In this question, we are going to clarify the definition of monopoly and giving few examples to it. And so well find out the characteristics of monopoly, that is one seller and large number of buyers, no close substitution, restriction of entry of new firms and advertising. After that, we are discussing the types of the monopolies, that is natural monopoly and legal monopoly, these are the two categories barrier. Legal monopoly can be also referred to as government-created monopoly. In this case, we’ll discuss in detail on the two types of monopolies. And we have discussing and provide the various diagrams for further understanding.
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Definition of Monopoly
Monopoly is a market structure in which there is a single seller and large number of buyers and selling products or can say it is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service, so by the definition that have no close substitution and have a high entry and exit barrier. For examples in monopoly market are electricity, water service, cable television, local telephone services and many more. If we are using water service that only can go to is Indah Water Konsortium Sdn Bhd, so Indah water Konsortium Sdn Bhd is a monopoly because only the place to giving to subscribe the home water service. Another hands, monopoly is a market containing a single firm, in such instances where a single firm holds monopoly power, so the company will typically be forced to divest its assets. Antimonopoly regulation protects free markets from being dominated by a single entity. So for another example of monopoly that is the TNB (Tenaga National Berhad) Sdn Bhn, this is a only company to develop, operate and maintain TNB’s portfolio of power generating units and provide the electric service to us. That is also the only place provide the electric to us so we are just only to subscribing this company for our home electric service.
Characteristics of Monopoly Market
First of the characteristic is that one seller and large number of buyers, this is the monopoly enterprise existence when there is only one seller of a product and it is only the firm that in the industry selling a product which has no close substitution. Monopoly market is the place where the monopoly enterprise operates so basically there are no different between a firm and an industry in monopoly as there only one seller. A monopolist is a price maker since there is one seller or producer and it has the market power to control over the price.
Second is no close substitution. No close substitution that is monopoly enterprise would like to sell a product which has no close substitute. It’s the consumers and buyers could not find any substitute for the product. For example, water supply from local public utility which has no close substitution, but if the buyer can find any substitution of water service so that is no more in monopoly.
Thirdly is the restriction of entry of new firms. It is in a monopoly market, there are strict barriers to the entry of new firm. The barriers to entry are natural or legal restrictions that restrict the entry of new firms into the industry. A monopolist faces no competition because of barriers of entry. Example for the barriers to entry, that’s limit pricing, firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss.
Fourthly is advertising, it is advertising in monopoly market depends on the products sold. That is to developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive and this is also particularly important in markets such as cosmetics, confectionery and the motor car industry. For the local public unities such as home phone service, water service and electricity don’t need to make advertisement by the monopolist since the consumers know from where to obtain the product.
Types of Monopolies
Natural Monopoly
Natural monopoly is a one firm can produce at a lower cost compared to what two or more firms could produce or it is the lower due to economies of scale if there is just a single producer than if there are several competing producers. For examples, a bigger plant in the generation electricity can supply electric power with lower cost compared to a few firms.
Government-Created Monopolies
This section is to look into the government-created monopolies, government created have many monopolies. This is to prevent firms from entering business into a market. This can be done through difficulty in obtaining license to operate in the market or providing patent and copyrights to a monopoly firm. Government franchise, government license, patent, copyright and control over raw material are the some legal barriers for a business.
Government franchise, in most of the countries, the government grants monopoly rights to privates companies to operate public utilities such as water supply, postal services, railway services, cable TV services and many more. Government franchise grants exclusive rights to a firm to sell certain goods and install in a certain area. For example, government had giving the right to install cable television system to Astro in Malaysia.
Government License, in basically enterprise is needs to obtain a license to operate any kind of business in the market. Government license controls the entry of s firm into a market and it is make the earlier firm as a monopoly firm. To obtaining a license in a monopoly market is much if difficult compared to the others market structures.
Patent, A patent is a grant issued by the government to the owner of an invention which gives him exclusive rights over the invention for a limited period of time or it is an exclusive right to the production of an innovation product. To the firms or individuals for their discoveries and invention are given by a patent. For example, invention of genetically modified organism (GMO) in rice can yield more production, because GMO having the patent to the inventor to commercialize its products. Thus, for the normally limit time period of the patent is takes about 20 years and after that the monopoly power over the product will expire.
Copyright, it is enacted by most government, is an exclusive right given to the author of a composer of a music or producer of a movie or artistic work and book. For example, the copyright this book belongs to Oxford-Fajar Snd Bhd and no other publisher or individual can copy this book or print this book without permission from Oxford-Fajar Sdn Bhd. The Oxford-Fajar has the right to sue the people who to prints out the book without permission.
Control over raw material, in which a firm can be bigger portion of natural resources and within a monopoly status can also be maintained through control over supply of raw material.
P
MC AC
Pm
AC
D= AR
MR
QmThe diagram of Monopoly
•A Monopolist is a price maker because he does not face any competitors. Therefore demand is price inelastic.
•A monopolist will seek to maximize profits by setting output where MR = MC
•This will be at output Qm and Price Pm.
•If the market was competitive the price would be lower and output higher.
Question 2
Answer
Introduction
In this question 2, I’m going to differentiate the features of perfect competition, monopolistic competition, oligopoly, and monopoly. Understand the term of market place where the buyers and sellers meet and transactions of goods and service take place. After that we have to giving the examples characteristics. Further onwards, I’m looking into the meant by perfect competition and how a perfect competitive firm or enterprise determines its equilibrium in short and long run.
Perfect Competition and Monopolistic Competition
Definition of Perfect Competition
Perfect Competition is a market in which there are many buyers and sellers, the products are homogeneous, and sellers can easily enter and exit from the market. All the firms sell an identical product, price takers and have a relatively small market share, buyers know the nature of the product being sold and the prices charged by each firm, the industry is characterized by freedom of entry and exit. For example, in a perfectly competitive market, should have a single firm decide to increase its selling price of a good so that the consumers can just turn to the nearest competitor for a better price.
Definition of Monopolistic Competition
A market structure in which there are large numbers of small sellers selling differentiated products but these are close substitute products and have easy entry into and exit from the market. Many products in the world represent monopolistic competition such as books, apparel, shoes, chocolates, toothpaste and many more.
Similarities of Perfect Competition and Monopolistic Competition
Perfect competition and Monopolistic competition are having the most of same characteristic.
Firm in both market are large in number and there exists freedom of entry and exit in the perfect competition and monopolistic competition market. And the firm maximizes profit when MR and MC. Thus, in long run, perfect competitive and monopolistic competitive firms earn only the normal profit, in short run the both are may earn normal profit or incur losses.
Differences between Perfect Competition and Monopolistic Competition
In the market of perfect competition, the forces of demand and supply for the entire industry determined prices. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits. For the monopolistic competition market, each firm has its own price policy. A perfect competition firms sell homogenous or standardized product but monopolistic competition firms sell differentiated products. Selling cost occurs only in monopolistic competition because of the product differentiation. A perfect competitive firm’s demand curve is perfectly elastic and MR curve is equal to average revenue curve. But in monopolistic competitive firm, the demand curve is downward sloping and MR curve is also downward sloping, in which lies below the average revenue curve.
Monopoly and Oligopoly
Definition of Monopoly
Monopoly is a market structure in which there is a single seller and large number of buyers and selling products or can say it is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service, so by the definition that have no close substitution and have a high entry and exit barrier. For examples in monopoly market are electricity, water service, cable television, local telephone services and many more.
Definition of Oligopoly
There are the only a few firms that make up an industry. This select group of firms has control over the price and oligopoly has high barriers to entry. And the products that are the oligopolistic firms produce are often nearly identical and, thus, the companies, in which are competing for market share, are interdependent as a result of market forces.
Differences between Monopoly and Oligopoly
Oligopoly is a market structure containing a small number of relatively large firms that often produce slightly differentiated output and with significant barriers to entry. For example, that is steel industry, aluminum, film, television, cell phone, gas and the Microsoft was once one of several oligopoly software companies. Monopoly is a market structure containing a single firm that produces a good with no close substitutes and with significant barriers to entry. While it might seem as though the difference between oligopoly and monopoly is clear cut, such is not always the case.
Differences Monopoly, Oligopoly and Perfect Competition and Monopolistic Competition
Monopoly and oligopoly there are opposite with perfect competition and monopolistic competition. For the perfect competition and monopolistic is characterized by many buyers and sellers, many products that are similar in nature and as a result, many substitutes. Perfect competition and monopolistic competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Therefore, producers in a perfectly competitive or in a monopolistic competitive market are subject to the prices determined by the market and do not have any leverage. For example to the market of monopolistic competitive and perfectly competitive, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.
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