Identify And Explain The Four Categories Of Monopolies

Monopoly Various definitions of a monopoly exist throughout the theory of economics, although composed differently; they all bring a person to the same conclusion, monopoly is market power. In economics, a monopoly is defined by Dominick Salvatore (2007), as “the form of market organization in which a single firm sells a product for which there are no close substitutes” (p. 331).

Market Structures

Market structures are characterized by how they are organized; this is primarily based on the amount of competition in a particular industry. Competition exists assuming each market houses a number of different buyers and sellers. The more competition in each market denotes less market control. Competition between firms lies within four categories.

The goods and/or services produced by a monopolist firm have no close substitute. As mentioned above, a monopoly exists when the market is controlled by a single producer. A monopoly is the complete opposite of perfect competition as they do not have to compete with anyone else in their industry. “The output of the monopolist, is the total industry output” (Webster, 2003, p. 332). Market Power. A monopoly is defined by its market power. Monopolies are known to dominate and maintain exclusive control over its particular market. Even though a monopoly has market power, they are still somewhat limited by market demand. Having market power gives a firm the ability to charge higher than normal prices without losing all of its customers.

Sources of Monopoly Power

In general, a monopoly by one company possesses the power to create barriers to entry for competing companies in a particular market. Also, once a company has achieved a loyal following, it then becomes easy for that company to maintain control of the market. This leads to the elimination of potential competition. Barriers to entry, according to the Organization for Economic Co-operation and Development (OECD) (2007) are “impediments that make it more difficult for a firm to enter a market” (pg. 1). The main types of these barriers are economic, natural, legal and

Market power, as defined by AmosWEB (2000-2010), is “the ability of buyers or sellers to exert influence over the price or quantity of a good, service, or commodity exchanged in a market”. Factors that are considered in determining a firm’s market power include market share, existing barriers to entry, pricing behavior, profitability, and vertical integration (Market power and dominance, 2010). A perfectly competitive market has no market power. These firms are considered price takers; they accept the price that buyers are willing to pay for their product, as the buyers in a perfectly competitive market have the ability to purchase the same product from a variety of firms. Market power exists in a monopoly, although the market power is not unlimited, market demand does come into play. In a monopoly, the firm has the ability to set the price of a good or service and for the most part, buyers are willing to pay the price the firm