Economics explained
Category:
Market structures
Monopoly
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A monopoly describes the situation where a market has only one producer.
In theory, a monopoly has the following characteristics:
a single seller
no close substitutes
high barriers to entry
the monopolist is a price maker.
If left uncontrolled, a monopoly can set its own price in the marketplace, which can result in what economists refer to as 'super-normal profits'. For this reason, monopolies are usually subject to control by government or a government agency.
Natural monopoly
A natural monopoly is a market situation where a monopolist has overwhelming cost advantage. In theory this can come about where a monopoly has sole ownership of a resource or where past ownership of capital resources
A monopoly exists when there is only one firm in the industry
In an industry with only one monopoly firm rather than lots of small competitive firms (perfect competition), three socially harmful things occur:
The monopoly firm produces less output than firms in a competitive industry.
The monopoly firm sells its output at a higher price than if the industry was competitive.
The monopoly firm’s output is produced less efficiently and at a higher cost than the output produced by firms in a competitive industry
👉Disadvantage to consumers
Higher prices
Firms with monopoly power can set higher prices than in a competitive market. Monopolists are also able to use price discrimination. This is the practice of charging different prices to different customers for essentially the same product.
Less choice
Abuse of monopoly power could also involve setting higher prices or limiting output and lead to less choice for consumers.
Disadvantage to other producers
Artificial barriers
A monopoly can also set artificial barriers to prevent other producers from entering the market. For example, it can limit production and access to technical developments. There may also be an unfair treatment of competitors.
Preferential treatment
The firm may give preferential treatment to certain parties, placing others at a disadvantage. This does not benefit other producers.