10 1 The Nature of Monopoly Principles of Economics

Sets marketed in other countries may be modified to represent a local city; for example, London streets are used in the British version. Monopoly games also have been licensed with other North American cities as the subject (e.g., Chicago); prominent local landmarks and points of interest usually replace street names as properties. The Monopoly board game was the brainchild of Charles B. Darrow, an unemployed heating engineer who sold the concept of the game to Parker Brothers in 1935.

However, our research is meant to aid your own, and we are not acting as licensed professionals. We recommend that you use your own judgement and consult with your own consultant, lawyer, accountant, or other licensed professional for relevant business decisions. A startup enthusiast who enjoys reading about successful entrepreneurs and writing about topics that involve the study of different markets. A great example of a company using this technique to develop a monopoly is Google.

The monopoly is allowed and heavily regulated by government municipalities and rates and rate increases are controlled. A natural monopoly develops in reliance on unique raw materials, technology, or specialization. Companies that have patents or extensive research and development costs such as pharmaceutical companies are considered natural monopolies. Microsoft Corporation was the first company to hold a pure monopoly position on personal computer operating systems.

After controlling the nation’s telephone service for decades as a government-supported monopoly, AT&T fell to antitrust laws. In 1982, AT&T, which had telephone lines that reached nearly every home and business in the U.S., was forced to divest itself of 22 local exchange service companies, the main barrier to competition. Conversely, a company that dominates a sector or industry can use its advantage to create artificial scarcities, fix prices, and provide low-quality products. Consumers must trust that a monopoly operates ethically due to limited or unavailable substitutes in the market. Public monopolies provide essential services and goods, such as the utility industry as only one company commonly supplies energy or water to a region.

  1. Not only does a monopoly firm have the market to itself, but it also need not worry about other firms entering.
  2. Due to this, these scarce but essential resources are made unavailable to the potential entrants.
  3. If another firm attempted to enter the industry, the natural monopolist would always be able to undersell it.
  4. Deutsche Telekom is a former state monopoly, still partially state owned.
  5. When a single seller supplies the entire output of an industry, and thus can determine his selling price and output without concern for the reactions of rival sellers, a single-firm monopoly exists.

This chapter begins by describing how monopolies are protected from competition, including laws that prohibit competition, technological advantages, and certain configurations of demand and supply. It then discusses how a monopoly will choose its profit-maximizing quantity to produce and what price to charge. While a monopoly must be concerned about whether consumers will purchase its products or spend their money on something altogether different, the monopolist need not worry about the actions of other competing firms producing its products. As a result, a monopoly is not a price taker like a perfectly competitive firm, but instead exercises some power to choose its market price.

The Standard Oil trust was dissolved into 33 smaller companies; two of its surviving “child” companies are ExxonMobil and the Chevron Corporation. It concerns with the competition that would come from other undertakings which are not yet operating in the market but will enter it in the future. So, market shares may not be useful in accessing the competitive pressure that is exerted on an undertaking in this area. The potential entry by new firms and expansions by an undertaking must be taken into account,[87] therefore the barriers to entry and barriers to expansion is an important factor here.

What is ‘Monopoly’

As of 2022, its desktop Windows software still held a market share of 75%. Monopoly, which is the best-selling privately patented board game in history, gained popularity in the United States during the Great Depression when Charles B. Darrow, an unemployed heating engineer, sold the concept to Parker Brothers in 1935. Before then, homemade versions of a similar game had circulated in many parts of the United States. Most were based on the Landlord’s Game, a board game designed and patented by Lizzie G. Magie in 1904. Notably, the version Magie originated did not involve the concept of a monopoly; for her, the point of the game was to illustrate the potential exploitation of tenants by greedy landlords.

Microsoft was free to maintain its operating system, application development, and marketing methods. Congress to limit “trusts,” a precursor to the monopoly, or groups of companies that colluded to fix prices. This act dismantled monopolies including Standard Oil Company and the American Tobacco Company. Each side of the square board is divided into 10 small rectangles representing specific properties, railroads, utilities, a jail, and various other places and events.

Phrases Containing monopoly

Monopolies make supernormal profit which can be invested in Research & Development. This is important for industries like medical drugs which require a lot of risky investment. In many industries which require substantial investment – a competitive industry with many small firms would be unsuitable. He is the owner of the 75-year-old Ambassador Bridge, a suspension bridge that is the only connection between Detroit, Michigan and Windsor, Ontario.

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Network effects arise in situations where products become more useful the larger the number of users of the product. For example, one advantage of using the Windows computer operating system is that so many other people use it. The greater the cost of establishing a new business in define monopoly an industry, the more difficult it is to enter that industry. That cost will, in turn, be greater if the outlays required to start a business are unlikely to be recovered if the business should fail. Sunk costs are those which cannot be retrieved in the case a firm shuts down.

Consequently, any price increase will result in the loss of some customers. Another important basis for monopoly power consists of special privileges granted to some business firms by government agencies. Governments might also regulate entry into an industry or a profession through licensing and certification requirements. Governments also provide patent protection to inventors of new products or production methods in order to encourage innovation; these patents may afford their holders a degree of monopoly power during the 17-year life of the patent. Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices (i.e. pricing high just because it is the only one around). It may also be noted that it is illegal to try to obtain a monopoly, by practices of buying out the competition, or equal practices.

monopoly and competition

At the start of the game, each player is given a fixed amount of play money; the players then move around the board according to the throw of a pair of dice. Any player who lands on an unowned property may buy it, but, https://1investing.in/ if he or she lands on a property owned by another player, rent must be paid to that player. Certain nonproperty squares require the player landing on them to draw a card that may be favourable or unfavourable.

As was the case when we discussed perfect competition in the previous chapter, the assumptions of the monopoly model are rather strong. In assuming there is one firm in a market, we assume there are no other firms producing goods or services that could be considered part of the same market as that of the monopoly firm. In assuming blocked entry, we assume, for reasons we will discuss below, that no other firm can enter that market. As always with models, we make the assumptions that define monopoly in order to simplify our analysis, not to describe the real world.

Utilities that distribute electricity, water, and natural gas to some markets are examples. In a natural monopoly, the LRAC of any one firm intersects the market demand curve where long-run average costs are falling or are at a minimum. If this is the case, one firm in the industry will expand to exploit the economies of scale available to it. Because this firm will have lower unit costs than its rivals, it can drive them out of the market and gain monopoly control over the industry.

To reduce prices and increase output, regulators often use average cost pricing. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve.[73] This pricing scheme eliminates any positive economic profits since price equals average cost. Regulation of this type has not been limited to natural monopolies.[73] Average-cost pricing does also have some disadvantages. Industries vary with respect to the ease with which new sellers can enter them. The barriers to entry consist of the advantages that sellers already established in an industry have over the potential entrant. Such a barrier is generally measurable by the extent to which established sellers can persistently elevate their selling prices above minimal average costs without attracting new sellers.

Pros and Cons of a Monopoly

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘monopoly.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. We spend a lot of time researching and writing our articles and strive to provide accurate, up-to-date content.


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