Monopoly – example

Monopoly market structure has been defined as the ability of a single firm  to influence a market through its action. The demand curve for the firm that enjoys a market monopoly will slope downwards from right to left. This is so because when the firm charges higher prices for it commodity less will be demanded and when the monopoly charges low prices for its commodity more will be demanded. If we assume that a monopoly is charging $ 150 for its product and was selling 20 units of its output. Then if the firm wants to increase its total sales it must reduce its prices. Monopolies are created by various reasons in the market. There are positive types of monopoly and negative type of monopoly. Positive monopoly is caused by economies of scale, firm’s efficiency and branding. Examples in the real world of positive monopoly are company that has been able to outdo the others through branding and therefore ending up as the sole producers in the market.

If there were three firms in a market  namely firm A, firm B and firm C , all producing beverages and each firm has different type of management policy. If firm A is more efficient in its management and ends up creating a brand that takes up to 95% of the whole market and the others take only the remaining five percent then there is a  possibility that firm A will drive the other firms out of the market hence forming a monopoly. The other positive type of monopoly exists when the government wants to protect consumers from exploitation or for the provision of essentials goods to its citizen. If the governments want to protect its citizens or maintain a certain living standards for its citizens it will take the initiative of providing that service. The reason for this is that the government do not have profits motive and will provide the goods even to the most non profitable geographical region. The services are electricity, water, and transport services. If we assume that the government gave firms the freedom to provide railway services to its citizen’s then transport by means of railway services will be provided to the profitable market leaving out the poor without any mode of transportation. This way the monopoly in railway transport is beneficial to the citizen hence defined by economist as positive monopoly. Another example of government monopoly is in the provision of state security. The government cannot leave this sensitive sector to the hand of private companies who are out to make profit. The private Companies will provide security to the rich and will not act to provide just services to all. If it is the business of the security organs to manufacture weapons then the nature of this activity cannot be left to competing firm. If competing firms rather than a monopoly firm were given this tender they would aim at increasing sales without considering the destination of these weapons.

The second type of monopoly is the negative monopoly. This is where one firm has superior and unfair advantage over the other firms in the market. The unfair advantage or superiority can be caused by cartels, control of natural resources by some company, and when the economy operates under the capitalism structure.

Be Sociable, Share!

{ 0 comments… add one now }

Leave a Comment