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Encyclopedia > Monopoly

A monopoly (from Greek mono(μονό), alone or single + polο (πωλώ), to sell) is a persistent situation where there is only one provider of a product or service in a particular market. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. [1] Monopoly is the best-selling commercial board game in the world. ... Competition is the act of striving against others for the purpose of achieving gain, such as income, pride, amusement, or dominance. ... A good in economics is any physical object (natural or man-made) or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ... This article is about a term used in economics. ... In economics, one kind of good (or service) is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. ...


A Monopoly should be distinguished from monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. In economics, a monopsony (from Ancient Greek μόνος (monos) single + ὀψωνία (opsōnia) purchase) is a market form with only one buyer, called monopsonist, facing many sellers. ... For the American pop-punk band, see Cartel (band). ... This article does not cite any references or sources. ...


A government-granted monopoly or legal monopoly is sanctioned by the state, often to provide an incentive to invest in a risky venture. The government may also reserve the venture for itself, thus forming a government monopoly. In economics, a government-granted monopoly (also called a de jure monopoly) is a form of coercive monopoly in a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation... scheiiiißßßßßee!!!!!!!!!!!!!regional, local; for levels below the national, it is a local monopoly. ...


It is argued in contemporary monopoly theory that if a monopoly is not protected from competition by government restrictions, then it is subject to potential competition and therefore is not able to gouge consumers without causing competitors to enter the field to take advantage of profit opportunities. Potential competition, a fundamental conception in micro-economics, refers to the possibility of new entrants into a given market. ... Price gouging is a term of variable, but nearly always pejorative, meaning, referring to a sellers asking a price that is much higher than what is seen as fair under the circumstances. ...

Contents

Economic analysis

  • No close substitutes: A monopoly is not merely the state of having control over a product; it also means that there is no real alternative to the monopolized product.
  • A price maker: Because a single firm controls the total supply in a pure monopoly, it is able to exert a significant degree of control over the price by changing the quantity supplied.

Other common assumptions in modeling monopolies include the presence of multiple buyers (if a firm is the only buyer, it also has a monopsony), an identical price for all buyers, and asymmetric information. In economics, a monopsony (from Ancient Greek μόνος (monos) single + ὀψωνία (opsōnia) purchase) is a market form with only one buyer, called monopsonist, facing many sellers. ... In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party. ...


The result of these conditions is that a company with a monopoly does not undergo price pressure from competitors, although it may face pricing pressure from potential competition. If a company raises prices too high, then others may enter the market if they are able to provide the same good, or a substitute, at a lower price. [2] The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory". Potential competition, a fundamental conception in micro-economics, refers to the possibility of new entrants into a given market. ... The Revolution in Monopoly Theory was the idea that emerged in the early 1980s, that monopolistic players in contestable markets would be acting in their best interests by being as competitive as possible. ...


Price setting for irregulated monopolies

Surpluses and deadweight loss created by monopoly price setting

In economics, a firm is said to have monopoly power -- or at least a degree of market power --if it is not facing a horizontal demand curve (see supply and demand). This is in contrast to a price-taking firm which always faces a horizontal demand curve, and therefore sells little or nothing at prices above equilibrium. In contrast, a business with monopoly power can choose the price at which it wants to sell. Image File history File links Monopoly-surpluses. ... Image File history File links Monopoly-surpluses. ... In economics, a deadweight loss (also known as excess burden) is a permanent loss of well being to society that can occur when equilibrium for a good or service is not Pareto optimal, (that at least one individual could be made better off without others being made worse off). ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. ...


In most markets, falling demand associated with increased price is due partly to losing customers to other sellers and partly to customers who are no longer willing or able to buy the product. In a pure monopoly market, only the latter effect is at work. Therefore, the drop in sales as prices rise may be much less dramatic than one might expect, especially for necessary commodities such as medical care. However, unless the monopoly is a coercive monopoly, there is also the risk of competition arising if the firm sets its prices too high. In economics and business ethics, a coercive monopoly is any monopoly maintained by coercion. ...


If a monopoly can set only one price, it will produce a quantity where marginal cost (MC) equals marginal revenue (MR), as seen on the diagram at right. The monopolist will then set the highest price at which that quantity can be sold. This, the optimal price according to supply and demand theory, is above the competitive price (Pc) and below the competitive quantity (Qc). In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. ... In microeconomics, Marginal Revenue (MR) is the extra revenue that an additional unit of product will bring a firm. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...


As long as the price elasticity of demand for most customers is less than one in absolute value, it is advantageous for a firm to increase its prices: it then receives more money for fewer goods. With a price increase, price elasticity tends to rise, and in the optimum case above it will be greater than one for most customers. The following formula gives the relation among price, marginal cost of production and demand elasticity that maximizes a monopoly profit: P(1+frac1e) = MC where (e) is the negative elastic of demand. A monopoly's power is given by the vertical distance between the point at which the marginal cost curve (MC) intersects with the marginal revenue curve (MR) and the demand curve. The longer the vertical distance, (i.e., the more inelastic the demand curve) the greater the monopoly's power, and thus, the larger its profits. In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price. ... In mathematics, the absolute value (or modulus[1]) of a real number is its numerical value without regard to its sign. ...


The economy as a whole suffers when monopoly power is used in this way because the extra profit earned by the monopoly will be smaller than the loss in consumer surplus. This difference is known as a deadweight loss. Supply curve shift Consumer surplus or Consumers surplus (or in the plural Consumers surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. ... In economics, a deadweight loss (also known as excess burden) is a permanent loss of well being to society that can occur when equilibrium for a good or service is not Pareto optimal, (that at least one individual could be made better off without others being made worse off). ...


Calculating monopoly output

The single price monopoly profit maximization problem is as follows:


The monopoly's profit is its total revenue less its total cost. Let the price it sets as a market response be a function of the quantity it produces (Q) P(Q) and let its cost function be as a function of quantity C(Q). The monopoly's revenue is the product of the price and the quantity it produces. Hence its profit is:

Pi = P(Q)cdot Q - C(Q)

Taking the first order derivative with respect to quantity yields:

frac{d Pi }{dQ} = P'(Q)cdot Q + P(Q) - C'(Q)

Setting this equal to zero for maximization:

frac{d Pi }{dQ} = P'(Q)cdot Q + P(Q) - C'(Q)=0
frac{d Pi }{dQ} + C'(Q) = P'(Q)cdot Q + P(Q)= C'(Q)

i.e. marginal revenue = marginal cost, provided

frac{d^2 Pi }{dQ^2} = P''(Q)cdot Q + 2cdot P'(Q) - C''(Q) < 0

(the rate of marginal revenue is less than the rate of marginal cost, for maximization).


This procedure assumes that the monopolist knows the exact demand function. [3]


Monopoly and efficiency

According to standard economic theory (see analysis above), a monopoly will sell a lower quantity of goods at a higher price than firms would in a purely competitive market. In this way the monopoly will secure monopoly profits by appropriating some or all of the consumer surplus: although the higher price deters some consumers from purchasing, most are willing to pay the higher price. Assuming that costs stay the same, this does not lead to an outcome that is inefficient in the sense of Pareto efficiency; no one could be made better off by shifting resources without making someone else worse off. However, overall social welfare declines, because some consumers must choose second-best products. Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. ... In economics, a firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors. ... Supply curve shift Consumer surplus or Consumers surplus (or in the plural Consumers surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. ... Pareto efficiency, or Pareto optimality, is an important notion in neoclassical economics with broad applications in game theory, engineering and the social sciences. ...


Negative aspects

It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of efficiency can raise a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen where a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a canal monopoly, while worth a great deal in the late eighteenth century United Kingdom, was worth much less in the late nineteenth century because of the introduction of railways as a substitute. Contestable markets refer to a market situation where there are very few, perhaps even only one, firm yet perfectly competitive market outcomes may still be observed (as opposed to expected monopolistic or oligopolostic outcomes). ... In economics and especially in the theory of competition, barriers to entry are obstacles in the path of a firm which wants to enter a given market. ... For other uses, see Canal (disambiguation). ...


Positive aspects

Some argue that it can be good to allow a firm to attempt to monopolize a market, since practices such as dumping can benefit consumers in the short term; and once the firm grows too big, it can be dealt with via regulation. When monopolies are not broken through the open market, often a government will step in, either to regulate the monopoly, turn it into a publicly owned monopoly, or forcibly break it up (see Antitrust law). Public utilities, often being natural monopolies and less susceptible to efficient breakup, are often strongly regulated or publicly owned. AT&T and Standard Oil are debatable examples of the breakup of a private monopoly. When AT&T was broken up into the "Baby Bell" components, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market and began to take phone traffic from the less efficient AT&T. In economics, dumping can refer to any kind of predatory pricing. ... This article is about anti-competitive business behavior. ... A public utility is a company that maintains the infrastructure for a public service. ... AT&T (formerly an abbreviation for American Telephone and Telegraph) Corporation (NYSE: T) is an American telecommunications company. ... Standard Oil (Esso) was a predominant integrated oil producing, transporting, refining, and marketing company. ... MCIs original corporate logo MCI Communications was an American telecommunications company that was instrumental in legal and regulatory changes that led to the breakup of the AT&T monopoly of American telephony. ... Sprint Nextel Corporation (NYSE: S), headquartered in Reston, Virginia, is one of the largest telecommunications companies in the United States. ...


Hotelling's law

Mathematician Harold Hotelling came up with Hotelling's law which showed that there exist cases where monopoly has advantages for the consumer. If there is a beach where customers are distributed evenly along it, an entrepreneur setting up an ice cream stand would naturally place it in the middle of the beach. A competing ice cream seller would do best to place his competing ice cream stand next to it to gain half the market share, but two stalls right next to each other is not an ideal situation for the people on the beach. A monopolist who owns both stalls on the other hand, would distribute his ice cream stalls some distance apart.[4] Harold Hotelling (Fulda, Minnesota, September 29, 1895 - December 26, 1973) was a mathematical statistician. ... Hotellings law is an observation in economics that in many markets it is rational for producers to make their products as similar as possible. ...


The "natural monopoly" problem

A natural monopoly is defined as a situation in which production is characterized by falling long-run marginal cost throughout the relevant output range. In such situations, a policy of laissez-faire must result in a single seller. The conventional Paretian solution to market failure of this kind is public regulation (in the United States) or public enterprise (in the United Kingdom). In economics, the term natural monopoly is used to refer to two different things. ... In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. ... Laissez-faire is short for laissez faire, laissez passer, a French phrase meaning to let things alone, let them pass. First used by the eighteenth century Physiocrats as an injunction against government interference with trade, it is now used as a synonym for strict free market economics. ... This article does not cite any references or sources. ...


Historical monopolies

Common salt (sodium chloride) historically gave rise to natural monopolies. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for winning salt from the sea, the most plentiful source. Changing sea levels periodically caused salt "famines" and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (the Dead Sea, the Sahara desert) requiring well-organized security for transport, storage, and distribution. The "Gabelle", a notoriously high tax levied upon salt, played a role in the start of the French Revolution, when strict legal controls were in place over who was allowed to sell and distribute salt. Advocates of laissez-faire capitalism, such as the Austrian school, maintain that a salt monopoly would never develop without such government intervention. [citations needed] R-phrases 36 S-phrases none Flash point Non-flammable Related Compounds Other anions NaF, NaBr, NaI Other cations LiCl, KCl, RbCl, CsCl, MgCl2, CaCl2 Related salts Sodium acetate Supplementary data page Structure and properties n, εr, etc. ... <nowiki>Insert non-formatted text hereBold text</nowiki>A famine is a social and economic crisis that is commonly accompanied by widespread malnutrition, starvation, epidemic and increased mortality. ... The Dead Sea (‎, yam ha-melaħ, Sea of Salt; Quranic Arabic: , baħrᵘ l- mayitⁱ [3], Death Sea) is a salt lake between the West Bank and Israel to the west, and Jordan to the east. ... The Sahara is the worlds second largest desert (second to Antarctica), over 9,000,000 km² (3,500,000 mi²), located in northern Africa and is 2. ... The gabelle was a very unpopular tax on salt in France before 1790. ... The French Revolution (1789–1815) was a period of political and social upheaval in the political history of France and Europe as a whole, during which the French governmental structure, previously an absolute monarchy with feudal privileges for the aristocracy and Catholic clergy, underwent radical change to forms based on... Laissez-faire capitalism is, roughly stated, the doctrine that the free market functions to the greatest good when left unfettered and unregulated by government. ... The Austrian School, also known as the “Vienna School” or the “Psychological School”, is a heterodox school of economic thought that advocates adherence to strict methodological individualism. ...


Examples of alleged and legal monopolies

Salt Commission The Tang government suffered a significant loss of tax revenue after the An Lushan Rebellion. ... The British East India Company, sometimes referred to as John Company, was the first joint-stock company (the Dutch East India Company was the first to issue public stock). ... This article is about the trading company. ... The United States Steel Corporation (NYSE: X) is an integrated steel producer with major production operations in the United States and Central Europe. ... Standard Oil (Esso) was a predominant integrated oil producing, transporting, refining, and marketing company. ... NFL redirects here. ... Major Leagues redirects here. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... AT&T (formerly an abbreviation for American Telephone and Telegraph) Corporation (NYSE: T) is an American telecommunications company. ... Microsoft Corporation, (NASDAQ: MSFT, HKSE: 4338) is a multinational computer technology corporation with global annual revenue of US$44. ... Berlaymont, the Commissions seat The European Commission (formally the Commission of the European Communities) is the executive branch of the European Union. ... The Court of First Instance, created in 1989, is a court of the European Union. ... The European Community (EC), most important of three European Communities, was originally founded on March 25, 1957 by the signing of the Treaty of Rome under the name of European Economic Community. ... De Beers, founded in South Africa by Cecil Rhodes, comprises companies involved in rough diamond exploration, diamond mining and diamond trading. ... Apple Inc. ... iPod is a brand of portable media players designed and marketed by Apple and launched in October 2001. ... This article is about the iTunes application. ... It has been suggested that this article or section be merged into ITunes. ... FairPlay is a digital rights management (DRM) technology created by Apple Inc. ...

Notes and references

  1. ^ Blinder, Alan S; William J Baumol and Colton L Gale (June 2001). "11: Monopoly", Microeconomics: Principles and Policy (paperback) (in English), Thomson South-Western, 212. “A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes and in which is very difficult or impossible for another firm to coexist” 
  2. ^ Depken, Craig (23). "10", Microeconomics Demystified (in English). McGraw Hill, 170. ISBN 0071459111. 
  3. ^ For a discussion on a monopolist who does not know the demand function, see [1] where a free software is available as well.
  4. ^ Hotelling's Law Economyprofessor.com

Further reading

  • Guy Ankerl, Beyond Monopoly Capitalism and Monopoly Socialism. Cambridge,Mass.: Schenkman Pbl., 1978. ISBN0870739387
  • Impact of Antitrust Laws on American Professional Team Sports

See also

Look up monopoly in Wiktionary, the free dictionary.

Market forms Wikipedia does not have an article with this exact name. ... Wiktionary (a portmanteau of wiki and dictionary) is a multilingual, Web-based project to create a free content dictionary, available in over 150 languages. ... In microeconomics, the main criteria by which one can distinguish between different market forms are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely. ...

Types Monopolistic competition is a common market form. ... A true duopoly is a specific type of oligopoly where only two producers exist in one market. ... A triopoly is a form of oligopoly where only three producers are present in a given market. ... In economics, a monopsony (from Ancient Greek μόνος (monos) single + ὀψωνία (opsōnia) purchase) is a market form with only one buyer, called monopsonist, facing many sellers. ... In a bilateral monopoly there is both monopoly (a single seller) and monopsony (a single buyer). ... This article does not cite any references or sources. ...

Proposed benefits For the American pop-punk band, see Cartel (band). ... In economics, the term natural monopoly is used to refer to two different things. ... According to communication theorist Harold Innis, monopolies of knowledge are created in the atmosphere of hostility between time-biased and space-biased media, wherein one tradition marginalizes the other. ...

Monopolistic practices The phrase The Long Tail (as a proper noun with capitalized letters) was first coined by Chris Anderson in an October 2004 Wired magazine article[1] to describe certain business and economic models such as Amazon. ... The increase in output from Q to Q2 causes a decrease in the average cost of each unit from C to C1. ...

General In economics, dumping can refer to any kind of predatory pricing. ... Predatory pricing is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market, or create a barrier to entry into the market for potential new competitors. ... Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. ... Geographical pricing, in marketing, is the practice of modifying a basic list price based on the geographical location of the buyer. ...

Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of transformation that accompanies radical innovation. ... A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... This aims to be a complete list of the articles on economics. ... Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. ... A competition regulator is a government agency, typically a statutory authority, which regulates competition laws, and may sometimes also regulate consumer protection laws. ...

External links

Criticism


  Results from FactBites:
 
Monopoly | BoardGameGeek (442 words)
Monopoly was patented in 1935 by Charles Darrow and released by Parker Brothers.
The game was actually one of a number of variants in existence at the time, all of which date back to an earlier, 1904 game by Elizabeth J. Magie, called The Landlord's Game.
Monopoly in the real London with real cabs fitted with GPS systems.
Monopoly, by George J. Stigler: The Concise Encyclopedia of Economics: Library of Economics and Liberty (2376 words)
Monopolies that exist independent of government support are likely to be due to smallness of markets (the only druggist in town) or to rest upon temporary leadership in innovation (the Aluminum Company of America until World War II).
It takes years before a monopoly practice is identified, and more years to reach a decision; the antitrust case that led to the breakup of the American Telephone and Telegraph Company began in 1974 and was still under judicial administration in 1991.
The main kind of monopoly that is both persistent and not caused by the government is what economists call a "natural" monopoly.
  More results at FactBites »

 
 

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