In a market economy, monopolies tend to have only one seller. However, it is close to impossible to have a pure monopoly where there is only one firm in the global market. As a result, monopolies tend to be defined as a market with few firms competing against each other. These firms have the power to hold the price above the socially optimal point. This is known as the monopoly power. A monopolistic market does not have the luxury of free entry and exit of the market (Perloff, 2004, P.109). This is because most of these monopolistic companies have barrier to entry by having things such as patents, copyrights among others. This hinders other firms from entering the market. This paper will examine how a monopoly impacts the market and some of the implications of having a monopoly in an economy.
Monopolies have some sort of power in a given market, monopolies tend to have curved their market niche. This is significant to most monopolistic firms in that their price is often high compared to the output produced, which is mainly due to inelastic market demand. Instead of charging price at the optimal level, where marginal cost crosses the marginal revenue, monopolistic firms tend to go overboard by charging its consumers at the point where demand crosses the marginal revenue (Harberger, 1998, P.79-82). This is the profit maximization point for most monopolies but not the socially optimal point for the society. Thus, some monopolies tend to ensure that they have maximum monopolistic profits by producing little but charging more for their goods. In addition, monopolies bring about dead weight loss to consumer and producer surplus. Other costs afflicted to the societies by the monopolies are the social costs such as rent seeking. This shows a negative impact of a monopolistic market (Pindyck, 2013, 390-93). On the other hand, pure monopolies are desirable in the market because of economies to scale. This means that some monopolies can charge less for their products because of specialization in that output can be doubled without necessarily doubling the cost.
Monopoly power has to be regulated by the government so that price can be maximized to suit the social welfare. This is crucial in a given market because the fact that firms can hold price over the marginal cost, insinuates production falls below the competitive level that brings about dead weight loss. In addition, price has to be regulated to ensure that consumers are not economically exploited by the firms. Thus, the government has enacted antitrust laws as a way of protecting the consumers (Buchanan, 1998, P.62). However, in cases of a natural monopoly, the consumers can enjoy their products and services at a lower charge.
In conclusion, it is evident that monopolies have few sellers but many buyers in their market. This is because there is no free exit and entry in the market because the market has barriers to entry such as patents. Monopolies tend to reap high revenue because they have the market power to hold the price above the marginal cost as a way of maximizing its profits. In addition, monopolies have the power to produce less output but sell at a high price. However, natural monopolies tend to deviate from this norm by ensuring that their price is close to the social optimal point such that they do not enjoy monopoly profits. This shows that there are different elements in terms of firms involved in a monopolistic market structure.
References
Buchanan, P., & Randall, R. (1998). The monopoly. St. Louis: Concordia.
Harberger, Arnold C. “Monopoly and Resource Allocation.” (1998, May 2): American Economic Review 44, no. 2 77–87.
Perloff, J. M. (2004). Microeconomics (3rd ed.). Boston: Pearson Addison Wesley.
Pindyck, R. S., & Rubinfeld, D. L. (2013). Microeconomics (8th ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.
