What is a Monopoly? (characteristics, causes and types)

The structure of the markets varies continuously, so that a market that is highly competitive can transform into one without competition, today there may be a large number of companies in a certain productive sector and tomorrow there will be very few or one alone.

The monopoly refers to an explicit market situation, included among the forms of imperfect competition, in which a single producer or seller exploits and controls the supply of a good or service, which gives it absolute power and serves as a privilege.

In other words, it is a form of market where a single company is the only provider of a certain good or service, completely dominating the market offer, consumers to acquire the good, must go to the monopolist and accept the conditions imposed by it.

Conduct of a monopoly company

A monopoly company It is clear about its dominance of the market and it knows that it has no competition, that gives it the freedom to directly influence the price and quantity offered in the market. It is said that the monopoly firm has the power of the market and uses it to increase prices and reduce the quantity produced to obtain higher profits.

Notwithstanding the limit of the power of the monopoly the demand has it, whatever price you decide to set, you will only be able to sell what people are willing to sell buy, it usually happens that if the price is very high, it will sell few units and otherwise if a low price, it will sell more units.

As previously stated in a monopoly, the price is high and the quantity produced is low, which directly benefits the company since It obtains a higher utility index, but it hurts consumers who, in order to enjoy the product, must pay many times a lot of costs. elevated.

On the other hand, there is a completely objective loss of efficiency, which occurs when the monopolist produces a quantity less than that which is would produce in perfect competition, there are different levels of production and there are people willing to pay for a product more than it costs them produce it in monopoly. In this way, the monopolist would be able to sell more units without lowering the price.

Causes of monopoly

There are factors that help explain the existence of a monopoly among these:

• Control of a productive resource.
• The coexistence of economies of scale.
• Productive innovation and technological improvement.
• Grant of patents to a single producer.
• The state controls the supply and imposes government regulations.
• When a company shows decreasing average costs, in production.

Monopoly characteristics

Like any situation in the market, the monopoly has well-defined characteristics that allow it to be easily identified, among others, the following can be cited:

• A single company that produces and sells a certain product or service.
• There are no similar or substitute goods or services on the market.
• There is a great demand.
• There are rigid barriers to market entry.
• The monopolist has the power to fix the price at his whim and convenience.
• A clean mobility of the factors of production does not occur.

Conditions for a monopoly to exist

They are other characteristics that are given in the form of conditions, since if they were not present, the monopoly as such would not take place, these are:

• The monopolist must exercise control over an essential resource to produce the product, such as: That it is the only company with the technology necessary to produce the good, has been granted the right to develop a patent on the product and therefore has the exclusivity of the same, the company has a government franchise that allows it to produce and distribute the good or product in a specific area.
• No other similar goods or services should be found in the market, which allow to replace what is offered by the monopolist. Clearly, said product must be the only one available for the consumer to acquire and satisfy the need or desire for it. There is no competition or any possibility of comparing and contrasting the quality of the product, between similar products.
• The company can control the price and the quantity produced. In order to specify them, they usually carry out an analysis of costs and the existing demand in the market. In this way, it makes decisions about the quantity that it is going to produce and at what the price with which it will finalize the commercialization will be.

The other 3 types of imperfect competition

The oligopoly:

There is a lot of demand and few suppliers, it occurs when there is little competition in the market, and they can influence the setting of the price.

Generally, in an oligopoly market there is the image of a market leader company, with great influence on prices and other small companies that do not influence as competition.

One of the concerns of the entities that control the companies is to avoid collusion, which consists of agreements between companies in order to control prices and avoid competition.

Within this, there is the image of an oligopoly with differentiated goods, which occurs when the leading companies in a certain sector productive develop goods differentiated by quality, design, technology and maintain control not only of supply but also over prices. The most common example is the automobile industry where there are few brands, the range of products is very wide and differentiated.

Monopsony:

It can occur in a market when there are several bidders and a single buyer or demander, monopsony can institute a form of price control, marked by the discretion of the buyer when determining the purchase price of said goods.

This situation results to the detriment of producers, who sometimes find it necessary to sell at any price due to the lack of alternative buyers. For example, public works.

Oligopsony:

It occurs when there are several efferent companies and few buyers of the goods in the market and the latter can influence prices. For example, the large distributors.

To conclude, it is worth mentioning another form of monopoly, such as monopolistic competition, in this case there are going to be many bidders with differentiated products and they have only a little control over the setting of the price. For example, fast food franchises.