What Is A Monopoly?
Anybody having played Monopoly, a highly admired board game, would know what monopoly means. In that game, players aim to acquire all the properties in the same color. In economic terminology, it represents having monopoly over properties of a specific color. On acquiring monopoly of specific kind of properties you can increase their rentals.
Monopoly in market means when there is just one manufacturer or seller for a product. Monopolist is frequently used to refer to that lone manufacturer or seller.
Monopolies occur when other companies or manufacturers are barred from coming to market to create competition for the monopolist. There are many ways to bar entry of new or additional players. Consequently, there can be many reasons for monopolies to occur.
Possession of an Input Resource
One reason that cause monopoly is a firm’s total control over the raw material necessarily required for producing a particular product. For instance, the sole mud considered good enough for roughing of baseballs used in key league plays is derived from an exacting location along the river Delaware. Now, that location is known to only one family, which owns this business.
At times, the government itself may create monopolies by granting exclusive rights to a product or service. For example, the US Postal service the lone company certified to carry delivery of residential non-rush letters. Another example is that of Amtrak, founded in 1971. The company was accorded monopoly of providing passenger train services in the US, as a result of which other another company willing to offer similar services is necessarily required to seek consent or cooperation of Amtrak.
Protection of Intellectual Property
Monopolies may arise even when the government unambiguously gives a lone company the rights to provide specific types of patents and copyrights. In simple words, copyrights and patents grant exclusive rights to the possessor of intellectual property that they are the only providers for a novel product for a predefined amount of time, thus creating short term monopolies for novel products or services. The underlying principle at the back of such rights is to motivate the companies to carry out research and development, necessarily required for creating new products or services. If it were not so, no company would be keen to carry on with research of innovative products or services and each would keep waiting for another company to take the initiative and that may never happen.
Sometimes, monopolies may take place when it is not economically viable to have more than one firm for producing the same product or offering the same kind of services. Firms with almost unlimited economies of scales are called natural monopolies. The good produced by such companies are called ‘club goods.’ These companies attain the status of monopoly as the size of their operations is so large that no new company would find it a viable preposition to enter that field and offer products at lower prices. Generally, natural monopolies occur in case of industries having high capital investment and low operational expenses.
Nevertheless, there is always an element of ambiguity when the market defines if a firm is monopolistic. For instance, Ford undoubtedly has monopoly for Ford Focus but not on cars as a whole.