Imperfect Competition: The Market Power of Monopolies

A company that is the sole provider of an item or service in a market is said to have a Monopoly. In other words, a monopoly is the sole manufacturer of a good or service that cannot be easily replaced. A single company has monopoly power when it controls 25% or more of a specific market for regulatory purposes. 

 

In this article, we embark on a journey through the labyrinthine landscapes of monopolistic power. We will unravel their origins, explore their consequences, and examine the ongoing debates surrounding their regulation. Join us as we navigate this critical terrain where market dynamics and societal well-being intersect, shedding light on the enduring allure and enduring challenges posed by monopolies in the modern world.

 

What Causes Monopolies to Exist?

 

A number of factors, such as the following, can lead to monopolies developing:

 

• If a company owns a scarce resource exclusively, as is the case with Microsoft holding the Windows Operating System brand, it has monopoly power over that resource and is the only company that can profit from it.

• Governments have the authority to grant a company monopoly status, as with the Post Office, the Railway, etc.

• Patents and copyrights for mental works

• The costs of building a productive factory, particularly in respect to the market. This is an instance of a natural monopoly; utilities for gas and electricity are two examples.

• The combination of two or more businesses may result in the creation of a monopoly. Because of the potential reduction in competition, such mergers are closely regulated.

• This could be avoided if the two businesses acquire a combined market share of at least 25%.

 

Causes & Characteristics

 

True competition in the world is imperfect competition. To make extra money, some manufacturers and merchants are still doing it today. In this case, the seller uses his or her ability to set the price as leverage to raise the sale price. A retailer will raise the pricing and make money if he sells non-identical goods on the market. High earnings enable new sellers to enter the market, and sellers who experience losses might swiftly exit it.

 

The strict requirements of a fictitious, perfectly functioning, or totally competitive market are not met by imperfect markets. They are distinguished by fierce competition for market share, substantial hurdles to entry and exit, a wide range of goods and services, and a sparse population of buyers and vendors.

 

The following circumstances can result in unfair competition:

 

• Limited availability of cost and price data

• Monopolistic behavior by some providers

• Collusion between vendors to maintain high prices

• Continue to discriminate against purchasers based on their purchasing power

 

Also Read | What are Primary markets? - Meaning and Functions | Analytics Steps

 

Types of Inadequate Competition

 

In economic theory, imperfect competition is a type of market structure that illustrates some, but not all, characteristics of competitive marketplaces.

 

A few examples of imperfect competition are:

 

Monopolistic competition:

 

It occurs when numerous businesses contend with slightly distinct items. Although the production costs are higher than what fully competitive businesses can accomplish, society gains from the uniqueness of the items.

 

Monopoly: 

 

An organization with no rivals in its industry. A monopolistic business would produce less, incur higher expenses, and charge more for its goods than it would if it were subject to price competition. Such unfavorable outcomes force general government monitoring.

 

Monopoly rivalry:

 

Market behavior and performance in the more complicated scenario of monopolistic competition (atomistic structure with product differentiation) can be considered to roughly correspond to the trends associated with perfect competition. The following are the main variations. First, individual sellers are able to slightly adjust their individual selling prices due to the differentiation of their products.

 

They are unable to do so significantly, however, as they continue to be strongly influenced by the impersonal forces of the market acting through the general level of prices. Second, sales-promotion expenses and the cost of changing products to appeal to customers are likely to be involved in competition amongst vendors. 

 

Everyone will participate in this competitive game, but on average no one will come out on top. The long-term equilibrium pricing will account for these additional costs. But in exchange, they will enjoy a wider selection. Third, because not all sellers will be equally effective in their product policies and sales promotions, some will experience profits above the rate of basic interest on their investment.

 

These profits will result from their ability to attract customers. Like perfect competition, monopolistic competition may also affect sectors of the economy that are subject to destructive competition. This could happen as a result of both the entry of too many new businesses despite the risk of losses and the failure to eliminate surplus capacity.

 

Oligopoly:

 

This market has a small number of competitors. Similar to how a monopoly reduces production and increases profits, they establish a cartel. It comprises duopoly, a specific kind of oligopoly with just two businesses in one industry.

 

In the most basic oligopolistic business, there are only a small number of vendors, and each seller provides a sizable enough market share that any practical and moderate change in his policies will significantly affect the market shares of all his rival sellers, prompting them to respond or react.

 

Sellers may respond by lowering their prices by a comparable amount, so that no one benefits at the expense of others and the group's overall profits are likely to decrease, for instance, if seller A reduces his selling price sufficiently below the general level of prices being charged by all sellers to allow him to capture sizable numbers of customers from his rivals if they hold their selling prices unchanged. 

 

Alternatively, seller A's competitors might respond by cutting their prices even further, compelling him to respond further. Seller A will likely retract his increase and return his price to the previous level if, on the other hand, seller B raises his selling price above the average level being charged by all sellers, which will likely cause him to lose at least some customers to his rivals.

 

However, his competitors might also respond by raising their prices by a similar amount to what seller A did, in which case the industry's average price level would rise and the aggregate earnings of all sellers would likely grow.

 

Also Read | What is Oligopoly: Types, Characteristics and Examples | Analytics Steps

 

Monopsony

 

A market with only one buyer and several sellers.

 

Oligopsony

 

A market known as an oligopoly has numerous sellers but few purchasers.

 

Understanding of Imperfect Competition

 

In order to make the theories of consumer and producer behavior, supply and demand, and market price determination mathematically tractable so that they can be accurately defined and explained, perfect competition is a set of assumptions used in microeconomics. It is occasionally used as a benchmark to assess the effectiveness and efficiency of actual markets in welfare economics and applied economics for public policy.

 

The following conditions must be satisfied for the ideal competition environment:

 

• Businesses market identical goods without any product differentiation.

• The market has enough buyers and sellers so no corporation can control the price it sets, and customers alone determine the price they are willing to pay for each business.

• There is perfect and free knowledge available to all current and potential market participants on conditions, preferences, and technology from the past, present, and future.

• You can conduct every transaction for free.

• Companies don't have to pay anything to enter or leave the market.

 

It becomes clear right away that, with a few possible exceptions, such as vendors at a flea market or farmer's market, relatively few companies in the real world operate in this manner. Competition is referred to as imperfect if and when the aforementioned pressures are not satisfied, as differentiation allows certain businesses to gain an edge over others and produce more profits than competitors, often at the price of customers.

 

In an environment of imperfect competition, businesses compete for market share, sell a variety of goods and services, determine their own prices, and frequently erect obstacles to entry and exit, making it more difficult for upstart businesses to compete. Numerous market forms, including monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies, exhibit imperfect competitive markets.

 

Governmental Restraints

 

The unique privileges that some commercial companies have received from governmental organizations are a significant additional foundation for monopoly power. Although the trend in recent years has been to encourage competition for many of these services, state and local governments have frequently granted exclusive franchise rights to operate in a specific market to taxi and bus companies, cable television companies, and providers of telephone services, electricity, natural gas, and water.

 

Governments may also control admission into a profession or business by certification and licensing procedures. In order to promote innovation, governments also grant patent protection to those who develop new goods or manufacturing techniques; throughout the patent's 17-year lifespan, these patents may give their holders some degree of monopolistic power.

 

When network effects are present, patents may become even more important. Network effects occur when a product's utility increases with the number of consumers who utilize it. For instance, the fact that so many other people utilize the Windows computer operating system is a benefit. In terms of sharing files and other information, that has benefits.

 

Limited Ownership of Inputs and Raw Materials

 

Ownership of key inputs only occasionally serves as the source of monopoly power. An organization may end up being the sole manufacturer of a good or service if it controls every input needed to generate that commodity or service.

 

Through its control of nearly all bauxite mines worldwide (bauxite being the raw material used to make aluminum), The Aluminium Company of America (ALCOA) came to possess a monopoly position. Almost all of the nickel in the world was once controlled by the Canadian International Nickel Company. With practically all of the world's diamond production being under De Beers' control, the diamond market is dominated by this company.

 

However, this authority has diminished as new diamond supplies in Canada, Australia, and Russia have been created and sold without DeBeers' involvement, and as a result, DeBeers now controls a far lower portion of the global supply.

 

Limitations of Inadequate Competition

 

The Cambridge school's unwavering commitment to developing a static and calculable economic science had certain disadvantages. Ironically, there needs to be no active competition in a market with perfect competition. In an ideal market, all vendors must offer the same products to the same customers, who are equally knowledgeable, at the same prices. In perfect competition, there is no place for branding, product distinction, promotion, or innovation.

 

The qualities of a completely competitive market are impossible for any genuine market to achieve. The limited use of physical capital and capital investment, entrepreneurial activity, and changes in the availability of scarce resources are only a few of the aspects that the pure competition model ignores. Other economists have embraced theories that are more adaptable and less mathematically rigid, such Mises' evenly rotating economy. The core graphs and equations used in the majority of Economics 101 texts, however, are derived from the Cambridge tradition, which continues to dominate the study today.

 

Competitive Monopoly

 

Monopoly and perfect competition are the two extremes of market structure. According to the degree of monopoly, competition, or variance in certain other features, there are some significant forms in between. Monopolistic competition is one of them.

 

A market with multiple vendors of distinct goods (such as soaps, tooth pastes, electrical appliances, motorcycles, etc.) is said to have monopolistic competition. In other words, it describes the conflict between a large number of producers of similar but imperfect alternative items. There are a lot of tiny vendors, but none of them has a noticeable impact on the output and price strategies of other sellers.

 

Also Read | Monopoly Market: Characteristics, Pros and Cons & Effects | Analytics Steps

 

Conclusion

 

Monopoly power is a crucial filter for section 2 cases because it includes more powerful and long-lasting control over prices than simple market power. Practically speaking, courts have needed a market share of more than 50% to determine the presence of monopoly power. The Department thinks that such circumstances typically should generate a rebuttable presumption that a corporation has monopoly power if the firm has maintained a market share in excess of two-thirds for a sustained period of time and the firm's market dominance is unlikely to be diminished in the near future.