Monopolies, Oligopolies and the Economy Essay
Monopoly is a term to describe an industry where a seller of a product or service does not have a competitor offering a close substitute. The word is derived from the Greek words monos (meaning one) and polein (meaning to sell). Rarely does a pure monopoly exist. In a pure monopoly there is only one company making and selling the item in question; however there can also be the situation where there is one company who has the bulk of sales and the other firms in the same market have little or no impact on the overriding company.
Due to lack of competitors, the monopoly company has control of the supply and price of the good or service, unless there is government intervention. The monopoly will continue to make more goods as long as their marginal cost is equal to their marginal revenue. The monopoly will stop selling goods at the point when the next item sold lowers their marginal revenue on the previous goods sold. Because there is no competition the monopoly company has more control in making a profit. In normal business situations this would cause other companies to form and try to get into the same industry hoping
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As of July 29, 2008 two companies merged creating a monopoly in satellite radio. Sirius, which delivers more than 130 channels of 100% commercial free entertainment from news, sports, talk, traffic, and XM, the number one satellite radio company, combined to consume over 18 million subscribers and have cornered the market. Jointly, they have partnerships with the automobile market with General Motors, Honda, Nissan, Ford, and covering several hundred models of cars. This monopoly provides consumers with greater programming and content consumer choice, including offering consumers more for their dollar.
The new merger enables the combined companies to develop accelerated technological innovation and benefit retailers like Best Buy, Radio Shack, and Circuit City. It also gives them power to price their radio service for a considerable profit for they are currently the only company offering this service (FCC). Loral Space & Communications provides all the satellite communication for XM and Sirius in which they own 64% of Telesat, one of the world’s largest operators of communication satellites. Another monopoly is public education.
Because the consumers have no choice, unless they can afford private school or erhaps home schooling, they must use the public school system. Parents and students have little to no control over the teachers’ unions, local school districts, state funding or federal law. The government has control over the education and social needs of children who attend public schools (Hornberger) whether that involves social programs for food, scholarships, clothing or special needs. The government runs K-12 education and children must attend the local public school in their neighborhood, although sometimes secondary school students can attend a school elsewhere.
Public schools do not create a free competing market – the free market Adam Smith spoke of in The Wealth of Nations (Mankiw 361). Thus, a public school system is a monopoly. The average student simply has no choice. Some men also don’t have a choice but to use another type of monopoly. “About 50 percent of all men over the age 40 year are going to have some difficulty with erectile dysfunction,” said Chris Viehbacher, president of GlaxoSmithKline (Milford). Prior to 2001, the erectile dysfunction industry was monopolized by Pfizer with its drug Viagra.
Consumers with erectile dysfunction had only one drug available, Viagra. As a result Pfizer, the manufacturer, was a price maker and could determine the price and quantity supplied of Viagra. Viagra was developed by British scientists at Pfizer’s research centre in Sandwich, Kent, and covered by three patents. The first patent was filed in June 1991 after they created a new compound that they believed could be used to treat heart conditions (Uhlig). Viagra was a monopoly because the government gave Pfizer the exclusive right to produce the erectile dysfunction drug (Mankiw 312).
In order for the monopoly to remain, there has to be some sort of barrier to entry for new companies to enter the industry. Examples of barriers to entry would include high start up costs, limited resources, patents or legal barriers. A company can become a monopoly in different ways. In the case of Viagra, although the patent and monopoly were later lost, the company earned its monopoly position by offering the only product approved and patented for erectile dysfunction. In the case of the USPS the government outlawed any competition for them creating a monopoly.
While a monopoly usually involves one firm with significant control on the market, an oligopoly contains a few firms. An oligopoly is a market structure where a few companies selling identical or differentiated products control the marketplace. The few players in an industry are usually quite large compared to the market for the product, thus giving these few players an advantage at market control. There are barriers to entry in oligopolies that include patents or government grants, ownership of resources, cost prohibitive barriers, brand equity and diminishing average cost.
The leaders of companies within oligopolistic industries monitor decisions made by other players in the industry; this is called interdependency. The major companies within an oligopoly tend to compete through product differentiation or advertising rather than on price. Prices tend to remain rigid because competitors who may be willing to match price decreases may not be willing match price increases thus leaving no incentive for price competition. Mergers are common amongst oligopolies. Merging two firms into a single entity provides greater market control.
Collusion occurs when two players within an oligopolistic industry make a secret deal over price, production, or another portion of the market in order to act as a monopoly or cartel. Oligopolies lead the current economic setting, accounting for about half of what is produced. Oligopolistic industries are diverse and widespread, and can be found in almost any industry from fast food to pharmaceuticals. Oligopolies can offer services as well as goods. Two service providing firms worth mentioning are Fandango and Movietickets. om. These two firms sell sports events, concerts and movie theater tickets for a minimal charge and have cornered this market.
“Fandango, the nation’s leading moviegoer destination, sells tickets to more than 15,000 screens. Fandango entertains and informs consumers with exclusive film clips, trailers, celebrity interviews, fan reviews and news, while offering them the ability to quickly select a film and conveniently buy tickets in advance” (Fandango. com). Fandango has partnered with over 50 % of United States theaters. Fandango’s founding partners include the nation’s leading exhibitors: Carmike Cinemas, Century Theatres, Cinemark Theatres, Edwards Theatres, Regal Cinemas and United Artists Theatres. Additional partners include AMC Theatres, American Cinematheque, Brenden Theatres, CineArts Theatres, Cinebarre, Cobb Theatres, Hollywood Theatres, IMAX, Kerasotes Theatres, King Theater Circuit, Majestic Crest Theatre, Premiere Theatres, R/C Theatres, Reading International Theatres, Wehrenberg Theatres, and Winchester Theatres” (Fandango. com).
On other hand Movietickets. com is partnered with theaters in North America and some other ations. Because of its tendency to corner a larger global market, “MovieTickets. com has seven different versions of the MovieTickets. com website, including Spanish and French language versions” ( MovieTickets. com). As it tickets for over 100 theater chains worldwide it does so “more than five times the amount of theaters than its nearest competitor” (Movietickets. com). Some movie theaters reserve seats if tickets are purchased from Movietickets. com. Moviegoers can print their tickets to avoid going to the box office, also tickets can be e-mail to family and friends.
This makes movie ticket convenient for moviegoers… another factor in attracting a large market. An example of a product based oligopoly would be competition wakeboard boats. According to Statistical Surveys Inc. , (based on boat registration data from 46 states in 2007) “the Grand Rapids, Michigan firm’s data represents 97% of the U. S. market” (Williams). From the data they provided, Malibu leads the segment for the first six months of 2007 with a market share of 25% followed by MasterCraft with a 22% market share, Correct Craft with 15% market share and Moomba with 13% of the market.
Combined, these four companies make up at least 73% of the wakeboard boat industry and they dominate the pricing. While the popularity of wakeboarding has increased into a multi-billion dollar industry year after year, few boat companies are trying to break into the wakeboard market. The biggest barrier to entry for this oligopoly is the manufacturing efficiency. If a firm wishes to enter into the wakeboarding boat market, the firm must consider the large costs of production – the explicit costs vastly incorporating the expensive inboard engines and wake making features, and the labor intensive hours involved.
Further, with the current economy, these competition wakeboard boats are a luxury item for most and therefore the demand has increased which would de-incentivize emerging or hopeful new firms. The security exchange industry is also an example of an oligopoly because there are only a few companies in the industry who control the buying and selling of equities. The two largest exchanges in the United States and the World are the NYSE Euronext and the NASDAQ (Reuters). The NYSE Euronext is a publicly traded company with a market cap of 11. 54 billion dollars, has 4,000 companies listed and trades 30. trillion dollars annually. The NASDAQ is also a publicly traded company, has a market cap of 6. 17 billion dollars, has 3,200 companies listed and trades 11. 81 trillion dollars annually. If these two companies along with the few smaller exchanges were to collude and form a cartel, they could control the price the exchanges charged, the quantities of transactions and the time when the transactions occur (Mankiw 350).
However, this is an unlikely event because of the SEC and government regulations. Oligopolies lead the current economic setting, accounting for about half of what is produced (Amosweb. om). Oligopolistic industries are diverse and widespread, and can be found in almost any industry from fast food to pharmaceuticals. It is very evident that oligopolies are formed where there are huge opportunities for making enormous amounts of money. Oligopolies aren’t limited to selling only goods as in the wakeboard boat and exchange industries, but they also sell services as in the movie ticket business. Monopolies and oligopolies have some similarities and some differences. They both tend to be relatively large and have considerable market control, but they differ in market competition.
An oligopoly market has more than one player in the industry and those players tend to work together. A monopoly tends to dominate alone. The line that separates an oligopoly from a monopoly at times can be difficult to see due to the tendency of oligopoly firms to collude. Despite the differences, both oligopolies and monopolies have been important players in our economic system – they are at the heart and soul of our market system and continue to support the freedom and capitalism that are integral to the United States.