Effect Of Monopolies On The Economy

866 words - 3 pages

A monopoly is exclusive control of a commodity or service in a particular market, or a control that makes possible the manipulation of prices. A firm is the only provider of a product so there is no competition and it can set prices to whatever they wish. This is known as market power. The firm is able to raise the price of a good and not lose any sales as a result. This stems from exclusive control of important inputs, patents and copyrights, government licenses, economies of scale, or network economies. A famous example of a monopoly would be AT&T which was the only option for telecommunications until it was broken up in 1982. Today monopolies are very rare in the United States. Besides public utility services it is very rare to find monopolies that exist. Public utility services can remain monopolies because it is hard to use less electricity, water, etc, so in those areas the firm is able to clean up. In contrast, areas such as clothing, people would buy less if products became too expensive.There are a number of ways to classify monopolies. There are pure monopolies, in which a single firm is the only seller of a unique product. Back in the late 1990's Pokemon cards had become very popular. Since there was no alternative to these cards that every kid had to get their hands on they were very expensive. Pokemon cards were selling for $8 - $10 for a six card pack. These cards cost no more to produce than normal playing cards which are sold for $1 or $2. Probably the most common form of monopolies are oligopolies. In cases such as these, sales of a product are dominated by a small number of relatively large sellers who are able to collectively exert control over its supply and prices. Tobacco companies have joined together to regulate prices together through mergers and acquisitions throughout the years. Another form of monopolies is known as monopolistic competition. This exists when a relatively large number of firms that sell the same product with slight differentiations. An example of this is with gas stations. They all sell the same gas for about the same amount. The only difference between them are the locations.Monopolies are powerful because they get to operate under different market conditions other than the perfect competition scenario. In a monopolistic market, a firm can operate at the profit maximizing solution of marginal revenue equals marginal cost. In this scenario, price is higher and quantity supplied is lower than market equilibrium so the consumer is worse off than a perfect competition scenario. The alternative to a monopoly is perfect competition. In a competitive market, there are so many suppliers and entrants to the market that price...

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