What is a Monopoly?
Monopoly is “a firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.” (Miller 103) Characteristics of a Monopoly. Are that there is one single seller in the market with no competition and there are many buyers in the market. The seller controls the prices of the goods or services and is the price maker as well. The consumers do not have perfect information on the goods or services. Advantages of a Monopoly. The Monopolies avoids duplications and hence wastage of resources. Enjoys economics of scale, due to it being the only supplier of the product or service in the market, makes many profits and be used for research and development to maintain their status as a monopoly. They also use price discrimination to benefit the weaker economic section of society. To avoid competition, they can afford to invest in the latest technology and machinery. Disadvantages of a Monopoly. Monopolies have poor levels of service, there is no consumer sovereignty, the consumers are charged high prices for such low quality goods, and lack of competition could lead to low quality goods, as well as out dated goods. What is required for a monopoly to earn profits in the long run? First off, any market type can see super normal profits in the short-run. What is more important is what happens in the long-run. Pure monopolies are not the only monopoly that can make profits. Natural Monopoly or a price discriminating monopoly can make profits as well. The only difference between them is “why” they are monopolies to begin with. Oligopolies are not monopolies, although they do tend to make above normal profits. Monopolistic competition does not yield these types of profits in the long-run. Economic profit goes to zero here in the long-run because there is a lack of barriers here to prevent competition from entering (as there is with perfect competition). If a firm uses economies of scale...
Cited: Roger LeRoy Miller. Economics Today, Sixteenth Edition. Boston, MA: Pearson Education, Inc., publishing as Addison-Wesley, 2012, 2011, 2010, 2008, 2006.
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