How to Create a Monopoly in the Market?
Before creating a monopoly in the market, it is essential that you first understand the characteristics of a monopoly. They include:
- It maximizes profit.
- The monopoly is the price maker. It decides the price of their commodities even though they determine the price by determining the type of demand and desire of customers in the firm.
- The monopoly has high barriers to entry into the market. Other sellers are practically barred from joining the market.
- The monopoly must have a single seller. The seller should produce all the output. In other words, the market should be served by one firm.
- Price discrimination. The firm should be able to alter the quantity and price of the product. They can sell more product at a lower price in the elastic type of market, and sell less product at the less flexible kind of market.
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Monopolies can derive their power in the market from the entry barriers. Conditions that impede or prevent any other potential sellers from joining the market powers monopoly. There are usually three types of entry barriers to a monopoly. They include deliberate, legal, and economical.
They include technological superiority, cost advantages, capital requirements, and economies of scale.
Economies of scale
Reducing the unit costs for bigger volumes of production. Reducing the costs coupled with the initial costs, for instance, the sector is broad enough to fund one company of minimum effectiveness. In such a case, other firms striving to enter the industry will work at a size less than MES. In addition, they cannot produce at the average cost that can compete with the dominant firm. Above all, if the long-term average cost of the dominant firm is steadily reducing, the company will continue to cost methods to provide the commodity.
The production procedure may demand huge investments in terms of capital, maybe in the form of substantial sunk costs, development costs, and large research. This may, in turn, limit the number of firms in that sector.
A monopoly can be able to use, integrate and acquire the best types of technology in producing their goods while the entrants either are unable to meet fixed costs or do not have the expertise needed for the most reliable technology. Therefore, one huge firm can most times produce goods that are cheaper than the small companies.
No substitute goods
A monopoly involves a firm that offers commodities that have no close substitute. The open absence of a close substitute can make the demand for that good to be somewhat inelastic, hence, allowing the monopoly to extract real positive profits.
Control of natural resources
A major source of the monopoly power can result from the total control of natural resources such as the raw materials, which are vital for the production of the commodity.
The consumption of the product by a particular client can affect the value of the product to other customers. In other words, there is a direct relationship between the proportion of customers using the product and the actual demand for the product. In simple terms, the larger the number of the customers relying on the product, the higher the chances that another business person will start up the production of the product. Network externalities reflect social networks, fashion trends, and fads. These factors do play an imperative role in the acquisition or even the development of market power. An excellent example of this type of monopoly is the dominance of Microsoft suite and its operating system in computers.
The legal barriers
Several legal rights can offer the opportunity to monopolize a particular sector in a country. Some intellectual property rights, such as copyrights and patents, can give the monopolist the exclusive control over the selling and production of the commodities. Also, property rights can provide the company the exclusive control over the raw materials required for the production of the commodity.
This is an essential factor for the selling of the commodity of the single user. And they have done work it out in their way.
The firm that wishes to monopolize the market can engage in several types of deliberate activities to eliminate competition or exclude competitors. Some of these actions may include force, lobbying governmental authorities, collusion, and other anti-competitive practices.
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