Ashley Winterbottom

ECON 1010
Monopoly Essay

A monopoly is a single firm that produces the entire market supply of a good. This gives
a firm market power, the ability to alter the price of a product. Monopolists are price setters, and
must make pricing decisions that perfectly competitive firms never make. In setting the price, a
monopolist uses the profit-maximizing rate of output by following the profit maximization rule.
Profits are maximized at the rate where marginal revenue equals marginal cost. Because a
monopoly is the industry, the demand curve facing the firm is identical to the market demand
curve for the product.
There are key differences between a competitive industry and a monopoly industry. In
order to maintain the monopoly power, barriers to entry are used to exclude potential competition
from the market in the form of patents and copyright licensure. The success in a monopoly lies in
its barriers to entry. As long as barriers are in place, the monopoly can control the amount of
goods supplied in the industry. However, barriers can come in many different forms; a company
can use legal harassment, exclusive licensing, bundled products, and government franchises. In
many cases the slightest threat of legal action, and the expenses involved, will be enough to stop
small entrepreneurs in their tracks. These cases are often arduous, taking years to settle and
financially paralyzing. The HFC/ Beneficial lawsuit took many years to settle, and it took many
smaller firms and people for it to be successful.
A monopoly attains higher profits and achieves higher prices by restricting output,
resulting in constrained production and supplies as opposed to expanding in the competitive
industry. Average costs are not usually near minimum, when economic profits are at a maximum
and price exceeds marginal costs at all times. With a monopoly being the industry there is no
pressure to reduce costs or improve product quality.
Multiple firms that control the market are considered an oligopoly. These firms compete
against each other with similar, but differentiated goods. This can result in feverish competition
like a perfect competition, or a more strategic choice. Price competition between firms can prove
to be a no-win situation. Coke and Pepsi are have realized this and use advertising to lure
customers away. In some cases, an oligopoly can conspire to place limits on production, and fix
prices at monopoly levels.
A market made up of many firms, each of which has some distinct brand image, is called
monopolistic competition. Each brand has a monopoly over its distinct brand product with a
consumer loyalty, but provide similar goods. Monopolies and monopolistic competitions change
the determining factor of what gets produced. Without pressure to reduce cost and expand
production possibilities monopolies tend to limit economic growth and consumer choices. This
type of market tends to lean away from marginal cost pricing, resulting in less bang for your
buck and altering what society would produce. The limited supply and raised prices make it

more of a commodity, changing the target consumers. This type of market can also reduce job
opportunity, but leave the monopolist with large profits and greater access to all goods.
Monopolies also tend to inhibit innovation and technology from the continued profit existing
technology.
Monopolies, however, could possibly benefit society. They have greater resources to
pursue research and development. The promise of monopolistic power creates incentive for
innovation and invention for a new market. These large companies can also produce goods more
efficiently and on a larger scale than small individual firms competing for profit. All of these
factor into the threat of potential competition. In order to maintain the monopoly a firm must be
constantly on its toes.