firm will be large and monopolies may develope such as those in the motor car and chemical industries. (Hobday 2001, pg.44)
Monopolist companies tend to be large companies, so they can enjoy the economies of scale and reduce the costs.As a result of enjoying the economies of scale, customers can take the advantages of lower prices and high output. However beside these advantages it is often criticised that they charge higher prices for a lower output because of inefficiency. If the demand is lower than the level of supply, they need to keep supplying at the same level. So this is a disadvantage for the monopolist. They also face to operate restrictive practises to stop new firms joining the industry. But monopolists will ensure that they are able to use the all the technological facilities to maintain their position and they will afford to research and develop new techology as they have the required capital needed to invest in research.
Another disadvantage for Monopoly, monopolists often become lazy and inefficient because they have no incentive to innovate and research. They are also aware that their dominant position in the market, is safeguarded by barriers to entry. Instead of this they reduce the variety and choice of goods to consumers by restricting to output. But sometimes consumers can be offered for more variety and choice. For example BBC offers a much greater varriety of radio services than commercial radios. However monopoly is sometimes beneficial that the wastes of competition are avoided in this market structure. Duplication of services could be a good example for these wastes.
Finally, as an important disadvantage, monopolies may have some political ambitions sometimes as they have a great power in the economy. Therefore they might wish to control the governnment and the democracy could be harmed. (Hobday 2001, pg.45)
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