The Nature of the Monopolist Firms - Essay Example

Microeconomics-Monopoly Outline of the paper: Monopoly The major points about monopoly is summarised in this paragraph. Different types of monopoly, various features of monopoly, benefits and drawbacks of monopoly etc also mentioned in the abstract. 2. Introduction General characteristics of monopoly and various types of monopoly and examples of monopoly are mentioned briefly in this paragraph 3. Types of monopoly Natural monopoly, geographic monopoly, technological monopoly, and government monopoly are explained in this section. 4. Features of monopoly Various features of monopoly are explained with the help of diagrams in this section. The question like how monopolistic firms attain the capability to increase the prices of their product and services is explained with the help of other economic terms. 5. Conclusion The major points discussed in this paper were summarised in this section. 6. Suggested areas of further research The question; how to protect the interests of the consumers in monopolistic market should be researched further. 7. References The references used for this research were cited in MLA style in this section. Abstract Monopoly is one of the major microeconomic terms which refer to the total domination of a firm in the market. The monopolistic firms face less competition in the market and they can control the market activities more effectively than other firms. Monopoly is beneficial to the firms whereas it is against the interest of the public. Monopolistic firms can increase the prices of their product and services far more than the actual prices because of lack of competition they may face in the market. Monopoly has different forms like natural, geographic, technological, and government. This paper briefly explains various features of monopoly according to the principles of microeconomics. Introduction Monopoly is a condition in which only a single firm controls the entire market without having much competitions from others for their goods and services. It is a ploy usually adopted by big organizations to reduce competition from small firms. It is difficult for small firms to survive in monopolistic markets because of their inability to match with the competitive power and financial capabilities of the monopolistic firm. Monopoly is a good market condition for an organization; but it is not so good for the consumers. The ability to fix prices of products and services is the main advantage of a monopolistic firm. For example, Microsoft is enjoying monopoly in the operating system market in the world at present. They are charging heavily for their Windows operating system because of the absence of any other competitive products. Types of monopoly Based on the nature, monopoly can be classified into different categories like; natural, geographic, technological, governmental etc. An industry is said to be a natural monopoly if it produce a desired output at a lower cost than two or more firms. Public utilities like railways, telecommunications, water services, electricity, and mail delivery etc are examples for natural monopoly. These public utility services are mainly controlled by the government and private competition is not allowed in these sectors. A natural monopoly and monopoly are entirely different concepts since natural monopoly describes a firm's cost structure whereas a monopoly explains market share and market power. It is difficult for small firms to invest in areas with natural monopoly. For example, it is not easy for small firms to invest huge amounts needed for setting up a public transporting system like railways or public utility like water supply. Because of globalization, governments now permit private investments in natural monopolistic areas. In other words, the term natural monopoly is going to lose its significance since private companies may challenge the governments in these sectors. For example, BSNL (a public company) was the only telecommunication company in India till two decades before. At present many private companies like Reliance, AirTel, Vodafone, TATA etc are competing with BSNL in India. In short the natural monopoly of BSNL is no more in the picture at present. Geographic monopoly exists when a firm prevent others from entering their territory because of geographical peculiarities. For example, let's say Nike is the only shoe sold in Denver, because the mountains around prevent other shoe companies to ship in quantities of shoes, while Nike just happens to have a factory in Denver. Nike would then have a geographic monopoly of shoes in Denver, because they are the only one in Denver, due to the geographic landscape” (What is a geographic monopoly?) Nike was able to monopolise the Denver market because of the geographic peculiarities of Denver. Other companies cannot sell shoes for cheaper price in Denver even if they send their products to Denver through air transport because of the increased air transport cost. So the competitors may stay away from Denver like small market which may result in geographic monopoly to Nike in Denver market. Nike can exploit the situation well and they can charge their product more in Denver market compared to their prices in other markets. Technological monopoly means the power of technology one firm enjoys over others. For example, Microsoft with their technological power monopolized the operating system market in the world. No other organization can match the technologies developed by Microsoft and the competitors are struggling to compete with Microsoft. Microsoft has cleverly monopolized the operating system market with the help of other companies. For example their strategic tie up with Intel helped them immensely in maintaining their monopoly in the operating system market, since Intel produces Microsoft chips which perform better with only the Microsoft’s operating system. In fact Intel forced to design their microprocessors or computers to suit the needs of Windows operating system because of the immense market share Microsoft has. In short, the technological dominance of Microsoft over other competitors, forced even the chip manufacturers to follow the instructions from Microsoft. Government monopoly is another kind of monopoly in which only the government enjoys the freedom of sole provider of goods or service to the public. Competition is prohibited by law in areas where government monopoly exists. For example, atomic energy is one area in which private participation is prohibited. Atomic energy can be misused in different ways and no governments can allow private people invest in this sector. Defense sector is another area in which private participation is impossible. Features of monopoly Monopoly helps a firm to earn super-normal profit in the long run. The profit making capabilities of monopoly can be explained with the help of the following diagram. (Economics help) From the above chart, it is clear that a monopolistic firm always tries to set the output by equating Marginal Revenue (MR) and Marginal Cost (MC). A firm would maximize its profit when MR = MC. It is also clear that the monopolistic firm started to make profit when the Price (Pm) and Output (Qm) intersect with the MC and MR curves. Moreover, in a monopolistic market the Price would be greater than the Marginal Cost (P>MC). It is impossible for a firm to set higher prices in a normal market because of the still competition it may face from competitors. In other words, instead of super profits, firms will get only normal profits in normal markets. The equilibrium attains only when MR=MC. Profit of a firm depends on the difference between Average Revenue AR (Price) and Average Cost AC. In other words a firm would be able to make super profit when AR>AC. On the other hand when AR Read More