Documente Academic
Documente Profesional
Documente Cultură
INST/DEPT: IBA
Definition
A situation in which a single company owns all or nearly all of the market for a given
type of product or service. This would happen in the case that there is a barrier to entry
into the industry that allows the single company to operate without competition (for
example, vast economies of scale, barriers to entry, or governmental regulation). In such
an industry structure, the producer will often produce a volume that is less than the
amount which would maximize social welfare.
CHARACTERISTICS
The four key characteristics of monopoly are: (1) a single firm selling all output in a
market, (2) a unique product, (3) restrictions on entry into and exit out of the industry,
and more often than not (4) specialized information about production techniques
unavailable to other potential producers.
These four characteristics mean that a monopoly has extensive (boarding on complete)
market control. Monopoly controls the selling side of the market. If anyone seeks to
acquire the production sold by the monopoly, then they must buy from the monopoly.
This means that the demand curve facing the monopoly is the market demand curve.
They are one and the same.
A monopolized industry, however, tends to fall far short of each perfectly competitive
characteristic. There is one firm, not a lot of small firms. There is only one firm in the
market because there are no close substitutes, let alone identical products produced by
other firms. A monopoly often owes its monopoly status to the fact that other potential
producers are prevented from entering the market. No freedom of entry here. Neither is
there perfect information. A monopoly firm often has specialized information, such as
patents or copyrights, that are not available to other potential producers.
(2)PERFECT COMPETITION
Market in which no participant can influence prices. Characterized by a free flow of
information, no barriers to entry, and a large number of buyers and sellers.
CHARACTERSTICS
These four characteristics mean that a given perfectly competitive firm is unable to exert
any control whatsoever over the market. The large number of small firms, all producing
identical products, means that a large (very, very large) number of perfect substitutes
exists for the output produced by any given firm.
This makes the demand curve for a perfectly competitive firm's output perfectly elastic.
Freedom of entry into and exit out of the industry means that capital and other resources
are perfectly mobile and that it is not possible to erect barriers to entry. Perfect
knowledge means that all firms operate on the same footing, that buyers know about all
possible perfect substitutes for a given good and that firms actually do produce identical
products.
How many firms are needed in a perfectly competitive industry, such that each is so small
it has absolute no market control? There is no actual number that answers this question.
This is due partly to the fact that perfect competition is an idealized market structure that
does not exist in the real world. It is also partly due to the notion that the number of firms
is not as important as the result... that no firm has market control.
Here are two extreme examples that will help illuminate this notion. Example 1 is Phil's
home grown zucchinis. Phil is one among gadzillions (a really large number) of people
who grow zucchinis in their backyard gardens. Phil has no control over the zucchini
market because the total zucchini market contains gadzillions of zucchini producers, each
producing only a handful of zucchinis. Should Phil decide to produce more zucchinis,
fewer zucchinis, or none at all, the zucchini market and especially the zucchini price are
unaffected. Zucchini buyers continue buying zucchinis from the remaining gadzillions of
zucchini producers as if nothing changed. As far as the market is concerned, nothing has
changed.
Example 2 is the innovative folks at Quadra DG Computer Works, which produces the
Quadra 400 Data RAM Cartridges (a memory storage cartridge used in the Quadra 400
Data RAM Computer Storage System). In this hypothetical economic world, Quadra DG
Computer Works is only one of threes companies that produce computer storage
products. Because it holds a market share of 33 percent, Quadra DG has a substantial
degree of market control. Should Quadra DG decide to produce more or fewer Quadra
400 Data RAM Cartridges, or stop producing them altogether, then the computer storage
market takes notice. The price and quantity exchanged are likely to change.