Monopolist: Overview, Examples and Criticisms
What exactly is a Monopolist?
A monopolist is a person, organization, or corporation that controls an entire market for a particular item or service. A monopolist is likely to support measures that benefit monopolies since it offers them more power. Because customers have no other choice of product or service in the case of a monopoly, a monopolist has control over market prices but lacks the motivation to increase its product/service. They are driven ultimately by a determination to maintain the monopoly.
Concept behind Monopolists
A monopoly occurs when a monopolist becomes the exclusive supplier of a particular item or service. On the other hand, a monopsony refers to a single entity's complete ability to acquire an item or service.
Simply put, a monopoly in the manufacture of a good or service occurs when there is a lack of economic competition and a lack of potential substitute products, which creates the possibility of a high monopoly price beyond the marginal cost of the seller, leading to excessive profits for the manufacturer.
In economics, a monopoly is the availability of only a single vendor. However, the law requires a trust to be a business entity with significant market power-enough power to charge excessively high prices. Although monopolies can be large corporations, size is not a necessary quality of a monopoly. In a small industry, a small firm may also have the ability to raise prices. Furthermore, Monopolies can also be created by the government, organically, or by merging previously independent firms or organizations.
Monopolistic marketplaces had historically emerged when single manufacturers gained exclusive legal advantages from the government, such as the agreement made between the Federal Communications Commission (FCC) and AT&T between 1913 and 1984.
During this time, no other telecommunications firm was permitted to compete with AT&T due to the government's mistaken belief that the market could only sustain one producer.
More recently, when the fixed costs of manufacturing are relatively high, short-run private enterprises may engage in monopoly-like behaviour, driving down long-run firms' average total prices as production increases. Because of this tendency, a high-segment producer can briefly operate on a lower cost curve than another producer to stay in the competition.
What are its demands?
If the market's lone supplier is the monopolist, then the monopolist's demand curve is the market's demand curve. It may be recalled that the market demand curve is downward sloping, which is the law of demand. Given that the monopolist faces a downward-sloping demand curve, the price the monopolist can expect to receive for his output will not remain constant as output increases. A monopolist will have to control the price accordingly.
In contrast to an utterly competitive firm, the monopolist is not obligated to conform to the market pricing as it is. On the other hand, the monopolist is a price searcher, combing the market demand curve for the highest possible price to maximize profits.
Unlike a competitive corporation, the monopolist's marginal revenue out of each unit sold also fluctuates. Since the monopolist is confronted with a downward market demand curve, the price the monopolist can acquire for each additional unit of output usually falls as the monopolist increases its output. As a result, the monopolist's marginal income will fall as it grows output. The monopolist's marginal revenue out of each additional unit produced will not meet the established price. The marginal revenue the monopolist generates from producing another output unit will always be less than the price the monopolist may charge for the additional unit.
To better understand the concept, consider a monopolist now delivering N units of outputs. Assume the monopolist decides to sell one additional unit. As a result, it boosts its supply to N + 1 unit of manufacturing. Because the monopolist cannot differentiate on price, it must sell all N + 1 units of production at the new lower price. The monopolist's marginal gain from providing one extra unit equals the price it receives for this unit minus (-) the revenue loss from selling N units of output at a decreased market price. Thus, the cost of selling N + 1 units exceeds the monopolist's marginal revenue from delivering the additional output unit.
What are its effects?
The standard political and cultural argument for monopolistic markets is that a monopoly might charge a premium to its clients without alternative providers of the same product or service. Consumers have no substitutes and must pay the monopolist's price for the items. In many ways, this is an objection to excessive pricing rather than monopolistic activity.
The traditional economic argument against monopolies is not the same. According to neoclassical theory, a monopolistic market is wrong because it restricts outputs, not because of monopolist gains by raising prices. Reduced output means less production, which lowers total real social income.
Characteristics of a True Monopolist
A monopolist indirectly owns or controls a market and supplies an item or service to many customers as a lone vendor. However, there are several other characteristics of a monopolist that set it apart from the rest vendors/ suppliers:
It is sanctioned by the state to offer an incentive to participate in a hazardous business or to benefit a domestic interest group. Patents, copyrights, and trademarks are all government-granted monopolies. Many utility corporations in the United States are examples of government-granted trusts. By allowing only a specific company to do business in a specific sector, the government can also set up an enterprise and create a monopoly.
Criticism of Monopolists
Being the lone or dominating participant in a marketplace is only sometimes prohibited. On the other hand, specific types of monopolistic behaviour might be regarded as harmful in a free market, and such behaviours frequently draw the monopoly designation and the legal punishments that go with it.
When a corporation is the exclusive provider of an item or service, it might gain enough clout to prohibit other companies from accessing the market and competing. Due to a lack of market alternatives, customers are frequently forced to pay the higher costs demanded by the monopolist or forego the intended product or service.
Antitrust laws are enforced by governments to punish monopolists for any bad practices and maintain fair market competition. Consumers are protected by these regulations from aggressive company activities such as price gouging. Sometimes, the government will intervene and break up a monopoly.
Monopolistic Competition in the Long-Run
The short and long run in a monopolistic-competitive market is that new businesses can often enter the market, which is more likely if the enterprises are generating positive economic progress in the short run. In the long term, new enterprises will be drawn to these profit prospects and opt to enter the market. In contrast to a monopolistic market, a competitive market has no entry barriers, making it comparatively easy for new firms to enter the marketplace in the long run.
When new firms are introduced, the supply of differentiated goods grows, leading to the firm's market demand curve. The demand curve swings to the left as other businesses enter the marketplace until it is simply tangent to the average total cost curve at the profit-maximizing output level. After that, the firm's economic earnings are now zero, and there is no longer any reason for new enterprises to enter the market. Thus, in the long run, new company entry will lead each firm in a monopolistic competitive market to make consistent profits, just like a perfect competitor.
A monopolistic competitive business, instead of a perfectly competitive firm, picks a production level below its minimum efficient scale. When a company produces less than its minimum efficient size, it wastes its available resources. The company is deemed to have surplus capacity since it can readily handle an increase in output. This extra capacity is the high social cost of a monopolistic competitive market structure.
How do monopolists maximize profits?
The profit-maximizing production level of a monopolist is determined by equating its marginal income with its marginal cost, which is the identical profit-maximizing condition used by a fully competitive business to establish its equilibrium output level. Indeed, regardless of the market structure in which the company operates, the statement that marginal revenue equals marginal cost is employed to establish the profit-maximizing level of output of every organization. To calculate the profit-maximizing output level, the monopolist must augment its market demand and pricing information with data on its production costs for various output levels.
Monopoly Profits and Losses
While some believe monopolists always make a profit, this is only sometimes the case. Monopolists, like perfectly competitive enterprises, can also experience losses in the short run. Monopolies will suffer short-run losses any time their average total expenses exceed the price they can charge at the profit-maximizing output level.
Absence of a Monopoly Supply Curve
The monopolist's supply schedule cannot be represented as a separate supply curve from the market demand curve. Whereas the supply curve of an utterly competitive business is equal to a component of its marginal cost curve, the supply decisions of a monopolist are not only based on marginal cost. At each price level, the monopolist considers both the marginal cost and revenue. To calculate marginal revenue, the monopolist must first understand market demand. As a result, market demand will impact the monopolist's market supply.
Difference between Monopoly and Monopolistic Competition
The Bottom Line
To put it more simply, a monopolist is a person, company, or organization that owns and dominates a specialized market for a product or service. The monopolist has sufficient market power to demand excessive charges since there is no competition and no substitute goods or services. While being the lone or dominating player in a field is not unlawful in and of itself, the government may levy sanctions if the monopolist's behaviour continues to stifle free market competition. The federal governments of many countries now monitor unfair competition by enacting antitrust laws that limit monopolies and protect consumers from unethical company practices.