A market is said to be a monopoly when a single firm or an individual operates it. However, in such a market, many buyers are involved. On the other hand, an oligopoly market is one where a few persons or several firms come together to control the market. The major characteristics of a monopoly market are mainly a lack of competition for its services and products. The market also has no substitutes for its products. Monopoly’s power usually rises from government policies or by the integration of individual suppliers into one organization. Other powers of the monopoly emanate naturally. Oligopoly on the other hand arises when a number of firms act together to coordinate services or sell their product in a similar manner. They match their price such that their products are supplied in the market at the same price for all firms (Genakos et al, 2011). This paper will focus on the monopoly market in the real world.
The U.S steel is a good example of a monopoly. In fact, the company has been accused of being a monopoly for decades. The U.S steel company was established in 1901 by Elbert and when they joined Carnegie Steel Company that was previously owned by Andrew Carnegie with Federal Steel Company of Gary and National Steel Company owned by Moore. Once, U.S. Steel was the largest corporation in the world and the major steel manufacturer. The company produced 67% of the total number of steel manufactured in the U.S in its first year of operation. In the current business world, monopoly power is mainly attained by controlling a huge market share of the economy. For example, companies that manufacture software and computers are good examples. For instance, Microsoft and Intel have controlled the personal computer market. Microsoft has overall controls of markets that deal with the software while Intel Company has occupied the markets that deal with microchips. They make major inner operations of many computers produced in the world. This supremacy was at its peak around the year 2000 and has diminished to some extent in recent years, but still, the two companies control an estimated 80% of the market for personal computers today. The two companies have tried to dominate the market using their power to deter completion. Intel, on the other hand, has been accused of obliging dealers to only use its chips at the expense of its rivals such as AMD. Although they have been accused of their acts, they have still been able to control successfully and obtain high profits. Other monopoly companies like power suppliers obtain their power from government regulations since most of them are government parastatals. They adjust their prices without any benefit or quantity of their products or service. The following is a sample curve of a monopoly firm that maximizes its profits generating an output Qm at point G, where the marginal revenue and marginal cost curves intersect and sell this output at price Pm.
To provide an actual example of a business or industry where changes in the factors that influence demand created a change in the market demand for the products offered by that firm or industry, this paper consider the mobile phone industry and how the price of other similar products in the market have affected demand. The demand for mobile phones today is mostly determined by the price of other brands in the market. This can better be illustrated by the idea of price elasticity of demand.
The latter is an explanation of how consumers respond to products given various prices. For example, a company retailing its mobile phone brand at $900, very few people will buy the brand. Most consumers mostly buy phones retailing around $200 for a phone. There are so many brands of phones at varying price levels. If the price then lowers to say $500, more people will be interested in purchasing the phone. In regards to the latter, the brand of the mobile phone that is around $200, is purchased by the majority of consumers will buy at this price. That is why phones have a tendency to drop in price rather than raise in price. There are several phones brands in the market, which a consumer can choose from. For example, many consumers buy Motorola at the expense of iPhones.
An incentive is anything that has the capability of driving groups of people or an individual to respond to a particular action or behave in a certain manner. In fact, incentives impact people’s decision-making. Government incentives are measures taken by a government to attract the development or consumption of some items. Most Government incentives are aimed to attract investments in the economy or consumption of some products. It usually comes in the form of reduced tax liability, free rent of a government-owned property contract preference scheme among others (Spicer, 2012). An illustration of the government incentives was based on the installation of charging equipment in 2010. A federal tax credit that amounted to 50% was provided on the total cost of purchasing and installing a charging station at home. It had an established credit of $2,000 in every station. Indeed, various companies were qualified for tax credits worth $50,000 if they made bigger installations.
These tax credits expired on December 31, 2010, though were extended throughout 2013 with a cut tax credit equal to 30% with an extreme credit of up to US$1,000 for installation each station for individuals and up to US$30,000 for commercial buyers. Such government incentives stimulate the demand for the product, which is most beneficial to the whole economy (Spicer, 2012).
A monopolistic competition market entails many competing firms each selling a slightly differentiated product or service. Every service or product taken to the market has unique characteristics. Nevertheless, the products in this market compete for the same customer. There are several reasons why most products and services in the market are sold in monopolistic markets. Some of the reasons include; minimal significant obstacles to entry and exit to the market, therefore, markets are contestable; introduction of new products in the market is easy while it can be easily dropped from the market if it is not profitable to continue selling the product. Moreover, products differentiation creates diversity and a variety for customers to choose from. For example, typically almost every street in any city will have a number of different restaurants from which customers choose.
Furthermore, economic information is widely available in monopolistic competition markets (Lele, 2006). Knowledge about the market factors is widely shared between participants that are firms and consumers. For instance, a customer can look into several menus available from several hotels in a town, before they make their final decision regarding the one to take their meal. Furthermore, they can view the menu again, before ordering their meal once inside the hotel. However, they cannot fully appraise the restaurant or the meal provided until they take the meal. Lastly, every firm in the market makes independent decisions concerning its product’s price and the level of output to produce, based on its product quality, its target market, and its costs of production (McKenzie & Lee, 2008). For example, when Apple makes price decisions for its mobile phones, it does not consider the price of its competitors like Samsung. Though the price of the competitors may below, it will not affect its profitability due to differences in the target market and more so customer loyal
Genakos, C., Kühn, K. -U., Van, R. J., & National Bureau of Economic Research (2011). Leveraging monopoly power by degrading interoperability: Theory and evidence from computer markets. Cambridge, Mass: National Bureau of Economic Research.
Lele, M. M. (2006). Monopoly rules: How to find, capture & control the world’s most lucrative markets in any business. London: Kogan Page.
McKenzie, R. B., & Lee, D. R. (2008). In defense of monopoly: How market power fosters creative production. Ann Arbor: University of Michigan Press
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