Created on: February 10, 2013 Last Updated: February 11, 2013
Simply put, a monopoly is a market that is dominated by a single person, group or company. For example, the citizens in Savannah, Georgia, can only bank at Bank A. This means that bank A operates a monopoly with exclusive control and ownership in Savannah, Georgia. Bank A is the single seller in the market. This company can increase banking fees on customers at any time. Why? The bank can do this because there are no competitors in the market. The U.S. Postal Service and your local water company are also examples of a monopoly. Microsoft is also a monopolist because it owns the copyright for Windows. Most monopolies are created by natural barriers, legal barriers and company barriers.
Natural barriers or economies of scale impede new firms from entering a market. It is very difficult for a new company to produce enough volume to increase sales. For instance, your existing water company has all the resources to supply the city with water and collect profits. On the other hand, a new company will have to build a new network of pipes to enter the market. This will be a very expensive market penetrate.
Legal barriers and governments also play a role in establishing monopolies. Governments create monopolies when they issue patents. Patents give individuals or organizations legal monopolies on the products or services that they create. They also stop other people from selling, using or making your invention for 20 years. The government can also grant a person or a firm the exclusive rights to a service or product and exclude competitors from entering the market by law. The petroleum and public transportation industries are often controlled by government-granted monopolies.
Company or firm barriers are another reason why monopolies exist. There are firms that influence lawmakers to prevent new companies from entering the market. While the monopolist continues to increase prices and sometimes introduce inferior products, they control the market by using their economic power. There are large companies that have billions of dollars and this money is used to stop companies from developing new products and services. Standard Oil forced oil companies into bankruptcy and then purchased their assets. This company controlled 90 percent of the market at one time.
Finally, monopolies are companies that operate with exclusive control of the goods and services within a market. The monopoly occurs because there are natural barriers, legal barriers and company barriers. Of course, there are sometimes social and technological barriers that create a monopoly. Some monopolies benefit the consumers and some monopolies do not benefit them at all.
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