About Oligopolies and Monopolies

A market structure is any function that can influence the actions and efficiency of any company in a market situation (Von, 2010, p. 67). One example is the number of businesses in the sector. Monopolies, monopolistic competition, perfect competition, and oligopolies are examples of business types (Von, 2010, p. 69). This research would concentrate on oligopolies and monopolies.

As noted by Von, a monopoly condition happens when a single company manufactures and sells the product of an entire market (2010, p. 75). As such, the case of a “pure monopolist” means a firm which solely supplies a commodity that does not have any close substitutes.

In economics, demand means the desire as well as willingness by a consumer to pay for a particular commodity (Rios, McCornell and Brue, 2013, p. 123). In normal situations therefore, increase in demand will lead to increased prices for goods. This is because there will be too much money chasing few goods, hence the firm may increase prices until it reaches some equilibrium point where it earns maximum returns. Beyond this equilibrium, very few people will be willing to buy. Hence if price exceeds it, there can be losses. On the other hand, supply refers to what is available in the market for consumers in terms of a particular good or service (Rios et. al., 2013, p. 124).

Figure 1.1: Demand Curve of a Monopoly

Price b D

a D

c d Quantity demanded

Adapted from Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill, pp. 121-134.

The figure above shows the demand curve of a monopoly. DD representds the demand curve. When the monopolist increases the price of their good from a to b, the demand goes down from d to c.

Example of a Monopoly

Monsanto is a United States company which depicts a perfect monopoly example. It promotes the usage of Genetically Modified Organisms (GMOs). The entity has gone as far as cracking down on those who use their products without payment (Esteban and Shum, 2007, p. 335). The company trademarks at least 80% of America’s corn. At one time, the business prosecuted farmers who borrowed their patented seeds to grow, purporting that they should have bought it originally from them.

Merits and Demerits

Monsato presents the case of how a monopoly can abuse suppliers and consumers (Esteban and Shum, 2007, p. 37). First, they can charge exorbitant prices because their products cannot be substituted. They also set the price for suppliers since such people do not have alternative industries to supply their raw material. Monopolies can also be beneficial. Because they make high profits, they normally produce a lot of money which the government uses to plough back to the economy by taxing them. This leads to economic development.

Why Monopolies Cannot Face Competition Easily

This is due to the fact that sometimes, there are many barriers for entry for other firms (Von, 2010, p. 79, p. 78). For example, the industry might be one that requires a lot of capital to venture into, an aspect which most firms cannot afford. Moreover, monopolies can have protection legalities. For instance, gun production cannot be left in the hands of any citizens. The government regulates such activities, leading to the formation of monopolies.

Oligopoly

In this market, there are few sellers of a particular item as observed by Von (2010, p. 79). They are either pure oligopolies or differentiated oligopolies. The former produces products which are homogenous. The differentiated oligopolies trade in differentiated products.

Oligopoly Demand Curve

Pure oligopolies can further be sub-divided into pure collusive and non-collusive ones (Rios, McCornell and Brue, 2013, p. 127). In the former, there is either informal or formal cooperation amongst companies. In non-collusive, the few firms do not collude, and as such, fierce competition exists amongst them. This leads to price wars. (The dynamics of demand have already been explained earlier). It comes to a point where all prices are very low due to competition. At such a point, even if one firm lowers their price it will vary only insignificantly hence consumers remain indifferent. They do not run to an alternative seller. This brings about a circumstance where at first, the demand curve is normally elastic as seen earlier. Later, the curve becomes inelastic (consumers are indifferent) as shown below.

Figure 1.2: Demand Curve of a Monopoly

Elastic Demand

Price

Inelastic Demand

Quantity demanded

Adapted from Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

P signifies the stable price. After P upwards, the price is unstable hence the normal elastic demand curve. Below it, consumers are indifferent hence inelastic curve.

Example of Oligopoly

The automobile industry is a perfect example of oligopoly. There are few companies in this industry, the major ones being Toyota, Ford and Chrysler (Esteban and Shum, 2007, p. 335). This industry is a type of differentiated oligopoly because they do not collude. Ford for instance competes with Toyota.

Merits and Demerits

Simple choices are presented to consumers by oligopolies as an advantage. They (consumers) do not have difficulty choosing which products to buy as the range is only limited (Rios et. al., 2013, p. 126). Rios et. al. (2013, p. 126) points out that as a demerit, collusive oligopolies can sometimes gang up to form cartels which charge consumers exorbitant prices for their products. They agree to set the price at a constant high level in all the shops.

Conclusion

Oligopoly is the situation in a market whereby few firms dominate one industry, an example being the automobile industry. On the other hand, in monopoly only one firm dominates the industry. Both of these exhibit a disadvantage in that they can charge exorbitant prices to exploit consumers. However, they can also generate a lot of revenue which the government uses for economic development. The two scenarios are examples of the larger market structure which also contains monopolistic competition and duopoly structures.

Reference List

Esteban, S. and Shum, M., 2007. Durable‐goods oligopoly with secondary markets: the case of automobiles. The RAND Journal of Economics, 38(2), pp.332-354.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill, pp. 121-134.

Von Stackelberg, H., 2010. Market structure and equilibrium. Springer Science & Business Media, pp. 67-81.