Monopoly

I’m sure most of us have played the game monopoly before- the one in which we try to build and gather the biggest assets whilst retaining as much cash as possible. Though in real life, monopoly is the same, just on a much bigger scale.

What is a monopoly in economic terms? Well, it is a situation in which a firm or an individual has the power to control the market for a certain good or service, ceteris paribus. That means that this firm has the power to exploit prices and services so as to raise as much profit as it can, just like how in monopoly, people keep upgrading their houses to something really expensive.

How do monopolies come about? Usually, this happens because it is the only producer of a certain good or service, or because the demand for a particular brand of goods is very high. In the 20th century, Ford Motors had a monopoly on the car industry, because only they had the technology to create cars at such a quick level. It also owned branches that produced steel for cars parts, thus it could keep costs low and profits high. This would lead to it becoming a monopoly because other car manufacturing firms had to purchase materials from them.

However, having a monopoly in the economy can be bad news for infant firms or small firms. This is because of barriers. Once a firm has a monopoly, it would definitely want to continue it’s hold on the market. However, there are many other firms that produce the same good, or want to produce the same good. To stop this, the big firm imposes barriers to entry. Barriers to entry would include cost, research and development, advertisement and predatory pricing. The list is not exhaustive. Usually, the firms that are monopolistic are very profitable and have earned economies of scale. This is vital to the firm and dangerous to smaller and/ or infant firms who have not earned it.

Monopolies are also inefficient for consumers. Monopolies receive very little competition. As a result, they are able to charge exorbitant prices whilst still maintaining high demand for a good or service. Their firms also usually provide poorer and more inffecient service. Most also lose the initiative for innovation. They become like this because they do not have to compete. Imagine this. Picture Student A- a bright student who does well in examinations because of his intelligence and dilligence. However, after a while his success gets into his head. He starts to rest on his laurels and stops working hard. Besides that, he also becomes rude and arrogant towards his peers. A monopoly is something like that.

However, some people argue that monopolies do have some benefits for consumers. One tactic that monopolies employ would be predatory pricing. For example, two airlines; Rose Air and Jack Airlines are the only airlines that fly to London. Rose Air is a big and profitable firm but Jack Airlines is not as successful. However, there is a recession and many people are choosing not to fly to London. As a result, Rose Air decides to slash its prices for London Air tickets for a short period of time, so that it is even lower than Jack Airline’s tickets. This increases demand for Rose Air tickets and the demand for Jack Airlines tickets. Rose Air will not suffer as much as Jack Airlines because it can rely on bigger profits. Also, Rose Air only slashes its prices for short period of time. This benefits consumers because they can enjoy cheaper flights during a recession.

Also, some economists argue that monopolies, though inefficient, are not totally dangerous. This is because they can be controlled by government regulations. Governments can control monopolies by taxing them very high amounts. They can also give smaller or infant firms a head start with subsidies and grants.

The direct opposite of a monopolistic market is a market with perfect competition. This occurs when there are many small firms, all producing homogeneous goods. This means that no single firm has influence on the market. This is usually very rare. The only industry closest to perfect competition would be farming and agriculture.

Monopolies are also very similar to countries which have all their industries nationalized. This is because these countries face sparse or no competition at all and goods and services, though cheap are usually not of good quality. Service is also often slow and inefficient as everybody uses them.

In conclusion, like all market systems, monopolies do have their own pros and cons. However, in this case, monopolies do have more cons than pros. Nonetheless, it is not an unsolvable problem. It is up to the consumer to decide whether or not he or she wants to purchase goods or services from that firm and it is also up to the government to control it or not.