The word mono means single or one and the prefix polein finds its roots in Greek, meaning “to sell”. The Clayton Antitrust Act of 1914 created rules for mergers and corporate directors. The Federal Trade Commission Act created the Federal Trade Commission (FTC). Department of Justice, sets standards for business practices and enforces the two antitrust acts.
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A local company operating within one state can be investigated by the Attorney General of that state. 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.
Such challenges include high startup costs, specialized technologies, high government restrictions, complex business contracts, restricted purchase of raw materials, etc. Monopoly is derived from the words “monos” (single) and “polein” (to sell) of Greek. 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. 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.
You’re probably familiar with the word monopoly, but you may not recognize its conceptual and linguistic relative, the much rarer oligopsony. Both monopoly and oligopsony are ultimately from Greek, although monopoly passed through Latin before being adopted into English. Another related word is monopsony, used for a more extreme oligopsony in which there is only a single buyer.
Measuring Monopoly Power
Sunk costs are those which cannot be retrieved in the case a firm shuts down. These are costs that are essential for the firm, like advertising costs, but cannot be recovered. A federal district judge ruled in 1998 that Microsoft was to be broken into two technology companies, but the decision was later reversed on appeal by a higher court. Microsoft was free to maintain its operating system, application development, and marketing methods.
A natural monopoly develops from reliance on unique raw materials, technology, or specialization. Companies with patents or extensive research and development costs, like pharmaceutical companies, are considered natural monopolies. Multiple sellers in an industry sector with similar substitutes are defined as having monopolistic competition. Barriers to entry are low, and the competing companies differentiate themselves through pricing and marketing efforts. Microsoft Corporation was the first company to hold a pure monopoly position on personal computer operating systems. As of May 2024, its desktop Windows software still held a market share of more than 73%.
Monopoly in Economics Explained
Under monopoly conditions, too, there is bound to be interaction between the forces of demand and supply. However, the difference is that supply is not free to adjust itself to demand. A monopolist is the sole producer of his product, which has no closely competing substitutes. In other words, the cross-elasticity of demand between the product of the monopolist and the product of the closest rival must be very low i.e. the product of a rival cannot take the place of the monopolised product.
The structure of a market is also affected by the extent to which those who buy from it prefer some products to others. In some industries the products are regarded as identical by their buyers—as, for example, basic farm crops. In others the products are differentiated in some way so that various buyers prefer various products. Notably, the criterion is a subjective one; the buyers’ preferences may have little to do with tangible differences in the products but are related to advertising, brand names, and distinctive designs.
- At the point where marginal revenue is equal to marginal cost, profits will be maximised.
- At output OM, while MP‘ is the average revenue; ML is the average cost Therefore.
- In this, the monopolist firm utilizes its copyright and patents to prevent competition.
- These clubs gave young women like Lizzie an outlet to explore new ideas and concepts, says Pilon.
- In Monopoly, the money comes in denominations of $1 (white in color) to $500 (gold or orange).
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Industries vary with respect to the ease with which new sellers can enter them. 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 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.
Market performance refers to the end results of these policies—the relationship of selling price to costs, the size of output, the efficiency of production, progressiveness in techniques and products, and so forth. Consumers often develop trust and loyalty with firms that offer them quality products and services. A sense of familiarity that generates consequently deters them from going elsewhere to satisfy their demand. Hence, they find it difficult to capture market share for the product and service that they offer.
This is the major reason a monopolist firm wants to continue enjoying its monopoly. 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.
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- He does so because profits will go on increasing as long as marginal revenue exceeds marginal cost.
- Public monopolies, such as the utility industry, provide essential services and goods.
- Sometimes, a monopolist often sets the price of its product or service just above the average cost of production of the product/service.
- The word mono means single or one and the prefix polein finds its roots in Greek, meaning “to sell”.
- This, in turn, was based on The Landlord’s Game, patented by its creator Elizabeth Magie in 1904.
It depends on a number of factors including elasticity of demand of the product, existence of economies of scale, control of a key resource, existence of legal barriers, etc. The equation above says that when a monopolist increases its sales by one unit, it can potentially increase revenue by P. However, due to downward-sloping demand curve, he must reduce his price for all other units too. He can only do one of the two things i.e. either fix the price or fix the supply.
This act dismantled monopolies, including the Standard Oil Company and the American Tobacco Company. Their offerings are not perfect substitutes, as with Visa and MasterCard. Other examples of monopolistic competition include retail stores, restaurants, and hair salons. Get fascinating history stories twice a week that connect the past with today’s world, plus an in-depth exploration every Friday. When times got tough during the Great Depression, people turned to diversions like Monopoly and Scrabble—cheap, reusable write the meaning of monopoly fun for a wide age range. Years after Magie filed her patent, game developer Charles Brace Darrow was introduced to The Landlord’s Game at a party.