Social Responsibility of Business
The most basic definition of a monopoly is a firm which exists alone in the entire industry. However, it depends on how narrowly the industry is defined – what matters is how much power the monopoly holds varying with the amount of substitutes available in the market by rival firms (Friedman, 2002). For example, a cafeteria owner has monopoly in a university, but does not have a monopoly in the entire vicinity. Like any other thing, there are two sides to monopolies – it has its advantages and disadvantages. BARRIERS TO ENTRY
The most evident property of a monopoly is the barriers to entry which are the blockages and obstacles for new firms for entering the industry. Barriers to entry include factors such as economies of scale; this is the reduction of cost per unit as the level of production increases. Since monopolies are the only firms in their respective industries, they cover the entire market demand (Grant, 2002). To supply for that, the production level is huge; which gives the firm an economies of scale unlike other new firms who produce only a small amount.
Also, the cost of production for an established firm is always lower than a new firm
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A new firm’s product does not have the experience in the market and does not have credibility because it is new. Moreover, the monopoly has an ownership of the majority of the key factors of production; when it is the only firm producing such a huge quantity of output, monopolies not only purchase the factors of production but also the retail and wholesale outlets. Like this, neither do the new firms have enough factors of production, nor do they have retail outlets to sell their products at.
Big monopolies are legally protected with copyrights and patents that give only their firm to practice in a particular market or area. A major barrier to entry for the firm is the threat of takeovers or mergers – the monopolies are so huge that they easily take over the small firm either by a pact or if they do not agree, by aggressive tactics (Sowell, 2004). Lastly, these big firms intimidate the small firms are heavy advertisements and price wars and by giving threats to the small new firms. Therefore, it becomes difficult for new firms to enter the market with one major monopoly operating in.
CAUSES OF HAVING MONOPOLIES Due to less money being spent in price wars, advertisements and countering the rivals since there are none; the monopolies save up a lot on cash which contributes to a rise in profits. Also, with a large output, economies of scale take place which reduces the cost of production for the firm. This can enable the firm to sell at a lower price, but monopolies do not do so. This extra profit that the monopolies earn can be used by these monopolies to invest in research and development and capital products.
Normally, firms do not invest in research and development because even after spending so much money, it kind of stays useless – reason being, that all the other firms copy the new technique and again all the firms stand at the same level and the firm that spent money on research and development eventually has no edge over the others. Thus, firms wait for rivals to invest in research and development so that they can simply copy off the techniques rather than investing so much money in it themselves. But monopolies are the sole firm and only that firm can enjoy the results concluded from the research, so they invest in it.
Also, investment in new capital goods such as assets and machinery improves the quality of work, production efficiency and the end result of the consumer good. Lastly, there is a healthy competition for corporate control; competition improves the quality of the firm (European Commission, 1997). This is not the competition in the goods market, but in the financial markets – there is always a competition for takeovers and buying of maximum shares in the firm if the firm becomes inefficient, therefore, there is a strong need for effective and proficient running of the firm. CONSEQUENCES OF MONOPOLIES
Monopolies are chiefly considered to be against public interest. In perfect competition, the price is usually set equal to the marginal cost, so that the marginal revenue is also equal to price and perfect competition is achieved at MC = MR = P. Therefore, perfect competition signifies higher output at a lower price. But for monopolies, the price is way above the marginal cost because the companies can make supernormal profit (profit above zero profit; zero profit is at MC = MR). Therefore, the public is paying a higher price than normally should be paid for; the monopolies take advantage of being the only supplier.
Especially, if the good is a necessity and the inelasticity is high, the monopolies take even more advantage of this situation (Shell, 1989). The firms are well-aware of the helplessness of the customers; they will eventually come back to buy the monopoly firm’s product because of lack of choice and the need of fulfillment of wants. This leads to an extreme unequal distribution of income; the rich gets richer and the poor gets poorer. The monopolies keep exploiting the customers and give no chance to the new comers so that the power in the hands of the monopoly can be neutralized.
Lastly, these monopolies also practice illegal intimidation practices to scare away the new entrants; which causes an increase in corruption along with a lack in competition (Stigler, N. D). With no competition around, the monopoly firm becomes inefficient and the productivity falls with no decrease in prices – the inefficiency is extremely harmful for the industry as it collapses as a whole since that is the only firm in the entire market. PRO-COMPETITION POLICIES The concept of competition brings in the idea of contestable markets; a market where there is no cost on entries and exits and they can be freely and easily made.
Hit and run competition, which is to enter a market for a short period of time when it is high on profits and leaving as soon as the recession starts, is also a part of contestable markets. It brings in the best of both worlds – economies of scale with a higher output with the help of monopolies and lower prices due to competition; therefore, a higher output at a lower price. When there is competition, there is a threat to the firm of their customers switching to other companies if they do not produce goods which are up to the mark.
Therefore, this keeps the firm uptight and does not let it become incompetent (Depken, 2005). Due to price wars between companies, the customers benefit because both the companies try to sell at a lower price to gain a greater customer share (Brady, 1989). Therefore, the rich and the poor to quite an extent can afford the products. Profits are also distributed evenly in the industry instead of just one firm accumulating all the profit. CONCLUSION Monopolies, being the only firm in the market, can take advantage of this pact and make huge losses or be disadvantageous due to a lack of competition leading to inefficiency.
Therefore, it is crucial to have pro-competition policies which, as a first step, reduce the barriers to entry usually set by monopolies. An ideal situation can be achieved in the industry and market if this methodology is followed.
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