Monopolies on a Market
A monopoly describes a market situation in which one supplier controls the entire market for a particular product or service. A monopolist is the sole supplier of this product or service in a given market. Governments create and maintain most monopolies, but in some cases, private parties can also exercise monopoly power. The most famous case of such an arrangement was the US telephone industry from 1894 to 1996, when AT&T had a legal monopoly over long-distance service. Jordan Sudberg explains the market power of this monopoly so that you don’t have to worry about competition.
1. What Is a Monopolistic Market?
A monopolistic market is a market in which only one product seller exists. In other markets, there are many sellers. Monopoly markets have one seller and many buyers. Thus, the power of the seller to set prices is extraordinarily high as there is no buyer to whom he can offer the goods at a lower price than he charges to others. The monopoly prices are high, and the monopoly earns extra profits compared to a competitive market. Sudberg implies that a monopolistic market has only one product or service seller. There may be many buyers in the market. This is possible because, in a monopolistic market, the seller has power over the buyer.
2. The History of Monopolies
Monopolies have been a part of the social structure for centuries. On the world scene, the first officially recognized monopoly was that of the Medici bank in the 15th century. Adam Smith first wrote about monopoly. He believed monopolies are contrary to the general welfare of consumers due to their higher prices. He also argued against them on the grounds of morality and justice. Later, 19th and 20th-century economists, most notably Jacob Viner and Alfred Marshall, defended government control over monopoly power because they saw this as necessary for promoting healthy competition and fair markets.
3. Effects of Monopolistic Markets
Monopolistic markets have been the subject of much discussion and controversy. In a monopolistic economy, a single producer or firm controls the entire market for a good or service. Sellers of monopoly goods can choose any price they wish to sell their products, and consumers are forced to pay that price. This situation reduces the incentive for sellers to innovate and produce new products, reducing consumer choice. Monopolistic price increases also restrain competition in closely associated markets by reducing funds available for investment by rival producers. The government argued that a monopoly could only be maintained if the government protected them from their competitors.
Jordan Sudberg knows that a monopoly within a market is beneficial as monopolists can decide whether or not to lower or raise their prices depending on the demand or supply of their product. The monopoly gives the seller significant power, and they do not need to worry about competition coming into their market. The monopolist can cause massive damage to other markets by charging any amount they want while still being able to sell at that price.