Let’s take the case of the De Beers corporation. High profit margins: For companies in a monopoly system, the ability to set their own price and ensure that the product is only sold when they want allows for some ludicrous profits. The advantages are usually tailored in the same manner. (Suggested Read - Types of Trade Barriers)Īdvantages and disadvantages of a Monopoly systemĪ monopoly system is extremely beneficial to the business but highly detrimental to the consumers as they are often subject to exploitation. They can also be financial, as in the case of the telecom industry where investment requirements empty a hole in your pockets, wallets and the bank you would need a loan from. When firms cannot enter a particular industry, the already prevalent enterprises stand to benefit from that reduced competition.īarriers to entry can be legal barriers, as in the case of industries that require licenses from the government. Restriction on entry of firms: An auxiliary feature to no close substitutes, the restriction of entry of firms in a monopoly set up is one of the biggest factors enabling companies to create their kingdoms. This feature is one of the strongest arguments for antitrust laws which are laws regulating the monopoly power of companies. Take the case of insulin in the United States, when pharma companies create a monopoly on the sale and supply of such an essential drug required to save millions of people, they can virtually charge any rate they want and people will have to pay. When you can set your own price giving people no choice but to buy, your firm is profitable irrespective of the situation.įirm is a price maker: As the firm is a sole source of supply for the commodity, they can virtually set their own price. No competition also allows the firm a lot of liberty in setting price and supply giving them a lethal advantage. This lack of competition is a powerful incentive for firms as without competition they are not subject to price wars or vying for larger market share when in fact, they control all the market share in that particular sector No competition: The lack of any substitutes eliminates competition for commodities sold in a monopoly market. This ties into the next point regarding competition. In the case of a monopoly, however, there are no substitutes for goods produced rendering the business in monopoly the sole source of the commodity. For example, a Reynolds pen and a Linc pen both perform the same function and hence are substitutes of each other. No close substitutes: In economics, substitute goods refer to goods and services that are closely related to each other and perform similar functions. This point is the central tenet for defining a monopoly system. In the business of railway transportation, the Indian railways are the sole enterprise in that particular business. Single seller and multiple buyers: The single most important feature of a monopoly is that there is only one seller of the goods. The features of monopolies are as follows: This leads to an extraordinary amount of power to the company at the center of a monopoly. The features of a monopoly are all based on the fact that there is only one seller and many buyers thus creating only one source of supply. (Recommended blog - Elasticity of Demand) But before reading into the pros and cons, it is important to gain a grasp on the features of a monopoly after which its advantages and disadvantages along with state restrictions make a lot more sense. That is, if the good’s price is hiked up, people will continue to buy it, making these goods in direct contradiction with the law of demand which states that the demand for a good is inversely related to its price.Ĭompanies in a monopoly market system have an undue advantage over those in competition. However, in case of inelastic goods, this point is overridden.Īn inelastic good is a good whose demand does not readily respond to price. They can decide everything regarding the transaction with the sole exception of not being able to control demand. The entire terms of the interaction are on the business’s terms. The company can decide whom to sell to, at what rate and what quantity. In theory, a monopoly represents a company with complete and absolute control over the sale and supply of a good. Whenever we hear the term monopolistic powers or monopolizing the market, it refers to the practices a business undertakes to become the sole seller of their respective goods and services. In economics, a monopoly refers to a market system where there is only one seller and many buyers. However, the game was born out of the concept. Surprisingly enough, a monopoly in economics refers to something different. They think of buying houses and hotels and charging rent. When most people hear the term monopoly, they think of the board game with the fake englishman on the board.
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