MONOPOLY: CHARACTERISTICS AND TYPES - DUDAS - 2025

A monopoly occurs when there is only one person or company that provides a particular good or service to consumers. In this way, this person or company absolutely controls the supply of the certain good or service, since there is no type of competition that buyers can go to.

It should not be confused with monopsony, where there is only one buyer for a specific good or service; or with oligopoly, when there are only a few sellers for the same good or service. The term monopoly first appeared in Aristotle's Politics.

In this work the Greek philosopher describes Thales of Miletus' grape press business as a monopoly. In many places, monopolies are regulated by law; Having a monopoly in the market for a good or product is not usually illegal, but it can be certain abusive behaviors that carry penalties.

characteristics

Monopolies are distinguished by clear characteristics, such as the existence of a single producer and many buyers, a high demand for the product, the creation of prices by the monopoly company, the great barrier to entry to new producers or price discrimination, among other.

Existence of a single producer and several consumers

The monopoly is characterized by the existence of a single producer of a good or service and several consumers for it.

That is why this is a form of imperfect competition, since there is no type of competition, the monopoly company controls the supply at its will, being able to manage prices and quantities as it suits it.

High demand

The product or service produced by the monopoly company is strongly demanded by consumers.

Price creation

The monopoly producer decides the prices. Unlike perfect competition, where the price is set by the market itself, in a monopoly it is the company that creates the price. This way, you can increase prices and maximize your profits.

Existence of strong barriers to the entry of other companies

Monopoly markets are characterized by the difficulty for other companies to enter them.

This usually happens because the products are sometimes unique, difficult to produce, or patented by the monopoly company. Due to the power of the monopoly company, a company that wants to compete with it will also have very high initial costs.

Price discrimination

Price discrimination is a profit-maximizing strategy that consists of assigning different prices for the same good or service in different markets.

You can reduce the supply and increase the price in less elastic markets, and increase the supply and reduce the price in elastic markets.

Types

Monopolies can occur for different reasons. Some occur naturally, others due to their geographical location, others for technological reasons and others have this form by obligation, such as governments.

Natural monopolies

A natural monopoly occurs in the face of a series of factors that make competition impossible. For example, some local phone companies have a monopoly because of the high infrastructure costs required for another company to become a competitor.

Furthermore, a series of conditions will be necessary that the regulation will not allow, making it also impossible. Normally, these types of monopolies are regulated by the government to ensure a fair and correct operation.

Technology monopolies

If a company is the first to create a good or service, it is very likely that it will patent it; This legal protection turns that market into a monopoly.

For example, if a technology company creates new software and patents it, other companies do not have the legal possibility to sell that same product.

Geographical monopolies

When a company is the only one offering its services in a specific place, it is a geographical monopoly. Usually these monopolies occur because the number of customers is not large enough for there to be competition.

An example of this are rural areas that only use the same gas station or supermarket. There is a chance for competitors to break into the market, but it is generally not worth it.

Government monopolies

Finally, governments must necessarily function as monopolies, since there cannot be two at the same time.

Many times these are the ones that regulate certain markets, making them function as a monopoly. An example could be the garbage collection service in a city.

Monopolies against perfectly competitive markets

Monopolies and perfect competition are at the opposite extremes of possible market structures, and differ on several points:

Marginal income and prices

While in perfectly competitive markets the price equals marginal cost, in monopoly markets the price is above this cost.

Product differentiation

In perfectly competitive markets there is no product differentiation; all products are replaceable and homogeneous. On the other hand, in the monopoly there is a great differentiation in the products and they are hardly substitutable.

Number of competitors

In perfectly competitive markets there are an infinite number of competitors. In the monopoly there is only one.

Barriers to entry

In perfect competition there are no barriers to entry to the market, while in monopoly the barriers are very high.

Elasticity of demand

The price elasticity of demand is the percentage change in demand for the product before a percentage change in its price. The more demand changes with a small change in price, the more elastic it will be.

In perfectly competitive markets, the demand curve is perfectly elastic, since consumers have infinite options to purchase the same product or service. In contrast, in monopolies the curve is completely inelastic.

Benefits

In perfect competition, companies may have excessive profits for a time, but this will attract other competitors, which will eventually reduce it to zero.

In monopolies, companies can maintain these profits because of the enormous entry barriers to competitors.

References

1. Milton Friedman. "VIII: Monopoly and the Social Responsibility of Business and Labor". Capitalism and Freedom (paperback) (40th anniversary ed.). The University of Chicago Press. p. 208
2. Krugman, Paul; Wells, Robin (2009). Microeconomics (2nd ed.). Worth.
3. Blinder, Alan S; Baumol, William J; Gale, Colton L (June 2001). "11: Monopoly". Microeconomics: Principles and Policy (paperback). Thomson South-Western.
4. Samuelson, William F.; Marks, Stephen G. (2003). Managerial Economics (4th ed.). Wiley.
5. Melvin, Michael; Boyes, William (2002). Microeconomics (5th ed.). Houghton Mifflin.