|
|
| Line 1: |
Line 1: |
| {{two other uses|the economic term|the board game|Monopoly (game)}}
| | <br><br> |
| {{Competition law}}
| |
| [[File:I Like a Little Competition.jpg|alt=|thumb|''"I Like a Little Competition"—J. P. Morgan'' by [[Art Young]]. Cartoon relating to the answer [[J. P. Morgan]] gave when asked whether he disliked competition at the [[Pujo Committee]].<ref>{{cite book|url=http://books.google.co.uk/books?id=XZqVCv435J8C&pg=PA93#v=onepage&q&f=false|title=J. Pierpont Morgan: Industrialist and Financier|author=Michael Burgan|page=93|year=2007|isbn=9780756519872}}</ref>]]
| |
| A '''monopoly''' (from [[Greek language|Greek]] ''monos'' μόνος (alone or single) + ''polein'' πωλεῖν (to sell)) exists when a specific person or [[company|enterprise]] is the only supplier of a particular commodity (this contrasts with a [[monopsony]] which relates to a single entity's control of a [[market]] to purchase a good or service, and with [[oligopoly]] which consists of a few entities dominating an [[industry]]).<ref>{{Cite book
| |
| |last= [[Milton Friedman]]|title= [[Capitalism and Freedom]]
| |
| |format= paperback
| |
| |accessdate= March 2008
| |
| |edition= 40th annivers sydney askins @ mykayla fox did this
| |
| |month=
| |
| |publisher= The University of Chicago Press
| |
| |page= 208
| |
| |chapter= VIII: Monopoly and the Social Responsibility of Business and Labor
| |
| |isbn = 0-226-26421-1}}</ref> Monopolies are thus characterized by a lack of economic [[competition]] to produce the [[good (economics)|good]] or [[Service (economics)|service]] and a lack of viable [[substitute good]]s.<ref>{{Cite book |last1= Blinder |first1= Alan S | first2 = William J | last2 = Baumol | first3 = Colton L | last3 = Gale |title= Microeconomics: Principles and Policy|format= paperback|accessdate= October 2007|edition=|date=June 2001|publisher= Thomson South-Western|page= 212|chapter= 11: Monopoly|isbn = 0-324-22115-0|quote = A pure monopoly is an industry in which there is only one supplier of a product for which there are no close substitutes and in which is very difficult or impossible for another firm to coexist}}</ref> The verb "monopolize" refers to the ''process'' by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge high prices.<ref name=Orbach&Campbell>{{cite journal | first1 = Barak | last1 = Orbach | first2 = Grace | last2 = Campbell | url = http://ssrn.com/abstract=1856553 | title = The Antitrust Curse of Bigness | journal = Southern California Law Review | year = 2012}}</ref> Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).<ref name=Orbach&Campbell/>
| |
|
| |
|
| A monopoly is distinguished from a monopsony, in which there is only one ''buyer'' of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a [[cartel]] (a form of [[oligopoly]]), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have [[market power]] and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in ways that leave market interactions distorted.{{citation needed|date=December 2012}}
| | Are your bath room wall tiles rather old? Does your shower cubicle lack sparkle? Grubby grout lines in kitchen area? In these credit crunchy times you can still decorate with ease when you "do it yourself".<br><br>Now, take a similar 'knock off' and refill your own name brand plastic box. Voila! No one will ever know cannot afford to hold with the Joneses. Who would like to cultivate with them anyway? I heard each goes broke venturing into the fuel in that H3!<br><br>Luxury rugs also come in durable qualities and with very easy procedures to care of these guys. One such example is the dynamic area rug. It has soft yarn will be mildew proof and in order to clean. Have got good warmth retention quality, making your bathrooms experience satisfying. Due to its non slip latex, has the properties that will dsicover you not breaking your leg whilst getting a purify. Its multi acrylics yarn makes the properties that allow it to be quite powerful. It is easy to clean using mild action detergent and you can hang or tumble empty. It does not need bleaching or wrinkle removal.<br><br>Cow cookie cutters can be made within a number of countless materials including metal and plastic. One of best looking metals may can be generated out of is copper. Not only can it look great, but much more for an extremely good looking home decoration material too. If have got a number of these laying around in in kitchen area just waiting to be used, what say we you pull them out and have as a decoration? You can stand them up on the shelf on your own kitchen wall, or string a few of them up and hang them on your own wall to buy your home a tad more of it country as well as feel.<br><br>When referring to home decor, there is a lot of styles which you may use. Can be the Italian, French, Moroccan, Asian at the same time the American style has become more most trendy these days. Well, your choice will might depend on your interest and require.<br><br>Candles your market bedroom seem great but be careful. You ought not risk fall asleep with candles burning. That being said, Enjoy votives or tea lights in bed. Anything larger would throw off too much light. Votives and tea lights supply you with a nice low warm glow to area that's perfect the love room.<br><br>Keep to mind that incredibly probably only work once with delighted client Meal penalty area. Unless your kids don't tear them up. It is easy to put it well in this cabinet and all of them later down the line. If possible, get some different kinds, plan interchange these products. Grandparents are great here, they love to spoil children with the junk fast dinner. Recruit them to save the it does not matter.<br><br>Cookies. Just in case kids are situated in school, just one is hassle-free. Keep one of the resealable packages [toll house, keebler] and refill it with homemade ones or with one of the most cheap fakes. Most kids like homemade better than the store bought, but every child likes the 'treat' with the name brand ones.<br><br>If you loved this informative article and you would like to receive more details with regards to [http://mohamedia.net/ Decorate your home] assure visit our page. |
| | |
| When not legally obliged to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition.{{citation needed|date=December 2012}}
| |
| | |
| Monopolies can be established by a government, form [[natural monopoly|naturally]], or form by integration.
| |
| | |
| In many jurisdictions, [[competition law]]s restrict monopolies. Holding a dominant position or a monopoly of a market is often not illegal in itself, however certain categories of behavior can be considered abusive and therefore incur legal sanctions when a business is dominant. A [[government-granted monopoly]] or ''legal monopoly'', by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic [[advocacy group|interest group]]. [[Patent]]s, [[copyright]], and [[trademark]]s are sometimes used as examples of government granted
| |
| monopolies. The government may also reserve the venture for itself, thus forming a [[government monopoly]].{{citation needed|date=June 2012}}
| |
| | |
| ==Market structures==
| |
| In economics, the idea of monopoly will be important for the study of [[management structure]]s, which directly concerns normative aspects of economic competition, and provides the basis for topics such as [[industrial organization]] and [[regulatory economics|economics of regulation]]. There are four basic types of market structures by traditional economic analysis: perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a structure in which a single supplier produces and sells a given product. If there is a single seller in a certain industry and there are not any close substitutes for the product, then the market structure is that of a "pure monopoly". Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless companies retain some market power. This is termed [[monopolistic competition]], whereas by oligopoly the companies interact strategically.{{citation needed|date=June 2012}}
| |
| | |
| In general, the main results from this theory compare price-fixing methods across market structures, analyze the effect of a certain structure on welfare, and vary technological/demand assumptions in order to assess the consequences for an abstract model of society. Most economic textbooks follow the practice of carefully explaining the ''perfect competition'' model, only because of its usefulness to
| |
| The boundaries of what constitutes a market and what doesn't are relevant distinctions to make in economic analysis. In a general equilibrium context, a good is a specific concept entangling geographical and time-related characteristics (''grapes sold during October 2009 in Moscow'' is a different good from ''grapes sold during October 2009 in New York''). Most studies of market structure relax a little their definition of a good, allowing for more flexibility at the identification of substitute-goods. Therefore, one can find an economic analysis of the market of ''grapes in Russia'', for example, which is not a market in the strict sense of general equilibrium theory monopoly.{{citation needed|dateju=June 2012|date=December 2013}}
| |
| understand "departures" from it (the so-called ''imperfect competition'' models).{{citation needed|date=June 2012}}
| |
| | |
| The boundaries of what constitutes a market and what doesn'geographical and time-related characteristics (''grapes sold during October 2009 in Moscow'' is a different good from ''grapes sold during October 2009 in New York''). Most studies of market structure relax a little their definition of a good, allowing for more flexibility at the identification of substitute-goods. Therefore, one can find an economic analysis of the market of ''grapes in Russia'', for example, which is not a market in the strict sense of general equilibrium theory monopoly.{{citation needed|dateju=June 2012|date=December 2013}}t are relevant distinctions to make in economic analysis. In a general equilibrium context, a good is a specific concept entangling geographical and time-related characteristics (''grapes sold during October 2009 in Moscow'' is a different good from ''grapes sold during October 2009 in New York''). Most studies of market structure relax a little their definition of a good, allowing for more flexibility at the identification of substitute-goods. Therefore, one can find an economic analysis of the market of ''grapes in Russia'', for example, which is not a market in the strict sense of general equilibrium theory monopoly.{{citation needed|dateju=June 2012|date=December 2013}}
| |
| | |
| == Characteristics ==
| |
| * ''Profit Maximizer'': Maximizes profits.
| |
| * ''Price Maker'': Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm.
| |
| * ''High Barriers to Entry'': Other sellers are unable to enter the market of the monopoly.
| |
| * ''Single seller'': In a monopoly, there is one seller of the good that produces all the output.<ref>Binger and Hoffman (1998), p. 391.</ref> Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry.
| |
| * ''Price Discrimination'': A monopolist can change the price and quality of the product. He or She sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.
| |
| | |
| ==Sources of monopoly power==
| |
| Monopolies derive their market power from barriers to entry – circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry: economic, legal and deliberate.<ref name=GoodwinEtAl-307308>{{cite book | last1 = Goodwin | first1 = N | last2 = Nelson | first2 = J | last3 = Ackerman | first3 = F | last4 = Weisskopf | first4 = T | title = Microeconomics in Context | edition = 2nd ed. | publisher = Sharpe | year = 2009 | pages = 307–308}}</ref>
| |
| * ''Economic barriers'': Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.<ref>{{cite book | first1 = William F. | last1 = Samuelson | first2 = Stephen G. | last2 = Marks | title = Managerial Economics | edition = 4th ed. | publisher = Wiley | year = 2003 | pages = 365–366}}</ref>
| |
| ::''Economies of scale'': Monopolies are characterised by decreasing costs for a relatively large range of production.<ref name="Nicholson 2007">{{cite book | last1 = Nicholson | first = Walter | last2 = Snyder | first2 = Christopher | title = Intermediate Microeconomics | publisher = Thomson | year = 2007 | page = 379}}</ref> Decreasing costs coupled with large initial costs give monopolies an advantage over would-be competitors. Monopolies are often in a position to reduce prices below a new entrant's operating costs and thereby prevent them from continuing to compete.<ref name="Nicholson 2007"/> Furthermore, the size of the industry relative to the [[minimum efficient scale]] may limit the number of companies that can effectively compete within the industry. If for example the industry is large enough to support one company of minimum efficient scale then other companies entering the industry will operate at a size that is less than MES, meaning that these companies cannot produce at an average cost that is competitive with the dominant company. Finally, if long-term average cost is constantly decreasing, the least cost method to provide a good or service is by a single company.<ref>Frank (2009), p. 274.</ref>
| |
| ::''Capital requirements'': Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of companies in an industry.<ref>Samuelson & Marks (2003), p. 365.</ref> Large fixed costs also make it difficult for a small company to enter an industry and expand.<ref name=GoodwinEtAl-307308/>
| |
| ::''Technological superiority'': A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or finances to use the best available technology.<ref name="Nicholson 2007"/> One large company can sometimes produce goods cheaper than several small companies.<ref>{{cite book | last1 = Ayers | first1 = Rober M. | last2 = Collinge | first2 = Robert A. | title = Microeconomics | publisher = Pearson | year = 2003 | page = 238}}</ref>
| |
| ::''No substitute goods'': A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits.{{citation needed|date=June 2012}}
| |
| ::''Control of natural resources'': A prime source of monopoly power is the control of resources that are critical to the production of a final good.{{citation needed|date=June 2012}}
| |
| ::''Network externalities'': The use of a product by a person can affect the value of that product to other people. This is the [[network effect]]. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words the more people who are using a product the greater the probability of any individual starting to use the product. This effect accounts for fads and fashion trends.<ref>Pindyck and Rubinfeld (2001), p. 127.</ref> It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft operating system in personal computers.
| |
| * ''Legal barriers'': Legal rights can provide opportunity to monopolise the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.{{citation needed|date=June 2012}}
| |
| * ''Deliberate actions'': A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force (see [[anti-competitive practices]]).{{citation needed|date=June 2012}}
| |
| | |
| In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. Great liquidation costs are a primary barrier for exiting.<ref name=Png-271>{{cite book | last = Png | first = Ivan | title = Managerial Economics | page = 271 | publisher = Blackwell | year = 1999 | isbn = 1-55786-927-8}}</ref> Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A company will shut down if price falls below minimum average variable costs.
| |
| | |
| ==Monopoly versus competitive markets==
| |
| While monopoly and perfect competition mark the extremes of market structures<ref name=Png-268>Png (1999), p. 268.</ref> there is some similarity. The cost functions are the same.<ref>{{cite book | last = Negbennebor | first = Anthony | title = Microeconomics, The Freedom to Choose | publisher = CAT Publishing | year = 2001}}</ref> Both monopolies and perfectly competitive companies minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions, some of the more important of which are as follows:
| |
| * ''Marginal revenue and price'': In a perfectly competitive market, price equals marginal cost. In a monopolistic market, however, price is set above marginal cost.<ref>Mankiw (2007), p. 338.</ref>
| |
| * ''Product differentiation'': There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute for any other. With a monopoly, there is great to absolute product differentiation in the sense that there is no available substitute for a monopolized good. The monopolist is the sole supplier of the good in question.<ref name="Hirschey, M p. 426">{{cite book | last = Hirschey | first = M | title = Managerial Economics | page = 426 | publisher = Dreyden | year = 2000}}</ref> A customer either buys from the monopolizing entity on its terms or does without.
| |
| * ''Number of competitors'': PC markets are populated by an infinite number of buyers and sellers. Monopoly involves a single seller.<ref name="Hirschey, M p. 426"/>
| |
| * ''Barriers to Entry'': Barriers to entry are factors and circumstances that prevent entry into market by would-be competitors and limit new companies from operating and expanding within the market. PC markets have free entry and exit. There are no barriers to entry, exit or competition. Monopolies have relatively high barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market.{{citation needed|date=June 2012}}
| |
| * ''Elasticity of Demand'': The price elasticity of demand is the percentage change of demand caused by a one percent change of relative price. A successful monopoly would have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC company has a perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite.{{citation needed|date=June 2012}}
| |
| * ''Excess Profits'': Excess or positive profits are profit more than the normal expected return on investment. A PC company can make excess profits in the short term but excess profits attract competitors, which can enter the market freely and decrease prices, eventually reducing excess profits to zero.<ref>{{cite book | last1 = Pindyck | first1 = R | last2 = Rubinfeld | first2 = D | title = Microeconomics | edition = 5th ed. | page = 333 | publisher = Prentice-Hall | year = 2001}}</ref> A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.<ref>Melvin and Boyes (2002), p. 245.</ref>
| |
| * ''Profit Maximization'': A PC company maximizes profits by producing such that price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs.<ref>{{cite book | last = Varian | first = H | title = Microeconomic Analysis | edition = 3rd ed. | page = 235 | publisher = Norton | year = 1992}}</ref> The rules are not equivalent. The demand curve for a PC company is perfectly elastic – flat. The demand curve is identical to the average revenue curve and the price line. Since the average revenue curve is constant the marginal revenue curve is also constant and equals the demand curve, Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D = AR = MR = P.
| |
| * ''P-Max quantity, price and profit'': If a monopolist obtains control of a formerly perfectly competitive industry, the monopolist would increase prices, reduce production, and realise positive economic profits.<ref>Pindyck and Rubinfeld (2001), p. 370.</ref>
| |
| * ''Supply Curve'': in a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied.<ref>Frank (2008), p. 342.</ref> In a monopolistic market no such supply relationship exists. A monopolist cannot trace a short term supply curve because for a given price there is not a unique quantity supplied. As Pindyck and Rubenfeld note, a change in demand "can lead to changes in prices with no change in output, changes in output with no change in price or both".<ref>Pindyck and Rubenfeld (2000), p. 325.</ref> Monopolies produce where marginal revenue equals marginal costs. For a specific demand curve the supply "curve" would be the price/quantity combination at the point where marginal revenue equals marginal cost. If the demand curve shifted the marginal revenue curve would shift as well and a new equilibrium and supply "point" would be established. The locus of these points would not be a supply curve in any conventional sense.<ref>Nicholson (1998), p. 551.</ref><ref>Perfectly competitive firms are price takers. Price is exogenous and it is possible to associate each price with unique profit maximizing quantity. Besanko, David, and Ronald Braeutigam, ''Microeconomics'' 2nd ed., Wiley (2005), p. 413.</ref>
| |
| | |
| The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC company.<ref name="Binger, B 1998">{{cite book | last1 = Binger | first1 = B. | last2 = Hoffman | first2 = E. | title = Microeconomics with Calculus | edition = 2nd ed. | publisher = Addison-Wesley | year = 1998}}</ref> Practically all the variations mentioned above relate to this fact. If there is a downward-sloping demand curve then by necessity there is a distinct marginal revenue curve. The implications of this fact are best made manifest with a linear demand curve. Assume that the inverse demand curve is of the form x = a − by. Then the total revenue curve is TR = ay − by<small>2</small> and the marginal revenue curve is thus MR = a − 2by. From this several things are evident. First the marginal revenue curve has the same y intercept as the inverse demand curve. Second the slope of the marginal revenue curve is twice that of the inverse demand curve. Third the x intercept of the marginal revenue curve is half that of the inverse demand curve. What is not quite so evident is that the marginal revenue curve is below the inverse demand curve at all points.<ref name="Binger, B 1998"/> Since all companies maximise profits by equating MR and MC it must be the case that at the profit-maximizing quantity MR and MC are less than price, which further implies that a monopoly produces less quantity at a higher price than if the market were perfectly competitive.
| |
| | |
| The fact that a monopoly has a downward-sloping demand curve means that the relationship between total revenue and output for a monopoly is much different than that of competitive companies.<ref name="Frank 2009 377">Frank (2009), p. 377.</ref> Total revenue equals price times quantity. A competitive company has a perfectly elastic demand curve meaning that total revenue is proportional to output.<ref name="Frank 2009 377"/> Thus the total revenue curve for a competitive company is a ray with a slope equal to the market price.<ref name="Frank 2009 377"/> A competitive company can sell all the output it desires at the market price. For a monopoly to increase sales it must reduce price. Thus the total revenue curve for a monopoly is a parabola that begins at the origin and reaches a maximum value then continuously decreases until total revenue is again zero.<ref>Frank (2009), p. 378.</ref> Total revenue has its maximum value when the slope of the total revenue function is zero. The slope of the total revenue function is marginal revenue. So the revenue maximizing quantity and price occur when MR = 0. For example assume that the monopoly’s demand function is P = 50 − 2Q. The total revenue function would be TR = 50Q − 2Q<sup>2</sup> and marginal revenue would be 50 − 4Q. Setting marginal revenue equal to zero we have
| |
| : <math> 50-4Q=0</math>
| |
| : <math>-4Q=-50</math>
| |
| : <math>Q = 12.5</math>
| |
| | |
| So the revenue maximizing quantity for the monopoly is 12.5 units and the revenue maximizing price is 25.
| |
| | |
| A company with a monopoly does not experience price pressure from competitors, although it may experience pricing pressure from potential competition. If a company increases prices too much, then others may enter the market if they are able to provide the same good, or a substitute, at a lesser price.<ref>{{Cite book|last=Depken |first= Craig |title=Microeconomics Demystified |date= November 23, 2005 |publisher=McGraw Hill |isbn=0-07-145911-1 |page=170 |chapter=10}}</ref> The idea that monopolies in markets with easy entry need not be regulated against is known as the "revolution in monopoly theory".<ref>{{cite journal | title = The revolution in monopoly theory | first1 = Glyn | last1 = Davies | first2 = John | last2 = Davies | journal = Lloyds Bank Review | date = July 1984 | issue = 153 | pages = 38–52}}</ref>
| |
| | |
| A monopolist can extract only one premium,{{Clarify|date=April 2009}} and getting into complementary markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem is not true if customers in the monopoly good are stranded or poorly informed, or if the tied good has high fixed costs.
| |
| | |
| A pure monopoly has the same economic rationality of perfectly competitive companies, i.e. to optimise a profit function given some constraints. By the assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on a single agent or entrepreneur, the optimal decision is to equate the [[marginal cost]] and [[marginal revenue]] of production. Nonetheless, a pure monopoly can – unlike a competitive company – alter the market price for its own convenience: a decrease of production results in a higher price. In the economics' jargon, it is said that pure monopolies have "a downward-sloping demand". An important consequence of such behaviour is worth noticing: typically a monopoly selects a higher price and lesser quantity of output than a price-taking company; again, less is available at a higher price.<ref name='R000000'>{{Cite book| last1 = Levine | first1 = David | authorlink = David K. Levine | first2= Michele | last2 = Boldrin | title = Against intellectual monopoly | publisher = Cambridge University Press | date = 2008-09-07 | location = | page = 312 | url = http://www.dklevine.com/general/intellectual/againstfinal.htm | doi = | id = | isbn = 978-0-521-87928-6 }}</ref>
| |
| | |
| ==The inverse elasticity rule==
| |
| A monopoly chooses that price that maximizes the difference between total revenue and total cost. The basic markup rule can be expressed as (P − MC)/P = 1/PED.<ref name="Tirole">Tirole, p. 66.</ref> The markup rules indicate that the ratio between profit margin and the price is inversely proportional to the price elasticity of demand.<ref name="Tirole" /> The implication of the rule is that the more elastic the demand for the product the less [[pricing power]] the monopoly has.
| |
| | |
| === Market power ===
| |
| Market power is the ability to increase the product's price above marginal cost without losing all customers.<ref>Tirole, p. 65.</ref> Perfectly competitive (PC) companies have zero market power when it comes to setting prices. All companies of a PC market are price takers. The price is set by the interaction of demand and supply at the market or aggregate level. Individual companies simply take the price determined by the market and produce that quantity of output that maximizes the company's profits. If a PC company attempted to increase prices above the market level all its customers would abandon the company and purchase at the market price from other companies. A monopoly has considerable although not unlimited market power. A monopoly has the power to set prices or quantities although not both.<ref>Hirschey (2000), p. 412.</ref> A monopoly is a price maker.<ref>{{cite book | last1 = Melvin | first1 = Michael | last2 = Boyes | first2 = William | title = Microeconomics | edition = 5th ed. | publisher = Houghton Mifflin | year = 2002 | page = 239}}</ref> The monopoly is the market<ref>Pindyck and Rubinfeld (2001), p. 328.</ref> and prices are set by the monopolist based on his circumstances and not the interaction of demand and supply. The two primary factors determining monopoly market power are the company's demand curve and its cost structure.<ref>Varian (1992), p. 233.</ref>
| |
| | |
| Market power is the ability to affect the terms and conditions of exchange so that the price of a product is set by a single company (price is not imposed by the market as in perfect competition).<ref>Png (1999).</ref><ref>{{cite book | last1 = Krugman | first1 = Paul | last2 = Wells | first2 = Robin | title = Microeconomics | edition = 2nd ed. | publisher = Worth | year = 2009}}</ref> Although a monopoly's market power is great it is still limited by the demand side of the market. A monopoly has a negatively sloped demand curve, not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers.
| |
| | |
| ==Price discrimination==
| |
| [[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.<ref>Goodwin ''et al.'', p. 315.</ref><ref>Samuelson and Marks (2006), p. 104.</ref> 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. Similarly, most [[patent]]ed medications cost more in the U.S. than in other countries with a (presumed) poorer customer base. Typically, a high general price is listed, and various [[market segments]] get varying discounts. This is an example of [[framing (social sciences)|framing]] to make the process of charging some people higher prices more socially acceptable.{{citation needed|date=June 2012}} Perfect price discrimination would allow the monopolist to charge each customer the exact maximum amount he would be willing to pay. This would allow the monopolist to extract all the [[consumer surplus]] of the market. While such perfect price discrimination is a theoretical construct, advances in [[information technology]] and [[micromarketing]] may bring it closer to the realm of possibility
| |
| | |
| It is important to realize that partial price discrimination can cause some customers who are inappropriately pooled with high price customers to be excluded from the market. For example, a poor student in the U.S. might be excluded from purchasing an economics textbook at the U.S. price, which the student may have been able to purchase at the Ethiopian price'. Similarly, a wealthy student in Ethiopia may be able to or willing to buy at the U.S. price, though naturally would hide such a fact from the monopolist so as to pay the reduced third world price. These are deadweight losses and decrease a monopolist's profits. As such, monopolists have substantial economic interest in improving their market information and ''market segmenting''.{{citation needed|date=June 2012}}
| |
| | |
| There is important information for one to remember when considering the monopoly model diagram (and its associated conclusions) displayed here. The result that monopoly prices are higher, and production output lesser, than a competitive company follow from a requirement that the monopoly not charge different prices for different customers. That is, the monopoly is restricted from engaging in [[price discrimination]] (this is termed [[first degree price discrimination]], such that all customers are charged the same amount). If the monopoly were permitted to charge individualised prices (this is termed [[third degree price discrimination]]), the quantity produced, and the price charged to the ''marginal'' customer, would be identical to that of a competitive company, thus eliminating the [[deadweight loss]]; however, all [[gains from trade]] (social welfare) would accrue to the monopolist and none to the consumer. In essence, every consumer would be indifferent between (1) going completely without the product or service and (2) being able to purchase it from the monopolist.{{citation needed|date=June 2012}}
| |
| | |
| As long as the [[price elasticity of demand]] for most customers is less than one in [[absolute value]], it is advantageous for a company to increase its prices: it receives more money for fewer goods. With a price increase, price elasticity tends to increase, and in the optimum case above it will be greater than one for most customers.{{citation needed|date=June 2012}}
| |
| | |
| A company maximizes profit by selling where marginal revenue equals marginal cost. A company that does not engage in price discrimination will charge the profit maximizing price, P*, to all its customers. In such circumstances there are customers who would be willing to pay a higher price than P* and those who will not pay P* but would buy at a lower price. A price discrimination strategy is to charge less price sensitive buyers a higher price and the more price sensitive buyers a lower price.<ref>Samuelson and Marks (2006), p. 107.</ref> Thus additional revenue is generated from two sources. The basic problem is to identify customers by their willingness to pay.
| |
| | |
| The purpose of price discrimination is to transfer consumer surplus to the producer.<ref name="Boyes and Melvin p.246">Boyes and Melvin, p. 246.</ref> Consumer surplus is the difference between the value of a good to a consumer and the price the consumer must pay in the market to purchase it.<ref>Perloff (2009), p. 404.</ref> Price discrimination is not limited to monopolies.
| |
| | |
| Market power is a company’s ability to increase prices without losing all its customers. Any company that has market power can engage in price discrimination. Perfect competition is the only market form in which price discrimination would be impossible (a perfectly competitive company has a perfectly elastic demand curve and has zero market power).<ref name="Boyes and Melvin p.246"/><ref name=Perloff-394>Perloff (2009), p. 394.</ref><ref name=Besanko-449>Besanko and Beautigam (2005), p. 449.</ref><ref>Wessels, p. 159.</ref>
| |
| | |
| There are three forms of price discrimination. First degree price discrimination charges each consumer the maximum price the consumer is willing to pay. Second degree price discrimination involves quantity discounts. Third degree price discrimination involves grouping consumers according to willingness to pay as measured by their price elasticities of demand and charging each group a different price. Third degree price discrimination is the most prevalent type.{{citation needed|date=June 2012}}
| |
| | |
| There are three conditions that must be present for a company to engage in successful price discrimination. First, the company must have market power.<ref name="Boyes and Melvin p. 449">Boyes and Melvin, p. 449.</ref> Second, the company must be able to sort customers according to their willingness to pay for the good.<ref>Varian (1992), p. 241.</ref> Third, the firm must be able to prevent resell.
| |
| | |
| A company must have some degree of market power to practice price discrimination. Without market power a company cannot charge more than the market price.<ref name=Perloff-393>Perloff (2009), p. 393.</ref> Any market structure characterized by a downward sloping demand curve has market power – monopoly, monopolistic competition and oligopoly.<ref name="Boyes and Melvin p. 449"/> The only market structure that has no market power is perfect competition.<ref name=Perloff-393/>
| |
| | |
| A company wishing to practice price discrimination must be able to prevent middlemen or brokers from acquiring the consumer surplus for themselves. The company accomplishes this by preventing or limiting resale. Many methods are used to prevent resale. For example persons are required to show photographic identification and a boarding pass before boarding an airplane. Most travelers assume that this practice is strictly a matter of security. However, a primary purpose in requesting photographic identification is to confirm that the ticket purchaser is the person about to board the airplane and not someone who has repurchased the ticket from a discount buyer.{{citation needed|date=June 2012}}
| |
| | |
| The inability to prevent resale is the largest obstacle to successful price discrimination.<ref name=Perloff-394/> Companies have however developed numerous methods to prevent resale. For example, universities require that students show identification before entering sporting events. Governments may make it illegal to resale tickets or products. In Boston, [[Boston Red Sox|Red Sox]] baseball tickets can only be resold legally to the team.
| |
| | |
| The three basic forms of price discrimination are first, second and third degree price discrimination. In ''first degree price discrimination'' the company charges the maximum price each customer is willing to pay. The maximum price a consumer is willing to pay for a unit of the good is the reservation price. Thus for each unit the seller tries to set the price equal to the consumer’s reservation price.<ref>Besanko and Beautigam (2005), p. 448.</ref> Direct information about a consumer’s willingness to pay is rarely available. Sellers tend to rely on secondary information such as where a person lives (postal codes); for example, catalog retailers can use mail high-priced catalogs to high-income postal codes.<ref>{{cite book | last1 = Hall | first1 = Robert E. | last2 = Liberman | first2 = Marc | title = Microeconomics: Theory and Applications | edition = 2nd ed. | publisher = South_Western | year = 2001 | page = 263}}</ref><ref>Besanko and Beautigam (2005), p. 451.</ref> First degree price discrimination most frequently occurs in regard to professional services or in transactions involving direct buyer/seller negotiations. For example, an accountant who has prepared a consumer's tax return has information that can be used to charge customers based on an estimate of their ability to pay.<ref>If the monopolist is able to segment the market perfectly, then the average revenue curve effectively becomes the marginal revenue curve for the company and the company maximizes profits by equating price and marginal costs. That is the company is behaving like a perfectly competitive company. The monopolist will continue to sell extra units as long as the extra revenue exceeds the marginal cost of production. The problem that the company has is that the company must charge a different price for each successive unit sold.</ref>
| |
| | |
| In ''second degree price discrimination'' or quantity discrimination customers are charged different prices based on how much they buy. There is a single price schedule for all consumers but the prices vary depending on the quantity of the good bought.<ref>Varian (1992), p. 242.</ref> The theory of second degree price discrimination is a consumer is willing to buy only a certain quantity of a good at a given price. Companies know that consumer’s willingness to buy decreases as more units are purchased. The task for the seller is to identify these price points and to reduce the price once one is reached in the hope that a reduced price will trigger additional purchases from the consumer. For example, sell in unit blocks rather than individual units.
| |
| | |
| In ''third degree price discrimination'' or multi-market price discrimination <ref>Perloff (2009), p. 396.</ref> the seller divides the consumers into different groups according to their willingness to pay as measured by their price elasticity of demand. Each group of consumers effectively becomes a separate market with its own demand curve and marginal revenue curve.<ref name=Besanko-449 /> The firm then attempts to maximize profits in each segment by equating MR and MC,<ref name="Boyes and Melvin p. 449"/><ref>Because MC is the same in each market segment the profit maximizing condition becomes produce where MR<sub>1</sub> = MR<sub>2</sub> = MC. Pindyck and Rubinfeld (2009), pp. 398–99.</ref><ref>As Pindyck and Rubinfeld note, managers may find it easier to conceptualize the problem of what price to charge in each segment in terms of relative prices and price elasticities of demand. Marginal revenue can be written in terms of elasticities of demand as MR = P(1+1/PED). Equating MR1 and MR2 we have P1 (1+1/PED) = P2 (1+1/PED) or P1/P2 = (1+1/PED2)/(1+1/PED1). Using this equation the manager can obtain elasticity information and set prices for each segment. [Pindyck and Rubinfeld (2009), pp. 401–02.] Note that the manager may be able to obtain industry elasticities, which are far more inelastic than the elasticity for an individual firm. As a rule of thumb the company’s elasticity coefficient is 5 to 6 times that of the industry. [Pindyck and Rubinfeld (2009) pp. 402.]</ref> Generally the company charges a higher price to the group with a more price inelastic demand and a relatively lesser price to the group with a more elastic demand.<ref>Colander, David C., p. 269.</ref> Examples of third degree price discrimination abound. Airlines charge higher prices to business travelers than to vacation travelers. The reasoning is that the demand curve for a vacation traveler is relatively elastic while the demand curve for a business traveler is relatively inelastic. Any determinant of price elasticity of demand can be used to segment markets. For example, seniors have a more elastic demand for movies than do young adults because they generally have more free time. Thus theaters will offer discount tickets to seniors.<ref>Note that the discounts apply only to tickets not to concessions. The reason there is not any popcorn discount is that there is not any effective way to prevent resell. A profit maximizing theater owner maximizes concession sales by selling where marginal revenue equals marginal cost.</ref>
| |
| | |
| === Example ===
| |
| Assume that by a uniform pricing system the monopolist would sell five units at a price of $10 per unit. Assume that his marginal cost is $5 per unit. Total revenue would be $50, total costs would be $25 and profits would be $25. If the monopolist practiced price discrimination he would sell the first unit for $50 the second unit for $40 and so on. Total revenue would be $150, his total cost would be $25 and his profit would be $125.00.<ref name=Lovell-266>Lovell (2004), p. 266.</ref> Several things are worth noting. The monopolist acquires all the consumer surplus and eliminates practically all the deadweight loss because he is willing to sell to anyone who is willing to pay at least the marginal cost.<ref name=Lovell-266/> Thus the price discrimination promotes efficiency. Secondly, by the pricing scheme price = average revenue and equals marginal revenue. That is the monopolist behaving like a perfectly competitive company.<ref name=Frank-394>Frank (2008), p. 394.</ref> Thirdly, the discriminating monopolist produces a larger quantity than the monopolist operating by a uniform pricing scheme.<ref name=Frank-266>Frank (2008), p. 266.</ref>
| |
| {| class="wikitable"
| |
| |-
| |
| !Qd !! Price
| |
| |-
| |
| | 1 || 50
| |
| |-
| |
| | 2 || 40
| |
| |-
| |
| | 3 || 30
| |
| |-
| |
| | 4 || 20
| |
| |-
| |
| | 5 || 10
| |
| |}
| |
| | |
| === Classifying customers ===
| |
| Successful price discrimination requires that companies separate consumers according to their willingness to buy. Determining a customer's willingness to buy a good is difficult. Asking consumers directly is fruitless: consumers don't know, and to the extent they do they are reluctant to share that information with marketers. The two main methods for determining willingness to buy are observation of personal characteristics and consumer actions. As noted information about where a person lives (postal codes), how the person dresses, what kind of car he or she drives, occupation, and income and spending patterns can be helpful in classifying.{{citation needed|date=June 2012}}
| |
| | |
| ==Monopoly and efficiency==
| |
| {{Unreferenced section|date=October 2009}}
| |
| [[Image:Monopoly-surpluses.svg|thumb|250px|right|Surpluses and [[deadweight loss]] created by monopoly price setting]]
| |
| {{quote box
| |
| | quote = The price of monopoly is upon every occasion the highest which can be got. The [[Economic equilibrium|natural price]], or the price of [[free competition]], on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which it is supposed they will consent to give; the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.<ref name="Smith">Smith, Adam (1776), [http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-Nations.pdf Wealth of Nations], Penn State Electronic Classics edition, republished 2005</ref>{{rp|56}}
| |
| | |
| – Adam Smith (1776), ''[[Wealth of Nations]]''
| |
| | width = 25%
| |
| | align = right}}
| |
| {{quote box
| |
| | quote = Monopoly, besides, is a great enemy to good management.<ref name="Smith"/>{{rp|127}}
| |
| | |
| – Adam Smith (1776), ''[[Wealth of Nations]]''
| |
| | width = 25%
| |
| | align = right}}
| |
| | |
| According to the standard model, in which a monopolist sets a single price for all consumers, the monopolist will sell a lesser quantity of goods at a higher price than would companies by [[perfect competition]]. Because the monopolist ultimately forgoes transactions with consumers who value the product or service more than its cost, monopoly pricing creates a [[deadweight loss]] referring to potential gains that went neither to the monopolist nor to consumers. Given the presence of this deadweight loss, the combined surplus (or wealth) for the monopolist and consumers is necessarily less than the total surplus obtained by consumers by perfect competition. Where efficiency is defined by the total gains from trade, the monopoly setting is less [[economic efficiency|efficient]] than perfect competition.{{citation needed|date=June 2012}}
| |
| | |
| It is often argued that monopolies tend to become less efficient and less innovative over time, becoming "complacent", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of psychological efficiency can increase a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of [[contestable markets]] argues that in some circumstances (private) monopolies are forced to behave ''as if'' there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen when a market's [[barriers to entry]] are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a [[canal]] monopoly, while worth a great deal during the late 18th century [[United Kingdom]], was worth much less during the late 19th century because of the introduction of [[railways]] as a substitute.{{citation needed|date=June 2012}}
| |
| | |
| ===Natural monopoly===
| |
| Main Article: [[Natural monopoly]]<br>
| |
| A natural monopoly is a company that experiences [[Economies of Scale|increasing returns to scale]] over the relevant range of output and relatively high fixed costs.<ref>Binger and Hoffman (1998), p. 406.</ref> A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand". The relevant range of product demand is where the average cost curve is below the demand curve.<ref>Samuelson, P. & Nordhaus, W.: ''Microeconomics'', 17th ed. McGraw-Hill 2001</ref> When this situation occurs, it is always cheaper for one large company to supply the market than multiple smaller companies; in fact, absent government intervention in such markets, will naturally evolve into a monopoly. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic.{{Citation needed|date=August 2010}} Fragmenting such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies are government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.<ref>{{cite book | last1 = Samuelson | first1 = W | last2 = Marks | first2 = S | page = 376 | title = Managerial Economics | edition = 4th ed. | publisher = Wiley | year = 2005}}</ref>
| |
| | |
| To reduce prices and increase output, regulators often use average cost pricing. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve.<ref name="ReferenceA">Samuelson and Marks (2003), p. 100.</ref> This pricing scheme eliminates any positive economic profits since price equals average cost. Average-cost pricing is not perfect. Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies.<ref name="ReferenceA"/> Average-cost pricing does also have some disadvantages. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price exceeds the marginal cost (which is the output quantity for a perfectly competitive and allocatively efficient market).
| |
| | |
| ===Government-granted monopoly===
| |
| {{Main|Government-granted monopoly}}
| |
| | |
| A [[government-granted monopoly]] (also called a "de jure monopoly") is a form of [[coercive monopoly]] by which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity; potential competitors are excluded from the market by [[law]], [[regulation]], or other mechanisms of government enforcement.{{Citation needed|date=December 2011}}
| |
| | |
| ==Monopolist shutdown rule==
| |
| A monopolist should shut down when price is less than average variable cost for every output level<ref name="Frank2008">{{cite book | last = Frank | first = Robert H. | title = Microeconomics and Behavior | edition = 7th ed. | publisher = McGraw-Hill | isbn = 978-0-07-126349-8 | year = 2008}}</ref> – in other words where the demand curve is entirely below the average variable cost curve.<ref name="Frank2008"/> Under these circumstances at the profit maximum level of output (MR = MC) average revenue would be less than average variable costs and the monopolists would be better off shutting down in the short term.<ref name="Frank2008"/>
| |
| | |
| ==Breaking up monopolies==
| |
| When monopolies are not ended by the open market; sometimes a government will either regulate the monopoly, convert it into a publicly owned monopoly environment, or forcibly fragment it (see [[Antitrust|Antitrust law and trust busting]]). [[Public utility|Public utilities]], often being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned. [[American Telephone & Telegraph]] (AT&T) and [[Standard Oil]] are debatable examples of the breakup of a private monopoly by government: When AT&T, a monopoly previously protected by force of law, was broken up into various components in 1984, [[MCI Communications|MCI]], [[Sprint Corporation|Sprint]], and other companies were able to compete effectively in the long distance phone market.{{citation needed|date=June 2012}}
| |
| | |
| ==Law==
| |
| {{mergefrom|Monopolization|discuss=Talk:Monopoly#Merge Proposal for Monopolization|date=April 2013}}
| |
| {{Main|Competition law}}
| |
| The existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share company's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices (i.e. pricing high just because you are the only one around.) It may also be noted that it is illegal to try to obtain a monopoly, by practices of buying out the competition, or equal practices. If one occurs naturally, such as a competitor going out of business, or lack of competition, is not illegal until such time as the monopoly holder abuses the power.
| |
| | |
| First it is necessary to determine whether a company is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer".<ref>{{citation | title = Case 27/76: United Brands Company and United Brands Continentaal BV v Commission of the European Communities (ECR 207)| date = 14 February 1978 | url = http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc=61976J0027}}</ref> As with collusive conduct, market shares are determined with reference to the particular market in which the company and product in question is sold. The [[Herfindahl index|Herfindahl-Hirschman Index]] (HHI) is sometimes used to assess how competitive an industry is.<ref>{{citation | url = http://www.univie.ac.at/RNIC/papers/kerber_kretschmer_vwangenheim.pdf | title = Market Share Thresholds and Herfindahl-Hirschman-Index (HHI) as Screening Instruments in Competition Law: A Theoretical Analysis | date = September 23, 2009 | first1 = Wolfgang | last1 = Kerber | first2 = Jürgen-Peter | last2 = Kretschmer | first3 = Georg | last3 = von Wangenheim | publisher = Department of Economics, [[University of Vienna]]}}</ref> In the US, the [[merger guidelines]] state that a post-merger HHI below 1000 is viewed as unconcentrated while HHIs above that will provoke further review.<ref>{{citation | url = http://www.justice.gov/atr/public/guidelines/horiz_book/15.html | title = 1.5 Concentration and Market Shares | work = Horizontal Merger Guidelines | publisher = [[United States Department of Justice|U.S. Department of Justice]] and the [[Federal Trade Commission]] | date = April 8, 1997}}</ref>
| |
| | |
| By European Union law, very large market shares raise a presumption that a company is dominant,<ref>{{citation | title = Case 85/76: Hoffmann-La Roche & Co. AG v Commission of the European Communities (ECR 461) | url = http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&numdoc=61976J0085&lg=en | date = 13 February 1979}}</ref> which may be rebuttable.<ref>{{citation | title = AKZO Chemie BV v Commission of the European Communities | url = http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61986J0062:EN:NOT | date = 3 July 1991}}</ref> If a company has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market".<ref>{{citation | title = Case 322/81: NV Nederlandsche Banden Industrie Michelin v Commission of the European Communities | url = http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61981CJ0322:EN:HTML | date = 9 November 1983}}</ref> The lowest yet market share of a company considered "dominant" in the EU was 39.7%.<ref>{{citation | title = COMMISSION DECISION of 14 July 1999 relating to a proceeding under Article 82 of the EC Treaty (IV/D-2/34.780 — Virgin/British Airways | url = http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2000:030:0001:0024:EN:PDF | page = L30/1 | date = 14 July 1999}}</ref>
| |
| | |
| Certain categories of abusive conduct are usually prohibited by a country's legislation.<ref>{{citation | title = Case 6-72: Europemballage Corporation and Continental Can Company Inc. v Commission of the European Communities | url = http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61972CJ0006:EN:HTML | date = 21 February 1973}}</ref> The main recognised categories are:
| |
| * [[Limiting supply]]
| |
| * [[Predatory pricing]]
| |
| * [[Price discrimination]]
| |
| * [[Refusal to deal]] and [[exclusive dealing]]
| |
| * [[Tying (commerce)]] and [[product bundling]]
| |
| | |
| Despite wide agreement that the above constitute abusive practices, there is some debate about whether there needs to be a causal connection between the dominant position of a company and its actual abusive conduct. Furthermore, there has been some consideration of what happens when a company merely attempts to abuse its dominant position.
| |
| | |
| ==Historical monopolies==
| |
| | |
| ===Origin===
| |
| The term "monopoly" first appears in [[Aristotle]]'s [[Politics (Aristotle)|''Politics'']]. Aristotle describes [[Thales of Miletus]]'s cornering of the market in [[Olive oil extraction|olive presses]] as a monopoly (''μονοπωλίαν'').<ref>{{cite book | title = Politics | author = Aristotle | year = 350 B.C.E | url = http://classics.mit.edu/Aristotle/politics.html}}</ref><ref>{{cite book | url = http://www.perseus.tufts.edu/cgi-bin/ptext?doc=Perseus%3Atext%3A1999.01.0057&layout=&loc=1.1259a | page = 1252α | author = Aristotle | title = Politics}}</ref>
| |
| | |
| The meaning and understanding of the English word 'monopoly' has changed over the years.<ref>{{cite journal | last = Richardson | first = Gary | date = June 2001 | url = http://works.bepress.com/cgi/viewcontent.cgi?article=1007&context=gary_richardson | title = A Tale of Two Theories: Monopolies and Craft Guilds in Medieval England and Modern Imagination | journal = Journal of the History of Economic Thought}}</ref>
| |
| | |
| ===Monopolies of resources===
| |
| | |
| ====Salt====
| |
| Vending of common salt ([[sodium chloride]]) was historically a natural monopoly. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for producing salt from the sea, the most plentiful source. Changing sea levels periodically caused salt "[[famine]]s" and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (e.g. the [[Sahara desert]]) requiring well-organised security for transport, storage, and distribution.
| |
| | |
| The [[Salt commission|Salt Commission]] was a legal monopoly in China. Formed in 758, the Commission controlled salt production and sales in order to raise [[tax]] revenue for the [[Tang Dynasty]].
| |
| | |
| The "[[Gabelle]]" was a notoriously high tax levied upon salt in the [[Kingdom of France]] The much-hated levy had a role in the beginning of the [[French Revolution]], when strict legal controls specified who was allowed to sell and distribute salt. First instituted in 1286, the Gabelle was not permanently abolished until 1945.<ref>{{cite journal | first= Jean | last = Chazelas | title = La suppression de la gabelle du sel en 1945 | journal = Le rôle du sel dans l'histoire: travaux préparés sous la direction de Michel Mollat | publisher = Presses universitaires de France | year = 1968 | pages = 263–65 | url = http://www.worldcat.org/title/role-du-sel-dans-lhistoire-travaux-prepares-sous-la-direction-de-michel-mollat/oclc/14501767}}</ref>
| |
| | |
| ====Coal====
| |
| Robin Gollan argues in ''The Coalminers of New South Wales'' that anti-competitive practices developed in the coal industry of Australia's [[Newcastle, Australia|Newcastle]] as a result of the [[business cycle]]. The monopoly was generated by formal meetings of the local management of coal companies agreeing to fix a minimum price for sale at dock. This collusion was known as "The Vend". The Vend ended and was reformed repeatedly during the late 19th century, ending by recession in the business cycle. "The Vend" was able to maintain its monopoly due to trade union assistance, and material advantages (primarily coal geography). During the early 20th century, as a result of comparable monopolistic practices in the Australian coastal shipping business, the Vend developed as an informal and illegal collusion between the steamship owners and the coal industry, eventually resulting in the High Court case [[Adelaide Steamship Company|Adelaide Steamship Co.]] Ltd v. R. & AG.<ref>{{cite book | first = Robin | last = Gollan | title = The Coalminers of New South Wales: a history of the union, 1860–1960 | location = Melbourne | publisher = Melbourne University Press | year = 1963 | pages = 45–134}}</ref>
| |
| | |
| ====Petroleum====
| |
| [[Standard Oil]] was an [[United States|American]] [[petroleum|oil]] producing, transporting, refining, and marketing company. Established in 1870, it became the largest oil refiner in the world.<ref>{{cite web |url=http://www.exxonmobil.com/Corporate/history/about_who_history.aspx |title=Exxon Mobil - Our history |accessdate=2009-02-03 |publisher=Exxon Mobil Corp.}}</ref> [[John D. Rockefeller]] was a founder, chairman and major shareholder. The company was an innovator in the development of the business [[trust (monopoly)|trust]]. The Standard Oil trust streamlined production and logistics, lowered costs, and undercut competitors. "[[Trust-busting]]" critics accused Standard Oil of using aggressive pricing to destroy competitors and form a monopoly that threatened consumers. Its controversial history as one of the world's first and largest [[multinational corporation]]s ended in 1911, when the [[United States]] [[Supreme Court of 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]].
| |
| | |
| ====Steel====
| |
| [[U.S. Steel]] has been accused of being a monopoly. [[J. P. Morgan]] and [[Elbert Henry Gary|Elbert H. Gary]] founded U.S. Steel in 1901 by combining [[Andrew Carnegie]]'s [[Carnegie Steel Company]] with Gary's Federal Steel Company and [[William Henry "Judge" Moore]]'s National Steel Company.<ref>Morris, Charles R. ''The Tycoons: How [[Andrew Carnegie]], [[John D. Rockefeller]], [[Jay Gould]], and [[J.P. Morgan]] invented the American supereconomy'', H. Holt and Co., New York, 2005, pp. 255-258. ISBN 0-8050-7599-2.</ref><ref>{{cite web | url = http://www.fundinguniverse.com/company-histories/united-states-steel-corporation-history/ | title = United States Steel Corporation History | publisher = FundingUniverse | accessdate = 3 January 2014}}</ref> At one time, U.S. Steel was the largest steel producer and largest corporation in the world. In its first full year of operation, U.S. Steel made 67 percent of all the steel produced in the United States. However, U.S. Steel's share of the expanding market slipped to 50 percent by 1911,<ref name="post">{{cite web|url=http://old.post-gazette.com/businessnews/20010225ussteel2.asp|title=Steel Standing: U.S. Steel celebrates 100 years|last=Boselovic|first=Len|date=February 25, 2001|work=PG News - Business & Technology|publisher=post-gazette.com - PG Publishing|accessdate=6 August 2013}}</ref> and anti-trust prosecution that year failed.
| |
| | |
| ====Diamonds====
| |
| [[De Beers]] settled charges of price fixing in the diamond trade in the 2000s.
| |
| | |
| ===Utilities===
| |
| A [[public utility]] (or simply "utility") is an organization or company that maintains the [[infrastructure]] for a [[public services|public service]] or provides a set of services for public consumption. Common examples of utilities are [[Electric utility|electricity]], [[Natural gas utility|natural gas]], [[Water utility|water]], [[Water industry|sewage]], [[cable television]], and [[telephone]]. In the [[United States of America]], public utilities are often [[natural monopoly|natural monopolies]] because the infrastructure required to produce and deliver a product such as electricity or water is very expensive to build and maintain.<ref>{{cite web|url=http://www.answers.com/topic/public-utility |title=West's Encyclopedia of American Law |publisher=Answers.com |date=2009-06-28 |accessdate=2011-10-11}}</ref>
| |
| | |
| [[Western Union]] was criticized as a "[[price gouging]]" monopoly in the late 19th century.<ref>{{citation | url = http://arstechnica.com/tech-policy/news/2009/12/how-the-robber-barons-hijacked-the-victorian-internet.ars/2 | publisher = Ars technica | title = How Robber Barons hijacked the "Victorian Internet": Ars revisits those wild and crazy days when Jay Gould ruled the telegraph and … | first = Matthew | last = Lasar | date = May 13, 2011}}</ref>
| |
| | |
| [[AT&T Corporation|American Telephone & Telegraph]] was a telecommunications giant. AT&T was broken up in 1984.
| |
| | |
| In the case of [[Telecom New Zealand]], [[local loop unbundling]] was enforced by central government.
| |
| | |
| [[Telkom (South Africa)|Telkom]] is a semi-privatised, part state-owned [[South Africa]]n telecommunications company.
| |
| | |
| [[Deutsche Telekom]] is a former state monopoly, still partially state owned. Deutsche Telekom currently monopolizes high-speed VDSL broadband network.<ref name=IHT110908>Kevin J. O'Brien, [http://www.iht.com/articles/2008/11/09/technology/telecoms10.php IHT.com], Regulators in Europe fight for independence, ''[[International Herald Tribune]]'', November 9, 2008, Accessed November 14, 2008.</ref>
| |
| | |
| The [[Long Island Power Authority]] (LIPA) provided electric service to over 1.1 million customers in [[Nassau County, New York|Nassau]] and [[Suffolk County, New York|Suffolk]] counties of [[New York]], and the [[Rockaway, Queens|Rockaway Peninsula]] in [[Queens]].
| |
| | |
| The [[Comcast]] Corporation is the largest [[mass media]] and [[communications]] company in the world by revenue.<ref name="mediadb.eu">[http://www.mediadb.eu/en/data-base/international-media-corporations/comcastnbcuniversal-llc.html IfM - Comcast/NBCUniversal, LLC]. Mediadb.eu (2013-11-15). Retrieved on 2013-12-09.</ref> It is the largest [[cable television|cable]] company and home [[Internet service provider]] in the United States, and the nation's third largest home [[telephone service provider]]. Comcast has a monopoly in [[Boston]], [[Philadelphia]], and [[Chicago]].{{citation needed|date=July 2013}}
| |
| | |
| ===Transportation===
| |
| The [[United Aircraft and Transport Corporation]] was an aircraft manufacturer holding company that was forced to divest itself of airlines in 1934.
| |
| | |
| [[Iarnród Éireann]], the Irish Railway authority, is a current monopoly as [[Ireland]] does not have the size for more companies.
| |
| | |
| The [[Long Island Rail Road]] (LIRR) was founded in 1834, and since the mid-1800s has provided train service between [[Long Island]] and [[New York City]]. In the 1870s, LIRR became the sole railroad in that area through a series of acquisitions and consolidations. In 2013, the LIRR's [[commuter rail]] system is the busiest commuter railroad in North America, serving nearly 335,000 passengers daily.<ref>{{citation | url = http://www.apta.com/resources/statistics/Documents/Ridership/2013-q1-ridership-APTA.pdf | title = TRANSIT RIDERSHIP REPORT: First Quarter 2013 | date = 24 May 2013 | publisher = American Public Transportation Association | first = Matthew | last = Dickens | accessdate = 3 January 2014}}</ref>
| |
| | |
| ===Foreign trade===
| |
| [[Dutch East India Company]] was created as a legal trading monopoly in 1602. The ''Vereenigde Oost-Indische Compagnie'' enjoyed huge profits from its spice monopoly through most of the 17th century.<ref>{{cite web |last=Van Boven |first=M. W. |title=Towards A New Age of Partnership (TANAP): An Ambitious World Heritage Project (UNESCO Memory of the World – reg.form, 2002) |work=VOC Archives Appendix 2, p.14 |url=http://portal.unesco.org/ci/en/files/22635/11546101681netherlands_voc_archives.doc/netherlands%2Bvoc%2Barchives.doc }}</ref>
| |
| | |
| The British [[Honourable East India Company]] was created as a legal trading monopoly in 1600. The East India Company was formed for pursuing trade with the [[Indies|East Indies]] but ended up trading mainly with the [[Indian subcontinent]], [[North-West Frontier Province (1901–1955)|North-West Frontier Province]], and [[Balochistan]]. The Company traded in basic commodities, which included [[cotton]], [[silk]], [[indigo dye]], [[salt]], [[Potassium nitrate|saltpetre]], [[tea]] and [[opium]].
| |
| | |
| ===Professional sports===
| |
| [[Major League Baseball]] survived U.S. anti-trust litigation in 1922, though its special status is still in dispute as of 2009.
| |
| | |
| The [[National Football League]] survived anti-trust lawsuit in the 1960s but was convicted of being an illegal monopoly in the 1980s.
| |
| | |
| ===Other examples of monopolies===
| |
| <!-- This list is too long, please keep it to six -->
| |
| * [[Microsoft]] has been the defendant in multiple anti-trust suits. They settled anti-trust litigation in the U.S. in 2001. In 2004 Microsoft was fined 493 million euros by the [[European Commission]]<ref>[http://ec.europa.eu/competition/publications/consumer_en.pdf EU competition policy and the consumer]</ref> which was upheld for the most part by the [[General Court (European Union)|Court of First Instance]] of the [[European Communities]] in 2007. The fine was US$1.35 billion in 2008 for noncompliance with the 2004 rule.<ref>{{cite web
| |
| |url = http://www.forbes.com/home/markets/2008/02/27/microsoft-eu-fines-markets-equity-cx_po_0227markets08.html
| |
| |title = Microsoft Gets Mother Of All EU Fines
| |
| |author = Leo Cendrowicz
| |
| |work = [[Forbes]]
| |
| |date = 2008-02-27
| |
| |accessdate = 2008-03-10
| |
| }}</ref><ref>{{cite web
| |
| |url = http://money.cnn.com/2008/02/27/technology/eu_microsoft.ap/
| |
| |title = EU fines Microsoft record $1.3 billion
| |
| |publisher = [[Time Warner]]
| |
| |date = 2008-02-27
| |
| |accessdate = 2008-03-10
| |
| }}</ref>
| |
| * [[MPAA]] (Motion Picture Association of America) has a monopoly over film ratings in the U.S.
| |
| * [[Joint Commission]] is an organization that accredits more than 20,000 health care organizations and programs in the United States.<ref name=tjc>{{cite web
| |
| |url= http://www.ashe.org/ashe/codes/jcaho/background.html|title= American Society for Healthcare Engineering}}</ref> The Commission has a monopoly over determining whether a U.S. hospital can participate in the publicly funded [[Medicare (United States)|Medicare]] and [[Medicaid]] healthcare programs.
| |
| * [[Monsanto]] has been sued by competitors for anti-trust and monopolistic practices. They have between 70% and 100% of the commercial seed market.
| |
| * [[AAFES]] has a monopoly on retail sales at overseas U.S. military installations.
| |
| * [[State store]]s in certain [[United States state]]s, e.g. for liquor.
| |
| * The [[Registered Dietitian]] union seeks monopoly over nutrition services through state-level licensing schemes.
| |
| | |
| ==Countering monopolies==
| |
| {{Expand section|date=January 2010}}
| |
| | |
| According to professor [[Milton Friedman]], laws against monopolies cause more harm than good, but unnecessary monopolies should be countered by removing [[tariff]]s and other [[regulation]] that upholds monopolies.
| |
| | |
| ''A monopoly can seldom be established within a country without overt and covert government assistance in the form of a tariff or some other device. It is close to impossible to do so on a world scale. The [[De Beers]] diamond monopoly is the only one we know of that appears to have succeeded (and even De Beers are protected by various laws against so called "illicit" diamond trade). – In a world of [[free trade]], international cartels would disappear even more quickly.''<ref>[[Milton Friedman]], ''[[Free to Choose]]'', p. 53–54</ref>
| |
| | |
| However, professor Steve H. Hanke believes that although private monopolies are more efficient than public ones, often by a factor of two, sometimes private natural monopolies, such as local water distribution, should be regulated (not prohibited) by, e.g., price auctions.<ref>[http://www.cato.org/pub_display.php?pub_id=9307 In Praise of Private Infrastructure], ''Globe Asia'', April 2008</ref>
| |
| | |
| Thomas DiLorenzo asserts, however, that during the early days of utility companies where there was little regulation, there were no natural monopolies and there was competition.<ref>{{cite web|author=Thomas J. DiLorenzo |url=http://mises.org/daily/5266/The-Myth-of-Natural-Monopoly |title=The Myth of Natural Monopoly – Thomas J. DiLorenzo – Mises Daily |publisher=Mises.org |date= |accessdate=2012-11-02}}</ref> Only when companies realized that they could gain power through government did monopolies begin to form.
| |
| | |
| ==See also==
| |
| * [[Bilateral monopoly]]
| |
| * [[Complementary monopoly]]
| |
| * [[Demonopolization]]
| |
| * [[Duopoly]]
| |
| * [[Flag carrier]]
| |
| * [[History of monopoly]]
| |
| * [[Monopolistic competition]]
| |
| * [[Monopsony]]
| |
| * [[Oligopoly]]
| |
| * [[Ramsey problem]], a policy rule concerning what price a monopolist should set.
| |
| * [[Simulations and games in economics education]] that model monopolistic markets.
| |
| | |
| ==Notes and references==
| |
| {{Reflist|colwidth=30em}}
| |
| | |
| ==Further reading==
| |
| {{Refbegin}}
| |
| * Guy Ankerl, ''Beyond Monopoly Capitalism and Monopoly Socialism.'' Cambridge, Massachusetts: Schenkman Pbl., 1978. ISBN 0-87073-938-7
| |
| * {{cite encyclopedia |last1=McChesney |first1=Fred |authorlink= |editor= [[David R. Henderson]] (ed.) |encyclopedia=[[Concise Encyclopedia of Economics]] |title=Antitrust |url=http://www.econlib.org/library/Enc/Antitrust.html |year=2008 |edition= 2nd |publisher=[[Library of Economics and Liberty]] |location=Indianapolis |isbn=978-0865976658 |oclc=237794267}}
| |
| * {{cite encyclopedia |last1=Stigler |first1=George J. |authorlink1= George Stigler|last2= |first2= |authorlink2= |editor= [[David R. Henderson]] (ed.)|encyclopedia=[[Concise Encyclopedia of Economics]] |title=Monopoly |url=http://www.econlib.org/library/Enc/Monopoly.html |year=2008 |edition= 2nd |publisher=[[Library of Economics and Liberty]] |location=Indianapolis |isbn=978-0865976658 |oclc=237794267}}
| |
| {{Refend}}
| |
| | |
| ==External links==
| |
| {{commons category|Monopoly (economics)|Monopoly}}
| |
| {{Wiktionary|monopoly}}
| |
| * [http://www.linfo.org/monopoly.html Monopoly: A Brief Introduction] by The Linux Information Project
| |
| * [http://www.egwald.ca/economics/econpage.php3 Monopoly] by Elmer G. Wiens: Online Interactive Models of Monopoly (Public or Private) and Oligopoly
| |
| * [http://demonstrations.wolfram.com/MonopolyProfitAndLoss/ Monopoly Profit and Loss] by Fiona Maclachlan and [http://demonstrations.wolfram.com/MonopolyAndNaturalMonopoly/ Monopoly and Natural Monopoly] by Seth J. Chandler, [[Wolfram Demonstrations Project]].
| |
| * {{Cite NSRW|wstitle=Monopoly}}
| |
| * [https://web.archive.org/web/20080111010947/http://www.thesportjournal.org/2005Journal/Vol8-No1/SCJ_04_antitrust.asp Impact of Antitrust Laws on American Professional Team Sports]
| |
| * [http://www.economicswebinstitute.org/essays/monopolist.htm A monopolist who does not know the demand curve – A paper and a simulation software] by Valentino Piana (2002).
| |
| | |
| ===Criticism===
| |
| * [http://fare.tunes.org/liberty/microsoft_monopoly.html Government and Microsoft: a Libertarian View on Monopolies (by François-René Rideau on his personal website)]
| |
| * [http://www.mises.org/journals/rae/pdf/rae9_2_3.pdf The Myth of Natural Monopoly (by Thomas J. DiLorenzo on www.Mises.org) – 1996]
| |
| * [https://web.archive.org/web/20080210070614/http://www.catostore.org/index.asp?fa=ProductDetails&method=cats&scid=22&pid=144075 Natural Monopoly and Its Regulation]
| |
| * [http://www.polyarchy.org/paradigm/english/monopolies.html From rulers' monopolies to users' choices] A critical survey of monopolistic practices
| |
| * [http://www.regulationbodyofknowledge.org/market-structure-and-competition/monopoly-market-power/ Body of Knowledge on Infrastructure Regulation] Monopoly and Market Power
| |
| | |
| {{microeconomics}}
| |
| | |
| [[Category:Market structure and pricing]]
| |
| [[Category:Economic problems]]
| |
| [[Category:Monopoly (economics)| ]]
| |
| | |
| {{Link FA|ca}}
| |
| {{Link FA|es}}
| |