Monopoly Definition, Real-World Examples, Distinctive Features, Root Causes, Benefits, Drawbacks
The Solitary Seller: Welcome to the realm of monopolies, where a single entity stands tall in a market, supplying goods and services for a myriad of buyers. This lone wolf, the monopolist, holds the reins of power, controlling market supply and prices, setting the tone for the game.
Unlike in perfectly competitive markets, our solitary seller reaps the benefits of absolute control over prices and quantities sold. The demand they face is surprisingly similar to that in the market at large.
The monopolist cherishes their throne for various reasons. First and foremost, it's due to governmental favoritism. Second, the barriers to new entrants stand tall and imposing. Third, the monopolist finds themselves beyond the reach of product substitutes.
Monopoly: The Lone Wolf vs. The Pack
Monopoly marks the extreme end of the market structure spectrum. It stands opposed to perfect competition like night and day. Fewer items exchange hands under a monopoly than in a perfectly competitive market, allowing the monopolist to set prices above those offered in pure competition.
Since the monopolist is the sole provider in the market, they don't falter at the sight of competitors, new products, or the threat of substitution. If they decide to hike up the price of a product, there's no need to fret; they can do so without fear of losing market share.
Conversely, in a perfectly competitive market, a unilateral price increase equates to an immediate drop in market share as consumers hurriedly seek alternative sources.
Take a Look at Some Monopolies
Monopolies manifest themselves differently in various countries. Typically, you'll find them in strategic industries like electricity, telecommunications, and utilities.
In Indonesia, they take the form of:
- PT Perusahaan Listrik Negara (PLN) in the electricity sector
- PT Kereta Api Indonesia (Persero) in the railway industry
- PT Pindad in the military products sector
In the United States, you might encounter:
- Carnegie Steel Company
- Standard Oil Company
- American Tobacco Company
In India, examples include:
- Indian Railway Catering and Tourism Corporation (IRCTC)
- Hindustan Aeronautics India Limited (HAL)
Identifying a Monopoly
Examining a market structure from different angles helps us recognize the hallmarks of a monopoly.
- Number of players: The market is dominated by one player.
- Entry barriers: These are steep, stemming from economies of scale, regulatory constraints, or control of scarce resources.
- Substitutes: The market presents no viable alternative products.
- Market power: The monopolist holds absolute power, thanks to being the sole provider and faced with minimal competition and product substitutions.
- Pricing: The monopolist acts as the pricing maestro, setting prices at will.
- Discriminatory pricing: Companies harness the power to set different prices for various consumers buying the same product. This may be based on the buyer's reservation price, purchase volume, or other factors.
Historically, governments have been key players in the creation and maintenance of monopolies. They either grant companies exclusive rights or shape the regulatory environment to support the dominant firms.
On the other hand, antitrust policies and market liberalization efforts aim to break up or prevent persistent monopolies by encouraging competition and preventing the concentration of market power.
In the realm of monopolies, a single entity, such as PT Perusahaan Listrik Negara (PLN) in Indonesia or the Carnegie Steel Company in the United States, becomes the industry leader, dominating the market and setting prices for goods and services. However, this power is often supported by governmental favoritism and high entry barriers, making it challenging for other businesses to compete. In contrast, perfectly competitive markets feature numerous business entities, preventing any one company from setting prices at will due to the threat of product substitutes and consumer responses to unilateral price increases.
