Monopolies are defined as a market with a single supplier, yes it's more than just a game! This week, we learned about what needs to happen in order for a monopoly to arise, as well as prices under monopolies.
In order for a monopoly to arise, there must be no close substitutes and no barriers to entry. The absence of substitutes is a hard one to maintain, because it is often not permanent. New substitutes can arise due to technological changes or new products. It is a tricky situation to try to keep up with if you want to keep a monopoly going. As for the barriers to entry, these include natural, ownership, and legal. Natural boundaries are the least vulnerable to change. Natural barriers mean one firm can meet the entire market demand cheaper than two or more firms can. The second barrier is ownership, which means one firm controls all production and supply. The third is legal, which means the government restricts entry by using tools like patents, licenses, or copyrights.
Prices under monopolies vary as well. A single-price monopoly sells at the same price for everyone, while price-discrimination means different units are set at different prices not related to cost. Price discrimination is often not possible in a monopoly because what’s to stop low price people from reselling.
Monopolies are a tricky concept in this day and age because the government puts up many restrictions to prevent companies from monopolizing a market, seeing as how we love our competition here in America. I can think of the example stated in class, the Postal Service. This is our only method of sending actual letters, and even that has taken a beating with the internet and e-mail, etc. Also, I’ve noticed an awful lot of Publixs opening up in the Palm Harbor area. I live here and I just recently realized how quickly a Publix seems to be popping up on every corner and I believe we only have one Sweet Bay left in the entire area? It seems to me Publix may soon be the only option for grocery stores around here. Anyone agree/disagree?
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The government also creates monopolies by creating legal barriers. Patents, licenses, public franchising, and copyrights all help to create monopolies. In this case, the government plays the devil's advocate.
ReplyDeleteI do agree there are a lot of Publix's going up but I would hardly consider them a monopoly. There are many substitutes and other grocery stores or other areas to buy your groceries. Whether or not you use those other sources is up to you.
ReplyDeleteDeBeers would be another example of a monopoly. It is a firm that controls the entire production of raw diamonds in the world. This is an example of an ownership barrier to entry.
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