What is a Monopoly

as soon as looking in ~ the reasons of monopoly, the is essential to first define what the is. The term syndicate originates indigenous the old Greek language. Monos, definition “sole”. And Poleo, an interpretation “sell”. About translated, it method “Sole Seller”. Any kind of person or organization who is the only seller in the market might be share as having a monopoly.

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Monopolies are well-known as huge companies that have tendency to take benefit of the consumer. They tend to use their position to collection prices that are in overabundance of what the consumer would usually pay in a compete market. Together a result, they are usually greatly regulated in bespeak to avoid unreasonable methods that take advantage of the consumer.


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Introduction to Microeconomics

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3 varieties of Monopoly

There room three types of monopoly: Natural, Un-natural, and State. All 3 have distinctive characteristics and also causes. For this reason let united state look at the 3 types of monopoly below:

1. Organic Monopolies

One type of syndicate is the organic monopoly, which is dubbed ‘natural’ because there is no direct government involvement. This derives indigenous the truth that its development originates native variables that space not man-made.

because that instance, railways space a prime example of a herbal monopoly. This is since the expense to build an additional track would more than and above what a competitor would make earlier in profit.

Utilities are one more example. Come build brand-new sewers or strength lines would certainly be costly, inefficient, and also impractical. If two companies were come build and also offer different lines, the prices would be higher than what they would be under a monopoly. Therefore, various other firms do not want to go into the market because there is no benefit to be made.

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In short, natural monopolies exist since it is maybe to carry out a product or service at a lowercost than a competitive industry would offer. In part, this is due to the efficiencies that economies of scale offers. For instance, utilities, railways, and other together industries have the right to offer a service or product at a price that is lower than what would certainly be accomplished if there was competition.

With much more competitors, over there is competition end customers and also resources, i m sorry pushes increase prices past what the customer would certainly be willing to pay. Therefore, there would certainly be no suggest in conduction organization with many competitors.

2. State Monopolies

Another type of syndicate is the state monopoly. This covers industries where the state has complete ownership. Remarkable examples incorporate postal services, utilities, television, and the supply of money. These room usually regulated by the state as they are understood as ‘natural’ monopolies. In other words, the goods can only it is in efficiently provided under a syndicate structure. Therefore, quite than to trust a private firm to operation them, they space taken under federal government ownership instead.

The target of state ownership is to avoid price gouging that personal monopolies would participate in. Together monopolies have better power to dictate prices, they may increase the expense to the customer over and over the sector rate.

Some governments regulate these monopolies instead, yet in countless countries, over there is a solid political will to have actually these managed by the state. In the UK for example, the re-nationalization of the railways has come to be increasingly renowned in order to reduce ticket prices.

3. Un-natural Monopolies

The third type of syndicate is un-natural monopolies which space a mix of natural and also state monopolies. They are natural monopolies in the classic sense however are re-enforced through the state. Patents room a clear example of one unnatural monopoly.

A personal firm create a brand-new product. This may be completely different from every little thing is top top the market. Because that example, a new medical drug, that can reverse the results of Alzheimer’s. Nothing else is obtainable to the consumer. For this reason this drug has actually a monopoly within the market.

it is naturally developing as it is the an initial and just product top top the market. However, this product is given an artificial monopoly through the patent system. For a certain duration of time, this will certainly be the just product customers deserve to buy.

7 reasons of Monopolies

Monopolies have the right to occur as result of a variety of factors. Some might apply, some might not. V that said, monopolies have tendency to erode end time; maybe with the exception of natural monopolies. Causes such as patents, high entrance costs, or short potential profits may prevent vain today. However, they have tendency not to last over the long-term.

1. High prices Scare Competition

One cause of natural monopolies are obstacles to entry. This is commonly as a an outcome of high prices – through railroads being a famous example.

To develop a brand-new station and also railroad would expense millions. High start-up prices are required. Potential rivals would require millions come invest and also compete. Also if competitors had the forced start up costs, the earnings they make might never covering their addressed costs.

there are numerous industries that have high entrance costs. For example, oil and gas room notoriously expensive to enter, through high fixed costs and a variety of regulatory requirements. Brand-new companies face a tough time in an sector that is dominated by large firms in the sector such as ExxonMobil and BP. High expenses dis-incentivize potential competitors from entering the market. As costs are high, the financial influence of failure is that lot greater.


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Monopolies are an ext common in sectors that have high resolved costs and also steadily diminish marginal costs. Because that example, if it prices $1 exchange rate to start a new tech company, that might be thought about a high solved cost. To supply its business to one extr customer, the marginal cost may it is in small, perhaps $10,000.

once the firm is just serving one customer, it requires them to salary a massive price to cover the costs. However, at 50,000 customers, the marginal expenses fall to $50 every customer, making that cheaper to carry out the service. This may keep continuous falling till the marginal price may in reality reach $0.

In an industry such together that described, the is financially effective for one agency to be in the market as it benefits from economies of scale. This method the an ext customers the is able to serve, the reduced prices it deserve to offer as the price per customer also falls. The many efficient agency may finish up driving every other competitors out because of its economic situations of scale and lower prices; taking advantage of lower production costs and out-pricing the competition.

2. Low Potential profits Are unattractive to Competitors

Potential earnings are a an essential indicator to potential businesses. If monopolies room making smallprofits, the is no worth a competitor’s time and also money to try and take a little share that the market.

Both Apple and Google invest billions in emerging their operating equipment in order come competewith Microsoft. The cost barriers were high, however the potential revenues were likewise high. Therefore,while prices are a obstacle to entry; for this reason too are the potential profits.

If monopolies start making especially profits, this sends out a signal come potential rivals thatthere is profit to it is in made. Because that example, that may expense $1 exchange rate to develop brand-new operatingsoftware. If Microsoft only makes $200 million a year, then there is not much profit forcompetitors to take.

However, if Microsoft tries to take advantage of consumers and also profits $1billion each year; there may be room because that competition. Companies may have the ability to come in, invest$1 billion, and take a re-publishing of those profits.

by contrast, as soon as there space low profits, the monopolist’s place is maintained as competitors are dis-interested. If we look come nature as an example; a lion would not rubbish its effort pursuing beetlesor shrew. They room too little and not worth the power in catching.

3. Property of a vital resource

Monopolies have the right to arise when one service owns a vital resource. These are generally physicalresources, such as diamonds. Because that example, if there is just one diamond mine in the country, thebusiness that owns it will be may be to accomplish a monopoly. This is how De Beers regulated thediamond sector throughout the 20th Century.

It controlled diamond mines in southern Africa and also brought up those in various other nations. It controlled to keep control of the diamond supply for many of the 20th Century, only collapsing once worldwide competition came to be increasingly fierce.


The nationwide Grid in the UK is likewise a monopoly that has sole ownership of a crucial resource. It has actually power over the totality of the UK’s energy supply. While it is a publicly-traded company, the is hosted down by federal government regulation to stop consumers from being in-directly overcharged.

as soon as companies have actually sole ownership of a key resource, they room usually greatly regulated bygovernment. This is so that they do not take advantage of their monopolistic position in themarket.

4. Patents

one more cause of monopoly is as soon as the government grants a patent to businesses. This is a kind of pundit property that offers the owner the legal right to it is in the sole producer the a product.

The owner that the patent must provide details the the product and also make castle public. In exchange, the government guarantees the security of such legal rights in court for a period of time. Any type of business infringing top top this appropriate will it is in in violation that the patent and also can be sued.

if this grants the inventor a monopoly, the is designed come incentivize innovation. If the inventor of a product knew there was no legit production, they may not invest the time, energy, and also funds into emerging it. There is little incentive for the inventor if they recognize the product will be copied by Mr. Bloggs the very next day. Nevertheless, it create a monopoly on the product because that a set period of time.

5. Limitations on Imports

income quotas, tariffs, and also other trade restrictions can limit competition and be a reason of monopoly. If cheaper international competition is can not to go into the market, there are fewer pressure on residential companies.

for example, once the patent the a little niche drug runs out; there may be few pharma providers that would want to compete. This might be due to the fact that the drug only serves a few hundred people, so there is tiny profit to it is in made. Therefore, there is adomestic monopoly.

However, international drugs would be able to compete as they can accessibility multiple national markets, which creates a larger customer base and a higher potential for profit. By being able come access an ext markets, what to be a niche product, i do not care a large and fairly a rewarding market. Yet numerous countries stop this. In the united state for example, only drugs approved by the FDA can enter. This stop perfectly safe drugs indigenous Europe from coming in and also serving together a competition to the domestic monopoly.

6. Baby Markets

Another cause of monopoly occurs in new ‘baby markets’. During the infancy that a market, the first entrant will be able to establish one initial syndicate position. This is since they room the very first company in the market, without competition.

for example, if a service was to develop a theoretical teleportation device, it would certainly be the first to do so. In the early on stages in ~ least, that may have actually a monopoly until rivals are able to enter and create a similar product.

throughout these initial step of a new market, the is simple for the an initial entrant to establish a monopoly. However, this commonly does no last long as rivals see one opportunity.

7. Geographic Markets

Geographic monopolies can be qualified by the sole presence within a local market. Forexample, there may only be one restaurant in the neighborhood town. If you want a meal out, friend mayhave come travel half an hour come the nearest restaurant. When considering the regional market; it can beconsidered together a monopoly.

Other instances of neighborhood monopolies may include a gas terminal that is the just supplier top top themotorway. Whilst that does not have a monopoly over gas, the does in ~ the limit of its location.

Difference Between monopoly and Monopolistic Competition

it is important to identify the difference between a monopoly, and monopolistic power. In a monopoly there is just one providers in the market. For example, AT&T had actually a US monopoly in phone services throughout many of the 20th Century. This is different from monopolistic strength in a number of ways.

The distinction is that monopolistic power means a firm has syndicate like powers, yet is not the sole provider. In monopolistic competition, over there are numerous firms in the market, yet they complete on components other 보다 price. Examples include: Taxi’s, Restaurants, or Hairdressing.

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Monopolistic markets are also characterized by low obstacles to entry; something the is generally non-existent in syndicate markets. This allows brand-new firms to conveniently come in and also compete; in stark contrast to monopolies.