Monopoly: Definition, Types, and Market Structures
Monopoly: Definition and Characteristics
Monopoly Definition: A monopoly is a market situation where a single producer or supplier has significant market power within an industry.
Lack of Substitutes
In a monopoly, there are typically no close substitutes for the product or service offered. This means consumers have limited alternatives and must purchase from the monopolist.
Barriers to Entry: Gateways to Monopoly
Several factors can lead to the emergence of a monopoly:
Trusts
A trust refers to a vertical integration of companies, often aiming to control various stages of production or distribution.
Cartels
A cartel is a formal or informal agreement among firms in the same industry to reduce or eliminate competition. Cartels often focus on:
- Fixing prices
- Limiting supply
- Dividing the market
- Sharing profits
The goal is to create a monopolistic market structure, benefiting the producers at the expense of consumers.
Mergers and Acquisitions
Merger: A merger involves two or more independent legal entities combining their assets to form a new company.
Acquisition: An acquisition occurs when one legal entity purchases a controlling stake in another company without merging assets.
Types of Monopoly and Related Structures
Pure Monopoly
A pure monopoly exists when there is only one company in an entire industry. This is rare in the real economy, except in cases of public concessions.
Artificial Monopoly
An artificial monopoly is characterized by barriers to entry imposed by the state, such as licensing, patents, or copyright protection.
Natural Monopoly
A natural monopoly occurs when a single company can produce the entire market output at a lower cost than multiple competing companies. This often happens in industries with high initial investment costs (economies of scale), such as water distribution.
Estanco
An estanco is a monopoly on the production or sale of a specific asset, assumed by the state or granted to individuals in exchange for revenue. Common examples include tobacco, playing cards, salt, explosives, and spirits.
Monopolistic Competition
Monopolistic competition lies between monopoly and perfect competition. It shares characteristics of both:
- Many companies produce and sell in the sector.
- No significant barriers to entry.
However, the products are not homogeneous. The automobile market is an example.
Monopsony
A monopsony occurs when there is a single consumer in the market. This buyer has significant control over the price of goods, as producers must adapt to the buyer’s requirements. This can lead to lower prices for the consumer compared to a competitive market.
Bilateral Monopoly
Bilateral monopolies are common in the exchange of specialized or uncommon goods, such as specialized industrial parts. Bargaining power is a key factor in determining the price.