MONOPOLY

Microeconomics: Monopoly

The structure of the markets in which companies operate may vary. The implications of these variations are vital for an understanding of the environment or setting in which a business operates. A monopoly is a market structure where production is under the control of a single supplier. Since the monopolist is the sole source of supply in a market, the demand curve is also the industry demand curve. This implies that the monopolist faces a downward sloping demand implying that if the monopolist wants to sell more, it must reduce the price. In essence, a monopoly is signified by the lack of competition, which usually results in high prices and inferior product quality (Mankiw, 2011).

There are four distinctive causes of monopoly power. These include legal barriers, product differentiation barriers, economies of scale barriers, and transport cost and tariff barriers. Monopoly is the extreme instance in capitalism. In numerous perspectives, it can be considered that the system is not functional when there is a monopoly; it is a market condition that lacks incentive to enhance it (market) to meet the consumer’s demands. A significant element in monopolies is price discrimination; monopolistic companies undertake such restrictive practices with the sole intention of increasing the total amount of profits that they generate (Marshall, 2013).

Implications on the Article

The article outlines the great magnitude of monopoly in the American industries and the massive need for competition in the market. As is known, in a monopoly, there is minimal level of competition owing to the barriers of entry into the market. As indicated, the monopoly power of the large firms to influence and traverse through in the market elucidates as to why the rate of creation and entry of small firms into the market has been at its lowest since the 1970s period (The Economist, 2016).

This outlines one of the major barriers to entry in monopolies, which is the economies of scale barriers. In particular, these come about where existing companies are already operating on a vast scale of production and enjoying technical economies of scale. Therefore, this makes it hard for new entrants as they have to attain a substantial market share before they can gain complete advantage of potential economies of scale.

Monopolies generate obscene profits in their dealings with supplier / buyer companies and industries. A good example as pointed out in the article is the health-care industry, where a group of pharmaceutical and medical-equipment companies make combined returns on capital of twenty to fifty percent. Special interests pervade the health-care industry that is ruled by patent rules that engender companies’ provisional monopolies on innovative new drugs and creations. Insurance firms control a great deal of health-care procuring in America. Four of the biggest, Anthem, Cigna, Aetna and Humana, are scheduling to come together and become two larger firms. This will increase the level of monopoly within the industry (The Economist, 2015).

This level of dominance and generation of super-normal profits is perceived and experienced in the technology industry or sector where companies such as Facebook and Google enjoy a great deal of dominance with market shares in excess of 40%. For instance, at present, Google dominates the internet searches made for hotels and flights. This indicates the great need for competition within the market and industry. This is because with Google dominating, this does not necessarily satisfy the needs of the consumers. In conclusion, it can be perceived that the extreme level of domination and lack of competition within the industry instigates the supernormal profits that are generated by the company and the dominance and barriers restricting companies from entry.

References

Mankiw, N. (2011). Principles of Microeconomics. Ohio: South Western Cengage Learning.

Marshall, A. (2013). Principles of Economics. New York: Palgrave Macmillan.

The Economist. (2016). Too much of a good thing. Profits are too high. America needs a giant dose of competition. Retrieved 17 April 2016 from: http://www.economist.com/news/briefing/21695385-profits-are-too-high-america-needs-giant-dose-competition-too-much-good-thing