Professional Documents
Culture Documents
ON
Monopoly
SUBMITTED BY
SUBMITTED TO
WAGHODiYA, BARODA
ACADEMIC YEAR-2011
INDEX
1
SR NO. DISCRIPTION. PAGE
NO.
[1.0] MONOPOLY 3
Monopolies
[6.0] Optimal Public Policy 13
[9.0] Bibliography 20
2
[1.0]MONOPOLY
[1.0.1]Meaning of Monopoly
Monopoly is a market situation which where, there is only one seller of product
with barriers to entry of others. The product has no close substitutes. The cross
elasticity of demand with every other product is very low. Monopolist can sell his
commodity at any price he likes. He has the control over price. However a
monopolist can certainly fix the price at which he sells his commodity, but he
cannot at the same time determine the amount of commodity, that purchaser will
buy. In fact, if he charges a high price, the demand for commodity will be less, and
if he charges a low price. The demand for his commodity will be more. The price
is under the full control of the monopolist but not the demand, demand is
determined by purchaser.
[1.0.2]Features of Monopoly
2. No close substitute:
Under monopoly a single producer produces single commodities which have no
close substitute. As the commodity in question has no close substitute, the
monopolist is at liberty to change a price according to his own whimsy. Monopoly
cannot exist when there is competition.
A firm is said, to be monopolist only when it is the single producer and supplier of
the product which have no close substitute. Under monopoly the cross elasticity
3
of demand is zero. Cross elasticity of demand shows a change in the demand for a
good as a result of change in the price of another good.
A monopolist can sell more of his output only at a lower price and can reduce the
sale at a high price. The downward sloping demand curve expresses that the price
(AR) goes on falling ns sales are increased. In monopoly AR curve slopes
downward mid MR curve lies below AR curve. Demand curve under monopoly la
otherwise known as average revenue curve.
5. Patents:
Patents are a subclass of legal barriers to entry, but they're important enough to be
given their own section. A patent gives the inventor of a product a monopoly in
producing and selling that product for a limited amount of time. Pfizer, inventors
of the drug Viagra, have a patent on the drug, thus Pfizer is the only company that
can produce and sell Viagra until the patent runs out. Patents are tools that
governments use to promote innovation, as companies should be more willing to
create new products if they know they'll have monopoly power over those
products.
4
[2.0]Why Monopoly Arise?
Monopolies have existed throughout much of human history. This is because
powerful forces exist both for the creation and maintenance of monopolies6. At
the root of these forces is the natural human desire for wealth and power
together with the fact that monopolies can be immensely profitable and provide
their owners with tremendous financial, political and social power.
(3) By using various legal and/or illegal tactics, often referred to as predatory
tactics, aimed specifically at eliminating existing or potential competition, such as
(e) Taking control of, or conspiring with, suppliers of other products used by
competitors' customers,
6
(f) Threatening costly litigation (e.g., regarding allegations of patent or
copyright infringements regardless of the legal merits of such claims),
which large companies can easily afford but small companies often cannot
and
7
examples include a franchise for cable television for a certain city or region, a
trademark for a popular brand, copyrights on certain cartoon characters or a
patent for a unique product or production technique.
8
Monopoly is a term used by economists to refer to the situation in which
there is a single seller of a product (i.e., a good or service) for which there
are no close substitutes. The word is derived from the Greek
words moons (meaning one) and poleis (meaning to sell).
[3.0]Types of Monopoly
Monopolies can be classified in various ways, including according to the degree of
monopoly power, the cause of the monopoly, the structure of the monopoly and
whether the monopoly is with regard to selling or buying.
In the latter half of the nineteenth century trusts became a popular way to form
monopolies in the U.S. A trust was an arrangement by which stockholders in
several companies transferred their shares to a single set of trustees. In exchange,
9
the stockholders received a certificate entitling them to a specified share of the
consolidated earnings of the jointly managed companies. The trusts came to
dominate a number of major industries. The largest and most infamous of these
was Standard Oil, but trusts were also formed in numerous other industries
including railroads, coal, steel, sugar, tobacco and meatpacking.
(1) Substantially higher prices and lower levels of output than would exist if the
product were produced by competitive companies.
10
(2) A lower level of quality than would otherwise exist. This includes not only the
quality of the goods and services themselves, but also the quality of the services
associated with such goods and services.
It is often said, even by those who have negative opinions about monopolies that
"monopoly itself is not necessarily bad, but rather it is the abuse of monopoly
power that is harmful." This statement is an excessive simplification, and it can be
indicative of a lack of understanding of the full extent of harm that can be caused
by monopolies.
11
If a monopolist engages in behavior that produces results similar to that by firms
in an industry that is characterized by intensive competition (i.e., charges prices
close to cost and does not engage in price discrimination), then there might not
be a problem. Unfortunately, however, this is rare even for a
seemingly benevolent monopolist. The reason is that the very strong incentives to
maximize profits that exist for virtually any business, whether pure monopolist,
perfect competitor or somewhere in between, produce very different results for a
monopolist than they would for a firm in a highly competitive industry. And
monopolists (as is the case with competitive firms) usually do not rank
benevolence as a top corporate priority.
Thus, the management and employees in a monopoly might not at all be aware
that they are harming the economy, especially if their behavior is similar to that
by a non-monopoly. In fact, they may even genuinely believe that they are
benefiting the economy because of their conviction that they are more efficient
and productive than a number of firms competing with each other would be.
Another reason that the positive effects of even a benevolent monopolist would
not be as great as for a competitive company is that innovations that improve
quality and reduce production costs are often the result of desperation. (This is
something that is easy for many owners of struggling businesses to understand,
but is often difficult for others to fully grasp without experiencing it firsthand.)
Monopolists generally consider themselves successful, and thus, although they
often are innovators to some extent (typically mainly in their earlier years), they
usually just do not have that extra motivation to produce truly breakthrough
innovations that smaller companies desperate to gain market share (or to just
survive) have.
12
One is that, in many cases, monopolies that have arisen largely as a result of
illegitimate or illegal tactics (rather than through competition based on lower
prices and superior quality) and they have made great efforts to hide that fact
from the general public and politicians.
A second reason is that, even if a monopoly arises by fully legitimate means, there
are strong temptations for it to engage (even unknowingly) in practices that are
bad for the economy as a whole (e.g., higher prices, lower output and less
innovation than in a highly competitive situation), although such behavior and its
consequences are usually not readily apparent to laymen or to political decision
makers.
It has also been argued that governments need not intervene because
monopolies always tend to break down in the long run anyway due to market
forces. A major problem with this view is that the long run can be many years12,
and the economy and society can suffer substantial damage in the meantime.
Another problem is that this approach does not provide a deterrent to the
creation and abusive behavior of new monopolies.
In the case of monopolies that are not natural monopolies (i.e., products for
which there is no great advantage in terms of economic efficiency to having a
monopoly), public policy decisions should depend in large part on the behavior of
the monopolist. If the monopolist is regarded as charging reasonable prices,
providing high quality products, being innovative and not engaging in abusive
practices, then there might be good reason to leave it alone. One reason to leave
a monopoly alone in such circumstances is to avoid what can be the very
substantial costs involved in regulating it or breaking it up.
13
But if it is determined that a monopolist is charging prices substantially higher
than, providing quality lower than, or being less innovative than would occur
under competitive conditions or engaging in abusive practices, then there is good
cause to take aggressive action.
The ways in which governments can intervene to reduce the adverse effects of
monopolies can be classified into three broad categories:
(2) Regulating the monopoly to limit prices, eliminate price discrimination, set
quality standards, restrict political activities, etc.
When monopolies are permitted to exist, there are several types of policies that
should be implemented in order to assure maximum benefit to the economy.
They include
(b) Outlawing the use of monopoly power with regard to one product for
the purpose of gaining a monopoly with regard to other products,
Because of the strong consensus among economists that large monopolies, and
particularly those that abuse their monopoly powers, can be harmful to an
economy, most industrial countries have enacted laws aimed at preventing anti-
competitive practices and have regulators to aid in the enforcement of such laws.
There has, in fact, been a long history of governments attempting to deal with the
abusive practices of monopolists. For example, in 1624 the English Parliament
passed the Statute of Monopolies, which greatly restricted the king's right to
14
create private monopolies in the domestic economy. However, this legislation did
not apply to the monopoly powers granted to companies formed for overseas
exploration and colonization.
The U.S. first attempted to curb monopolies at a national level was through the
enactment of the Sherman Antitrust Act in 1890 in response to the widespread
revulsion to the highly abusive practices of Standard Oil. Despite the subsequent
passage of a variety of additional antitrust (i.e., anti-monopoly) measures, the
Sherman act remains in many respects the most important piece of legislation in
the U.S. with regard to monopolies.
1. Salt has a long history of being a monopoly in much of the world because
it is naturally scarce in many regions and because of the strong demand for
it (particularly for use as a food preservative and as a flavor enhancer). Salt
monopolies have been a very convenient way for governments and large
companies to raise vast amounts of money. For example, the rise of Venice
to greatness is attributed in large part to its salt monopoly.
15
means that the curve always slopes downward to the right, although some
sections may be horizontal or vertical.
6. The argument could be made that this implies that monopolies are
the natural state of an economy and thus government intervention should
not be used if one believes in a free market economy. However, kings or
other dictatorships have also existed throughout most of history, and thus
it could likewise be argued that dictatorship is the natural form of
government and its citizens should not strive to break it up in order to
attain or restore democracy.
8. For example, the fair use doctrine allows people to make copies of
copyrighted materials in some situations, trademarks can become invalid if
they are not actively protected and patents can be ignored by the
government if it wants to use an invention for its own purposes.
16
9. Large monopolies can be an efficient means of both raising revenue and
consolidating power for governments whose primary goals are other than
the prosperity of their citizenry (e.g., the accumulation of wealth and
power for their leaders). As economic competition and political competition
tend to go hand in hand, restricting economic competition through the
tolerance for or encouragement of monopolies can be an effective way of
restricting political competition (and thus restricting political freedom). In
fact, monopolies have commonly been used throughout history for these
purposes.
10. There have been a few major exceptions to this. Most notable was Bell
Labs, the research and development arm of AT&T. AT&T was one of the
largest and most pervasive monopolies in recent U.S. history, although a
highly regulated and generally benevolent one. Bell Labs was perhaps the
most prolific source of innovation that has ever existed, and it was
responsible for such revolutionary inventions as the transistor, the single-
chip 32-bit microprocessor, the UNIX computer operating system and
the C and C++ programming languages.
12. As John Maynard Keynes, one of the most influential economists of the
twentieth century stated so eloquently in what his most famous quote is
possibly: "In the long run we are all dead." (No wonder economics is often
referred to as the dismal science!) Keynes was referring to the Great
Depression of the 1930s and to those economists who advocated letting
the market mechanism eventually restore the economy to prosperity
instead of calling for immediate government intervention.
17
[7.0]Case Study 1: AT&T and Microsoft
AT&T was a government-supported monopoly - a public utility - that would have
to be considered a coercive monopoly. Like Standard Oil, the AT&T monopoly
made the industry more efficient and wasn't guilty of fixing prices, but rather the
potential to fix prices. The breakup of AT&T by Reagan in the 1980s gave birth to
the "baby bells". Since that time, many of the baby bells have begun to merge and
increase in size in order to provide better service to a wider area. Very likely, the
breakup of AT&T caused a sharp reduction in service quality for many customers
and, in some cases, higher prices, but the settling period has elapsed and the baby
bells are growing to find a natural balance in the market without calling down
Sherman's hammer again.
Microsoft, on the other hand, was never actually broken up even though it lost its
case. The case against it was centered on whether Microsoft was abusing what was
essentially a non-coercive monopoly. Microsoft has been challenged by many
companies, including Google, over its operating systems' continuing hostility to
competitors' software.
Just as U.S. Steel couldn't dominate the market indefinitely because of innovative
domestic and international competition, the same is true for Microsoft. A non-
coercive monopoly only exists as long as brand loyalty and consumer apathy keep
people from searching for a better alternative. Even now, the Microsoft monopoly
is looking chipped at the edges as rival operating systems are gaining ground and
rival software, particularly open source software, is threatening the bundle business
model upon which Microsoft was built. Because of this, the antitrust case seems
premature and/or redundant.
Back when there were a lot of oil companies competing to make the most of their
find, companies would often pump waste products into rivers or straight out on the
ground rather than going to the cost of researching proper disposal. They also cut
costs by using shoddy pipelines that were prone to leakage. By the time Standard
Oil had cornered 90% of oil production and distribution in the United States, it had
learned how to make money off of even its industrial waste - Vaseline being but
one of the new products launched.
The benefits of having a monopoly like Standard Oil in the country was only
realized after it had built a nationwide infrastructure that no longer depended on
trains and their notoriously fluctuating costs, a leap that would help reduce costs
and the overall price of petroleum products after the company was dismantled. The
size of Standard Oil allowed it to undertake projects that disparate companies
could never agree on and, in that sense; it was as beneficial as state-regulated
utilities for developing the U.S. into an industrial nation.
Despite the eventual break of up of Standard Oil, the government realized that a
monopoly could build up a reliable infrastructure and deliver low-cost service to a
broader base of consumers than competing firms - a lesson that influenced its
decision to allow the AT&T monopoly to continue until 1982. The profits of
Standard Oil and the generous dividends also encouraged investors, and thereby
the market, to invest in monopolistic firms, providing them with the funds to grow
larger.
[9.0] Bibliography.
19
20