A Monopoly is a market situation in which there is only one firm producing and selling a particular commodity. Thus a monopoly is a single producer and/or seller of a commodity in a market.
An absolute or a pure monopoly exists when the monopolist’s product does not have a close or perfect substitute. A perfect competition and monopsony (a single buyer of a commodity) are the opposite of a monopoly. Briefly, a monopoly is a market structure characterized by only one firm.
Causes of monopoly
The existence of monopoly may be attributed to the following factors:
- Patent law: Government may grant the sole right of producing a commodity to a particular person or firm for a certain number of years. Such a person may be an inventor of a machine, vehicle, ship, aeroplane, etc.
- Copyright: Governments often grant copyright to authors. singers, etc. And this prevents other people from reproducing their work: books, records, cassettes, inventions, etc. These lead to a monopoly
- Gift of God – natural monopoly: A state or a country may be endowed (blessed) with a particular mineral like petroleum, gold or diamond. This gives the state a monopoly power in its production. Similarly, a state may be gifted with fertile soil for the cultivation of important crops, like cocoa, timber, palm tree, etc. Since other countries cannot cultivate them, it leads to a monopoly.
- Act of parliament – statutory monopoly: The act of parliament may give monopoly power to federal and state governments to be the sole producers of essential goods and services. For example, public corporations like PHCN, Water board, etc are the only suppliers of electricity, pipeborne water, etc. in many developing countries.
- Large capital requirement: The ownership of a very large capital and its use to set up big companies, like iron and steel complex, may give monopoly power to the firm or state. Nigeria is the only producer of iron and steel products in West Africa; and Leventis is the major producer of soft drink in Nigeria.
- Amalgamation of firms: The reputable firms in an industry may merge or combine to produce goods. This gives them monopoly power in their production. Leventis and Seven-up Company may merge into one. And they become the sole producer of soft drinks in Nigeria.
- Tariffs: The restriction on importation of certain goods by tariff or embargo may give monopoly power to the home industry.
- Trade mark: Differentiation of goods by trade marks and trade names prevents other manufacturers from reproducing the products. Cadbury and level Brothers are the sole producers of Bournvita and Lipton tea respectively. And other people or firms can’t produce them.
Characteristics of a monopoly firm
The following are the important features of a monopoly market structure:
- A single producer of a commodity: A monopoly occurs when there is a single firm producing and/or selling a commodity in a market. The firm and the industry are therefore regarded as one.
- Blocked entry: Entry into the industry is blocked. That is, entry is entirely impossible (not free). Thus, new firms or members of the public are not allowed to produce or reproduce the commodity of a monopoly firm.
- No perfect substitute: Many monopoly products don’t have very close or perfect substitutes, especially natural monopoly like minerals, e.g. crude oil, gold, diamond, etc.
- Non fixed price – price maker: He doesn’t have a specific or fixed price. He is privilege to set his price. However, he can either fix the price or output but not both. He is termed as ‘a price maker’.
- Non-competition: A monopoly firm doesn’t compete with other firms in the production and sale of its products. It is the only firm the industry: Thus it doesn’t meaningfully involve in price and non-price competitions as practised by firms under imperfect competition.
- Standardized product – no variety: A monopoly firm only produces one particular or distinctive commodity. Thus he doesn’t flood the market with multiplicity of (many) branded goods as the practice of firms under monopolistic competition.
- Existence of abnormal profit at all times: A monopoly earns abnormal (large) profit both in the short and long runs. In deed, it is the only market structure that enjoys this privilege.
Control of monopoly
The following are the necessary measures which a government can adopt in order to bring monopoly under control
- Privatization: Government should privatize monopoly firms in order to eliminate them completely.
- High Taxes: Government should impose high taxes of various types especially profit tax, export, import and excise taxes on monopoly firms.
- Promoting Competition: Government should promote keen competition in monopoly industries by encouraging other investors.
- Prevent Mergers and Acquisitions: Government can enact laws to prevent merger and acquisition of firms. It reduces monopoly practice.
- Price Control: Government, should fix maximum prices for product of monopolies. And those who contravene (disobey) the law should be prosecuted.
- Abolition of patent law and copyright: The legal monopoly rights granted to inventors of machines and authors should be abolished.
- Production/importation of substitutes: Much efforts should be made, especially by the government, to produce and/or import high quality goods which are very close or perfect substitutes to those of monopoly firms.
- Restriction of monopoly firm’s raw materials: Government should deprive it of access to its raw materials. This hinders its production activity.
- Restriction of monopoly firm export: Government should stifle (hinder) effort of monopoly firm that exports its products through either increase in export duties or withdrawal of its licence of operation.
Advantages of monopoly
- Encouragement for invention and writing: The granting of legal monopoly like patent to inventors and copyright to authors and singers protect their work (inventions) and books from reproduction hy members of the public. This motivates them to carry out further important work.
- Abnormal profit at all times: Monopolists are privilege to reap supernormal ( large) profits both in the short and long runs. They therefore have sufficient resources (money) with which to carry out large scale production.
- Absence of destructive competition: It doesn’t involve in non-price competition, like persuasive advertising, sales promotion, publicity, etc. Thus total cost does not rise; and prices are moderate.
- Economies of scale: It reaps benefits of large scale production because of the extremely large size of its plant
- No wasteful duplication of resources: It prevents wasteful duplication of resources especially in the supply of social amenities.
- It undertakes research work: Being in possession of much resources (large capital), it sets up research and development department to find out the means of raising the quality of its products.
- It promotes efficiency: Many monopoly firms employ specialists in their various departments. This leads to efficient production of their products.
- Standardization: It encourages the practice of standardization of products and centralized management. These reduces cost.
- It ensures moderate prices: Statutory monopoly firms, e.g. PHCN, Water board, etc whose costs of production are subsidized, charge very low prices. Thus their products are quite affordable.
- It leads to rapid expansion of firm: It promotes rapid expansion (growth) of industry (firm) ; because of blocked entry, absence of competition and uncertainty.
- It leads to price discrimination in favour of the poor: Price discriminating monopoly reduces inequality gap between the rich and the poor. For example, public corporations or public utilities (public schools, public hospitals, street light, potable water, etc) makes goods and services to be available to the poor free-of-charge.
- Employment of skilled labour: Due to their large resources (capital), they employ specialists in different departments and branches.
- Low level of output – creating artificial scarcity: Monopoly manipulates (reduces) production output and supply in order to raise the price(s) and reap abnormal (large) profit. That is, he manipulates supply at expense of consumers.
- Exploitation of consumers (high prices): As he is the only producer of the commodity, he takes different actions to exploit (cheat) consumers. They may be in terms of high prices, inadequate supply, deliberately reducing the quality of the products and services. They have serious adverse effects on consumers.
- No Freedom of Choice: Consumers don’t exercise freedom of choice in the purchases of goods. They are restricted to the use of only one item, either good or bad, for indefinite (long) period.
- Low level of efficiency: The level of efficiency in state enterprises is relatively low. Thus many consumers prefer efficient services with high prices than those of state enterprises with low prices.
- Under Utilization of Resources: They under utilize resources; and this causes unemployment of people and inadequate use of raw materials
- Discrimination: A monopolist sells to people whom he likes and he can object selling to consumers whom he dislikes. Since he is the only producer, consumers who are deprived of the goods are forced to use inferior substitute, if any.
- Ineffective Control of Statutory monopoly: There is danger of bureaucracy, nepotism, corruption, inefficiency and discrimination in statutory monopoly (public corporations) due to government ineffective control mid unnecessary interference.
- They dominate the market – causes exit of other firms: They dominate the market at the expense of other firms. They reduce the influence (power) of other firms; i.e. they reduce level of demand of similar firms’ products, and this may lead to their exit.
- Lack of competition: Being a single producer, he does not compete with other firms. Thus, he does not make much effort to improve on the quality of his product. This lowers level of efficiency and quality of product remains constant or decline.