Price fixing is an agreement among competitors to raise, lower, maintain, or stabilize prices or price levels. Antitrust laws require that each company establish prices and other competitive terms independently, without consulting a competitor. Consumers expect that prices have been determined based on supply and demand, not by an agreement among competitors. In 1994, Microsoft was accused of using its significant market share in the personal computer operating systems business to prevent competition and maintain a monopoly. The structure of a market is also affected by the extent to which those who buy from it prefer some products to others.
It sums up the squares of the individual market shares of all of the competitors within the market. Antitrust cases can be brought against companies who violate antitrust laws and prosecuted by state or federal governments. This can discourage other companies from behaving in ways that violate such laws and harm consumers. Consumers who suspect a company is violating antitrust laws can contact the Antitrust Division or Federal Trade Commission at the federal level. A local company operating within one state can be investigated by the Attorney General of that state. Historically, monopolistic markets arose when single producers received exclusive legal privileges from the government, such as the arrangement reached between the Federal Communications Commission (FCC) and AT&T between 1913 and 1984.
What Is a Monopolistic Market?
As of May 2024, its desktop Windows software still held a market share of more than 73%. With the existence of a large monopoly, the risk of a potential entrant going out of businesses always looms. Hence, these potential entrants hesitate when it comes to taking a risk that could cost them too much.
Regulation of a Monopolistic Market
Monopoly was first depicted in The Landlord’s Game, which was invented by Elizabeth Magie Phillips (or Lizzie Magie) in 1904. This game inspired the monopoly board game that is played by most students today. The word monopoly has been derived from the combination of two words i.e., ‘Mono’ and ‘Poly’. The Clayton Antitrust Act of 1914 created rules for mergers and corporate directors. The Federal Trade Commission Act created the Federal Trade Commission (FTC).
Ease of entry
Strategic Pricing allows a monopolist to charge any price for their offerings. The price may be set to be extremely low – predatory pricing – in order to prevent any firm from entering the market. This is often done by a monopolist to demonstrate power and pressurise potential and existing rivals. As with the model of perfect competition, the model for a monopolistic competition is difficult or impossible to replicate in the real economy.
The determination of monopoly price under constant costs can be shown with the help of Fig. In the diagram, the AC curve will be a horizontal line running parallel to OX and for all the levels of output AC will be equal to MC. AR and MR represent the average revenue curve and marginal revenue curve respectively. The equilibrium between MC and MR is brought at point E when the output is OM. The monopoly profit will, therefore, be equal to PERS which is represented by the shaded area.
Inelastic demand refers to the situation in which consumers must have to buy the commodity what-so-ever may be the price. On the other hand, if demand is elastic, the monopolist will fix low price per unit. The decision regarding the determination of equilibrium price in the long run depends on the elasticity of demand and effect of law of costs on monopoly price determination.
The profits per units may be higher at higher price but the total profits will be higher at lower price. It is; therefore, better to sell more at a lower price than to sell less at a higher price. If the demand is inelastic, the monopolist will fix high price of his product.
A Google spokesperson claimed that the company’s tools account for £55 billion from over 700,000 businesses across the globe. Further, Google will continue to share the working of its systems with the CMA. This will sort matters for the company (Google) and address the concerns of the regulator (CMA). Monopoly is derived from the words “monos” (single) and “polein” (to sell) of Greek.
The boundaries of what constitutes a market and what does not are relevant distinctions to make in economic analysis. In a general equilibrium context, a good is a specific concept including geographical and time-related characteristics. Most studies of market structure relax a little their definition of a good, allowing for more flexibility in the identification of substitute goods. The single firm, being the sole supplier, becomes synonymous with the industry. This implies that the difference between a firm and an industry ceases to exist in the case of a monopoly. (i) To decide the amount of output to be produced and the price at which it will be sold to write the meaning of monopoly maximize profits.
Its controversial history as one of the world’s first and largest multinational corporations ended in 1911, when the United States Supreme Court ruled that Standard was an illegal monopoly. The Standard Oil trust was dissolved into 33 smaller companies; two of its surviving “child” companies are ExxonMobil and the Chevron Corporation. Monopolies can often lead to unfair trade practices like charging different prices from different consumers (price discrimination), setting prices far above the costs of manufacturing, selling inferior products and services, etc. Monopolies are discouraged in several countries as power and wealth tend to concentrate with a single seller. Moreover, such sellers may offer low-quality products at high prices, thus exploiting the consumer. A monopoly can be broken by imposing government regulations or opening the market to competition.
Sources of monopoly power
- Moreover, competitors are discouraged from entering the market often due to high initial costs.
- The East India Company was formed for pursuing trade with the East Indies but ended up trading mainly with the Indian subcontinent, North-West Frontier Province, and Balochistan.
- Therefore, a monopoly also has absolute product differentiation because there are no other comparable goods or services.
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. The barriers may exist because costs for established sellers are lower than they would be for new entrants, or because the established sellers can command higher prices from buyers who prefer their products to those of potential entrants. The economics of the industry also may be such that new entrants would have to be able to command a substantial share of the market before they could operate profitably. When they do occur, the monopoly that sets the price and supply of a good or service is called the price maker. Due to a lack of competition in the market and high barriers to entry, the company can inflate prices.
A monopoly is a single seller or producer without direct competitors for its products or services due to its business practices. A monopoly can dictate price changes and create barriers that prevent competitors from entering the marketplace. Price discrimination allows a monopolist to increase its profit by charging higher prices for identical goods to those who are willing or able to pay more. For example, most economic textbooks cost more in the United States than in developing countries like Ethiopia. In this case, the publisher is using its government-granted copyright monopoly to price discriminate between the generally wealthier American economics students and the generally poorer Ethiopian economics students.
