Business is about competition and business theory teaches us that competition means having a product or service which is the best in its class, while monopoly means having a product or service that no other company can offer. Although it sounds like a description of a monopoly, it is not. Monopoly is a market condition where a firm has exclusive control of a given good or service, while a market without competition means a market condition where there are too many firms with the same products and/or services for the consumers to choose from.
The monopoly or the situation whereby a firm controls more than the market, although it doesn’t have the customers’ interests in mind, is called a monopoly. Whereas perfect competition is usually a market in which companies have no competing products and/or services and they just respond to the prevailing market price, a monopoly is one in which companies have total market control. This means that profits are not determined by demand and supply, but by the ability of a firm to protect its existing profits. How then can monopoly profits be achieved? There are various ways in which this can be done and all have different effects on the firm’s profits and revenues. A monopoly results when monopoly prices for a given good or service fall lower than those established by competition.
Monoplying can be achieved through a close relationship between demand and supply, which is called “mono-supply.” In competitive markets, the price of a commodity will tend to rise when demand for that commodity falls. For example, if demand for oil rises above the cost of production, oil prices will generally rise. However, in a free market, the rise in oil prices is regulated by the factors described above – demand and supply.
Monoplying can also be caused by monopoly or limited competition. In monopoly markets, consumers have little choice but to pay the established prices. Likewise, in competitive markets, a firm with monopoly power can fix its price and demand to achieve monopoly profits. Thus, even if a firm with monopoly power does not attempt to fix its price on the market, the resulting fixed price may depress demand for the product or service, causing consumers to pay more for the same or similar goods.
The most familiar example of a firm establishing a monopoly is AT&T. AT&T granted monopolistic rights to deliver wire services when it formed an alliance withitton. It then set its own price, maintained its prices above its competitors, and did not let any new competitors into the market. The result was that consumers paid much more for AT&T’s wire service than any other carrier. It also received a large portion of the total revenue generated by the market. It retained that control over the price until it was bought out by Microsoft.
A similar example occurs in the case of a manufacturer of cribs. Luxottica developed a monopoly in the watch market by purchasing some watchmakers, developing its own designs, and setting its own prices. Because it had acquired a large number of exclusive watch designs, it could undercut its competitors by two to three times its market price. Consumers paid less because they had to buy from Luxottica rather than one of its rivals. In short, by charging a monopoly price and protecting its expensive products from competition, Luxottica increased its revenues by capturing a major portion of the total revenue generated by the market.
Yet another example occurs when demand and supply are in equilibrium. If demand and supply are both constant, then the market will tend to find the appropriate equilibrium, and the price level is determined by the demand or supply elasticity of the market. If demand and supply are both unresponsive, the situation is described as being “abnormal.” An example of this would be an economy in which demand and supply are considered to be perfectly flexible; in such a market, a firm could adjust its price to capture a portion of the market share by developing a monopoly, in which case it would enjoy the benefits of a perfect competition, while its competitors were forced to resort to practices that cost them market share, such as lower unit production or higher unit costs.
In the case of a competitive market, the price level is determined by the equilibrium quantity. A company may enter a market only to see that its competitors have created a large enough difference in production to prevent its products from competing successfully. When a firm enters a market with a product that is too close to its competitors, it may attempt to reduce its costs in order to reduce its over-all equilibrium quantity. However, if it does not reduce its costs enough, it risks losing its customers to competitors who are more cost-effective.