Monopoly: Characteristics, Types and Barriers to Entry

Introduction

The monopoly is an economic situation characterized by the absence of any competition. It is a market situation in which a single producer faces a multitude of buyers. The product must not have any close substitutes.

Thus, a company is considered to be in a monopoly situation if the cross elasticity between the demand for its product and the price of all other products is low, that is to say that even if the company increases the price of its product, the demand for this product is only slightly affected or remains unchanged.

I – Characteristics of the monopoly

Monopoly is a kind of privilege exclusive to an economic agent which allows him to sell alone in a market facing a multitude (even infinity) of buyers.

• In this sense, the monopoly market is a market for which :

• There is only one seller present on the market;

• There are a multitude of buyers;

• There is no substitutable product or service on the market that would be offered by other companies;

• The demand addressed to the monopoly is in fact the demand of the market;

• The monopoly can set the market price by adjusting its quantity produced;

• There are barriers to entry.

Indeed, monopolistic companies always have high market power and tend to maximize their profits. Their incentive to innovate is low, which ultimately affects the quality of their product or service and therefore constitutes a loss of welfare for the consumer.

Therefore, the monopoly would produce less wealth and make the community pay more.

II – The different types of monopoly

There are several forms of monopolies in everyday economic life, which can be presented as follows :

1 -The natural monopoly

Natural monopoly in a market emerges when the firm’s technology exhibits economies of scale large enough to cover the entire market at a lower average cost of production than would result from competition among several firms.

This is the case, for example, with infrastructure, as it is characterized by very high fixed costs and economies of scale. Duplicating such infrastructure would be inefficient and therefore unfavorable for society, as it would lead to a higher cost for the community, because the minimum cost of the product is obtained when all production is carried out by a single firm.

2 -The discriminatory monopoly

It refers to the situation in which a firm in a monopoly situation practices differentiated prices in order to better capture customers whose demand is more or less strong.

Thus, it charges the highest price to captive customers, that is to say those who have no other choice, and charges increasingly lower prices to customers whose demand is less and less intense.

3- The intellectual property monopoly

It corresponds to the temporary exclusivity right granted by patents, copyright, or trademark law. These rights, which protect against competition, are granted with the aim of encouraging innovation. Thanks to their patent, the inventor of a new product or process is guaranteed against copying and imitation.

4- The technological monopoly

The technology monopoly is not only temporary but also not exclusive or limited to one organization or another. Indeed, it is in the last two phases of the product life cycle namely maturity and decline as the original technological innovation begins to spread more and more, thereby leading to the geographical dispersion of the product’s manufacturing.

5- The private monopoly

It fits the situation in which The seller controls his selling price as he sees fit in order to maximize his profit. He can then modify the price to adapt it to his level of production.

6- The public monopoly

It allows the State to have the exclusive right to produce or market a product or service through one of its establishments, prohibiting any access to this sector by private companies. It is part of a strategic choice made by the State to :

• Ensuring macroeconomic imperatives;

• Ensure the development of the entire territory;

• Allow everyone to access products or services, even the most disadvantaged populations.

7- The legal monopoly

It is established by a regulatory or legislative act. Its use serves to restrict competition and achieve various policy objectives such as :

• Security;

• Solidarity;

• Property management.

8- The local monopoly

It results from a geographical situation that creates a monopoly. This is the case, for example, of a company that is the only one to provide a certain service in a restricted geographical area where it has no competitors in its market, or the case of an isolated service station.

9- The monopoly of platforms

It relies on network economies, who are a kind of demand-side economy of scale: the more users there are, the greater the satisfaction an individual receives from using them.

This is the case, for example, with the use of the telephone if there is only one subscriber, the equipment has no interest because it cannot call anyone and cannot be called by anyone and it is only useful when there are two or more subscribers.

This phenomenon is further reinforced by cross-network effects, that is to say when the usefulness of the network also depends on the number of users who connect on the other side of the platform.

III- Barriers to entry : source of market power

In most cases, monopoly situations are explained by the existence of “barriers to entry”, which means that it is very difficult, if not impossible, for other companies to enter the market.

There are several types of barriers to entry :

• The ownership by a single company of a single resource;

• The network effect;

• The existence of significant fixed costs given the size of the market, for example: expensive infrastructure;

• The existence of economies of scale in certain sectors of activity with increasing returns that prevent small companies from being profitable. An economy of scale corresponds to the reduction in the unit cost of a product that a company obtains when the quantity of production increases;

• The imposition by public authorities of legislation to guarantee a public service or to temporarily protect certain innovative firms;

• Implementation of market strategies to prevent the entry of new businesses;

• The establishment by the monopoly of exclusive derivative products on its product preventing competitors from accessing this product.

On the other hand, not all monopoly positions are harmful, especially when it comes to preserving the general interest.

In any case, monopoly is generally due to the presence of high barriers to entry to a market. This is the most common source of monopolies as it corresponds to the active strategies of firms to oust competitors from the market.

These strategies can be collective, such as price agreements, or individual, such as dumping or price discrimination.

Conclusion

In general, a firm that is the only one in a market can set any price it wants. This price is higher than the price that would be charged in a competitive market and represents a welfare loss for the consumer. But the price cannot increase without limit. If the price becomes exorbitant, the consumer may reduce or even stop buying, and this is the monopolist’s risk.

Faced with this, the State can subject the monopoly to regulations preventing it from exploiting its market power, by imposing pricing that ensures the general interest, possibly compensating with subsidies, or nationalize the natural monopoly and accept the losses inherent in this pricing.