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Monopoly Power

Paper type: Essay
Pages: 6 (1375 words)
Categories: Business, Power, Price
Downloads: 11
Views: 1

Monopolies are extraordinarily undesirable. Here, the buyer loses their power and market force become extraneous. According to Beggs (2017), “A monopoly is simply a market with only one seller and no close substitutes for that seller’s product.” Monopoly is a market situation where is only one seller of a particular product and dominates the entire market with barriers to entry to other sellers or firms. For examples, Nike has a monopoly in the market for basketball shoes.

They had more than 73% of total US basketball market in 2017.  “https://www.economicshelp.org/wp-content/uploads/2012/11/monopoly-diagram-2017.png” \*  A monopolist will seek to maximise profits by setting output where MR = MCThis will be at output Qm and Price Pm. Compared to a competitive market, the monopolist increases price and reduces output Red area = Supernormal Profit (AR-AC) * QBlue area = Deadweight welfare loss (combined loss of producer and consumer surplus) compared to a competitive market there are kinds of monopoly such as Simple monopoly, Pure monopoly, Legal monopoly etc.

Pure monopoly is where a single firm controls the supply of a commodity with no substitutes not even a remote one.

Pure monopoly is very rare in the real-world business. It exists when there a single firm is the sole producer of a product for which there are no close substitutes. For a pure monopolist, its supply is the entire market supply and thus, downward slopping. A legal monopoly is when a seller or firm receives or acquires a monopoly due to legal provisions in the country. Legal monopoly can be required through a public franchise, a government license, or copyright. AT&T Corp. is an example of a legal monopoly, operating as one until 1982. A legal monopoly is regulated and monitored by the government. It also acts in the interest of consumers by setting the price at an affordable range for the general public. According to Nickolas (2018), “In a monopolistic market, the monopoly has full control of the market, so it set the price and supply of the good or service”.

There are characteristics of a monopolist market such as price maker, barrier to entry, etc. Price Maker is the ability for a monopolist to control or dominate the market and set a specific price and supply goods and services. When a seller controls the production and distribution of a good or service, it makes it difficult for other firms to enter the market which create a high barrier to entry, another characteristic of a monopolistic market. According to Agarwal (2017), “Barriers to Entry are designed to prevent potential competitors from entering the market.” Barrier to entry may lead to monopoly. It results in different market structures such as monopoly or oligopoly. The higher the barrier to entry in a market, makes it more difficult for a competitor to enter the market. In other words, the barrier to entry limits the number of competitors in a market. According to Pettinger (2017) “Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay.” Consumer surplus is the area between the demand curve and above the market price.

From the diagram above, the supply and demand curve, it is the area between the equilibrium price and the demand curve.An example of a firm that has dominated a market share is Spotify. Spotify has dominated music market share. It has over 40% of the global market share of music streaming services. Spotify has about twice as my many paid subscribers as Apple music, the second-largest provider. One of the reasons Spotify has been able to dominate the streaming music industry is Scale matters. According to chin (2018), Scale can help an internet company like Spotify because it creates a loyal fan base through personalization that can further spread to others through social features that allow users to share their favorite playlists and artists with friends.

According to Forbes (2018), “Spotify’s revenues are projected to grow from levels of close to € 2 billion in 2015 to about € 5.3 billion in 2018. Spotify has about twice as many paid subscribers as Apple Music, the second-largest provider. We expect Spotify’s premium subscriber base to grow from levels of 28 million in 2015 to about 94 million in 2018, driving the mix of premium revenues in its overall revenue base. Ad-supported revenues are also expected to grow to about 109 million in 2018, from about 64 million in 2015, as smartphone penetration improves and as the company expands into new markets. Moreover, the number of content hours per user has been steadily rising since 2015, implying that more ads can be delivered to each user, driving revenues.” Spotify has increased massively since 2015.

A monopoly can be criticized because of its negative effects on consumers such as restricting output onto the market, charging higher prices than in more competitive market or restricting choice of the consumer. Because of the lack of competitors, monopolist tends to charge higher prices than in a competitive market. The increase the price of a product leads to a decrease in consumer surplus and a deadweight welfare loss. The higher prices would lead to allocative inefficiency and supernormal profits which tends to lead to a reduced benefit to the consumer and unequal distribution of income. A restraining infrastructure may utilize its market power and pay the lower cost to its providers. For example, Supermarkets have been censured for paying the lower cost to farmers. Another disadvantage of monopoly is the Diseconomies of scale, if a monopoly becomes too large, it may experience diseconomies of scales- higher average cost because it becomes too large.

Monopolies, however, are not necessarily bad, given that they are highly motivated and publicly motivated as competitive industries. Companies are aspired to be monopolized in competitive markets by eliminating competitiveness, but this is unlikely to be achieved due to market forces and the absence of barriers to entry and exit. A monopoly has some positive effects. One of the advantages of monopoly is economies of scale, increasing output will result in lower average production costs. These can be passed on in the form of lower prices to the consumer. This is important to industries with a high fixed costs, such as steel production.

If a monopoly produces at output Q2, average costs (P2) are much lower than if a competitive market had several firms producing at Q1(P1). Another advantage of monopoly is power is its helps to avoid the duplication of service. In a few areas, the foremost effective number of firms is one. For illustration, in the event that a city deregulates its transport travel, at that point equal transport companies may compete for productive peak-hour administrations. This may lead to expanded blockage as a few buses turn up at once. It is more productive to have an imposing business model and maintain a strategic distance from this wasteful duplication of administrations. In conclusion, all firms are concerned with deciding the cost level that would deliver them adequate benefit whereas keeping up the consumer’s fascination and request. This ought to work within the advantage of customers and the society in case controls are input for governments to intercede when a firm manhandle its restraining infrastructure control to the hindrance of consumers.

Despite the actual fact that monopoly produces less output at higher costs and therefore the negative impact on consumer surplus, the existence of monopolies is notwithstanding inevitable as long as company seeks to maximize profit and increase market share. Although monopoly is not desirable as it restricts competition and causes a reduction in consumer surplus and social welfare, in a real business market it is nevertheless inevitable that a company would often take advantage of its strong market position to control the supply of goods or services.

Reference List

Jordi Beggs (2017) What is a monopoly Available at: https://www.thoughtco.com/what-is-a-monopoly-1147778 (Accessed: 21 march 2019).Kimberly Chin (2018) Here’s why Spotify is dominating the stream-music industry Available at: https://markets.businessinsider.com/news/stocks/spotify-ipo-dominating-the-streaming-music-industry-rbc-2018-3-1019865871 (Accessed: 21 march 2019)Steven Nickolas (2018) What are the characteristics of Monopolistic Market Available at: https://www.investopedia.com/ask/answers/040915/what-are-characteristics-monopolistic-market.asp (Accessed: 21 march 2019). Terjvan Pettinger (2017) Consumer Surplus Available at: https://www.economicshelp.org/blog/188/concepts/definition-of-consumer-surplus/ ( Accessed: 21 march 2019)The Forbes (2018) A closer look at Spotify’s recent growth Available at : https://www.forbes.com/sites/greatspeculations/2018/04/05/a-closer-look-at-spotifys-growth/#60d49cde79f9 (Accessed: 21 march 2019)

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Monopoly Power. (2020, Sep 14). Retrieved from https://studymoose.com/monopoly-power-essay

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