Monopoly - economics Essay Example for Free

Monopoly economics Essay Monopoly means a market where there is only one seller of a particular good or service. In economics, a monopoly (from the Latin word monopolium – Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. Monopoly should be distinguished from monopsony, in which there is only one buyer of the product or service; it should also, strictly, be distinguished from the (similar) phenomenon of a cartel. In a monopoly a single firm is the sole provider of a product or service; in a cartel a centralized institution is set up to partially coordinate the actions of several independent providers (which is a form of oligopoly). Characteristics Only one single seller in the market. There is no competition. There are many buyers in the market. The firm enjoys abnormal profits. The seller controls the prices in that particular product or service and is the price maker. Consumers don’t have perfect information. There are barriers to entry. These barriers many be natural or artificial. The product does not have close substitutes. Advantages of monopoly Monopoly avoids duplication and hence wastage of resources. A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers. Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly. Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network. Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition. Disadvantages of monopoly Poor level of service. No consumer sovereignty. Consumers may be charged high prices for low quality of goods and services. Lack of competition may lead to low quality and out dated goods and services. Advantages Disadvantages of Monopolies A monopoly is a market structure having only one producer or seller of a product or service. Some of the negative aspects of a monopoly include the single business being able to control pricing and charge relatively high prices, exceptional power over the market and a lack of new products being introduced into the market. Monopolies are created by economic, social or political factors. When one entity has control over a natural resource, a monopoly market for that resource is created. An example would be Saudi Arabia where the government has complete control over the oil industry. Monopolies are also formed when companies have copyright or patent rights to a product.