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What Are the Principles of Monopoly Power? What Are Functioning and Regulation Problems of a Monopoly?
The theory of monopoly has had a long academic history, demonstrating both the possibilities and the drawbacks of such economic structure. The monopoly power has a distinct set of principles, which include a single firm that covers the supply on the entire market, lack of consumers’ choice, and the absence of competition that reinforces the monopolist’s influence. Because of the consequences of the above principles, monopoly is considered a problematic economic structure, which needs to have governmental regulations in order to work effectively and keep the market developing. It seems important to review the principles of monopoly, their consequences, and the possible regulations that are used to control the monopolistic markets.
Monopoly is one of the most well-studied economic concepts, as it refers to the specific structure of the capitalistic market relations. In a monopolist market, “there is exclusive right of a person, corporation or state to sell a particular commodity” (Lerner, Abba 55). Unlike the ideal type of competitive market, where there are multiple manufacturers and sellers who try to maximize the revenue while keeping the prices and level of quality on compatible level with each other, the monopolistic structure means there is only one subject that provides service or commodity, while all the consumers do not have alternative suppliers. Again, as Abba Lerner put it, the “power of the monopolist – as distinguished from a seller in a competitive market – arbitrarily to decide the price of the commodity” (Lerner, Abba 55). Thus, monopoly may be considered as the opposite market structure to the perfect competition, with stages like monopolistic competition and oligopoly – a multi-firm structure with differentiated products and a system with a small number of large firms respectively – locating in the middle of the continuum. Monopoly, an extreme form of market structure, has a set of distinct principles that separates such system from the other forms listed above.
Probably the most distinctive feature of a monopolistic structure is the absence of market competition. As one firm gains full control over a unique resource or pushes every other firm from the competition in an environment of an unregulated market, it becomes the sole supplier of the resource. Because there is only one large supplier of the commodity, consumers do not have other options and cannot choose another firm to purchase similar service or products. Therefore, an ideal monopolistic structure would mean there is no competition in the market, which is led by a single company. Thus, with no competition, there is lack of mechanisms that “provide the pressures that constrain economic subjects” (Sweezy, Paul 27). This feature leads to the next principle, which states that in a monopoly, it is the firm that decides the basic conditions of the market processes. In other words, it is the firm that sets the price of its products, basing it on the maximization of the benefit. In a competitive system, each firm’s pricing policies are tied to consumers choice, which may prefer products of other firms if a company sets higher prices. Clearly, in a monopoly, such scenario is not the case, as consumers cannot change their choice and become dependent on the sole supplier, not the other way around. Finally, another significant principle that describes monopoly power is the extremely high price of entering the market. In an ideal monopolistic type, not only one firm controls the entire market, but it is also nearly impossible for other firms to try to enter this market. The action of the monopolist and the structure of the market make the “overthrowing” of the single supplier a highly unlikely process. For example, if in a small desert village, the only lake is owned by one company, it becomes extremely hard for any other company to sell water to the villagers – because they do not have access to the resource and because alternative ways of water supply would cost too much to compete with the monopolist. All of the above principles lead to an assumption that monopoly is a structure that has multiple issues and needs regulation to work effectively.
The absence of competition and the freedom and independence of the monopolist makes this system highly problematic. First, because the monopolist has no fear of losing the customers, it will almost certainly raise the price and decrease the quality of the commodities. It has become a widely accepted assumption that the “monopolist almost always reduces the quality sold to any customer compared with what would be purchased under competition” (Mussa, Michael, and Sherwin Rosen 301). Despite the fact that in some cases monopoly is an unavoidable measure, when the supply of a certain service is too important to give it into the poorly regulated hands of a competitive market (e.g., some of the healthcare services), it seems harmful in most of the market relations. For instance, the traditional leverage theory claims that a firm that managed to become a monopolist within one market has the leverage that makes it able to impose power onto other markets (Kaplow, Louis 516).
Thus, the monopoly power has the capacity to expand and occupied other markets, making it an even more dangerous process. It seems that unregulated monopolistic structure of a market leads to lack of consumers’ freedom and puts the customers into a dependent position as compared to the suppliers of the goods, damaging the basic principles of free market relations. To some degree, an unrestrained monopoly power is a totalitarian structure, which takes the control over the freedom of choice from the consumers and gives it to the monopolist, adding no restrictions or borders to the monopolist’s actions. Because of the inherent structural problems of monopoly, governments often face the need to set antitrust regulations of the market, blocking the potential of rising monopolies and keeping a healthy level of competition in the market relations.
Although the main characteristic that defines the level of monopoly power within a market is the share of the biggest company in this market, it is not a universal index. There are a variety of actions and features that demonstrate the level of monopoly power, each demanding specific approach and set of actions. Regulations may be viewed as a tool that is “usually undertaken where markets cannot or do not function in the ideal way” (Sherman, Roger 17). In case of monopoly, there is a variety of potentially dangerous and harmful ways that monopoly can use to reinforce its benefit and power: exclusive dealing, unjustifiable price raise, unnatural limiting of the supply, product bundling, etc. In case if the monopoly is solely private, the government puts regulatory laws to defend the market and the consumers, formulating and forbidding actions and policies that may be perceived as destructive regarding the healthy competitive market environment. Without a doubt, there are multiple issues with effective regulations. First, with the technological advances, the ways to use the monopoly leverage also develop. There, the governments need to constantly review their regulatory policies. Also, large monopolies have enough resources to influence the government’s’ work, with Google, for example, spending $6 million on lobbyist service in Washington during the three months of 2017 (Taplin, Jonathan). However, even without the opposition from big corporations, it seems incredibly hard to introduce regulations that would keep the balance of healthy free market relationships with the antitrust regulations, not leaning to one side or another. Still, monopolies’ far from ideal structure means there is no other option except producing more effective and complex regulation initiatives.
To conclude, a monopoly is a type of structure of market relationships that includes a single supplier, monopolist, who controls the market. Unlike the competitive market structure, under a monopoly, consumers are dependent on the single firm and its decisions, as it has no competitors. Monopoly has multiple issues, as it gives most of the economic power to large corporations, leaving consumers insecure and out of influence on the prices of the commodities and their own choices as customers. Not only does monopoly harm the quality of the products within the markets, but it is also capable of spreading into other markets, if not regulated. The process of governmental regulation of monopolies is a subtle issue, as the restrictive legislation needs to balance between the values of the free market and the dangerous consequences of the monopoly power.
Lerner, Abba. “The Concept Of Monopoly And The Measurement Of Monopoly Power.” Essential Readings In Economics, 1995, pp. 55-76. Macmillan Education UK, doi:10.1007/978-1-349-24002-9_4.
Sweezy, Paul M. “Monopoly Capitalism.” Marxian Economics, 1990, pp. 297-303. Palgrave Macmillan UK, doi:10.1007/978-1-349-20572-1_44.
Mussa, Michael, and Sherwin Rosen. “Monopoly and product quality.” Journal of Economic theory 18.2 (1978): 301-317.
Kaplow, Louis. “Extension Of Monopoly Power Through Leverage.” Columbia Law Review, vol 85, no. 3, 1985, p. 515. JSTOR, doi:10.2307/1122511.
Sherman, Roger. The Regulation Of Monopoly. 2nd ed., Cambridge, Cambridge University Press, 2001.
Taplin, Jonathan. “Why Is Google Spending Record Sums On Lobbying Washington?.” The Guardian, 2017, https://www.theguardian.com/technology/2017/jul/30/google-silicon-valley-corporate-lobbying-washington-dc-politics.