Monopoly and olygopoly Essay

A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity (this contrasts with amonopsony which relates to a single entity’s control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry) Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods. The verb â€Å"monopolize† refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power, to charge high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market). A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service ; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in ways that leave market interactions distorted. When not coerced legally to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition Monopolies can be established by a government, form naturally, or form by integration. In economics, the idea of monopoly is important for the study of market structures, which directly concerns normative aspects of economic competition, and provides the basis for topics such asindustrial organization and economics of regulation. There are four basic types of market structures by traditional economic analysis: perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a market structure in which a single supplier produces and sells a given product. If there is a single seller in a certain industry and there are not any close substitutes for the product, then the market structure is that of a â€Å"pure monopoly†. Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless companies retain some market power. This is termed monopolistic competition, whereas by oligopoly the companies interact strategically. Characteristics †¢ Profit Maximizer: Maximizes profits. †¢ Price Maker: Decides the price of the good or product to be sold. †¢ High Barriers to Entry: Other sellers are unable to enter the market of the monopoly. †¢ Single seller: In a monopoly, there is one seller of the good that produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. †¢ Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market. Natural monopoly A natural monopoly is a company that experiences increasing returns to scale over the relevant range of output and relatively high fixed costs. A natural monopoly occurs where the average cost of production â€Å"declines throughout the relevant range of product demand†. The relevant range of product demand is where the average cost curve is below the demand curve. When this situation occurs, it is always cheaper for one large company to supply the market than multiple smaller companies; in fact, absent government intervention in such markets, will naturally evolve into a monopoly. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic. Government-granted monopoly A government-granted monopoly (also called a â€Å"de jure monopoly†) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement OLIGOPOLY An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market. For example, major airlines like British Airways (BA) and Air Franceoperate their routes with only a few close competitors, but there are also many small airlines catering for the holidaymaker or offering specialist services. Concentration ratios. Oligopolies may be identified using concentration ratios, which measure the proportion of total market share controlled by a given number of firms. When there is a high concentration ratio in an industry, economiststend to identify the industry as an oligopoly. Characteristics †¢ Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs. †¢ Ability to set price: Oligopolies are price setters rather than price takers. †¢ Entry and exit: Barriers to entry are high. [3] The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. †¢ Number of firms: â€Å"Few† – a â€Å"handful† of sellers. [3] There are so few firms that the actions of one firm can influence the actions of the other firms. [5] †¢ Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. †¢ Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles). †¢ Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality. †¢ Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm’s market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm’s countermoves. It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his or her objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what other firms are doing or might do is to be contrasted with lack of interdependence in other market structures. In a perfectly competitive (PC) market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, as current market selling price can be followed predictably to maximize short-term profits. In a monopoly, there are no competitors to be concerned about. In a monopolistically-competitive market, each firm’s effects on market conditions is so negligible as to be safely ignored by competitors. †¢ Non-Price Competition: Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition. Advantages of Oligopoly Big Businesses Gain Massive Profits †¢ One of the greatest advantages that occurs from an oligopoly is for the few businesses which control the market for a product or service to build large profits due to reduced sales costs. If just a few companies are in control of the market, the companies have limited competition. It is able to reduce the costs of sales, advertising, promotion and public relations because there is very limited competition to pull the customers away. These reductions in cost can allow the companies in the oligopoly to build larger profits than they would have earned if there were more competitiors. Ability to Determine Prices. Instead of having to keep up with the market, the oligopolies essentially control the market. Unlike other markets where there are more competitiors, the companies in an oligopoly are less concerned about what other companies charge. They are able to establish prices for goods that people want and need based on what the companies in the oligopoly want to charge. Long Term Profits. These companies not only make massive profits, but they are able to retain them for the long haul. It takes a long time and a lot of money for a company to work its way into being a major supplier and part of the oligopoly. During this time, the existing oligopoly companies are able to maintain their profits. Disadvantages of Oligopoly Power in the Hands of a Few. If only a few companies control the availability of a specific product or service, these companies control everything about those products – what they look like, what they cost and how they are sold. Putting this power in the hand of a few companies takes away the normal influences of the market and the consumer. The market and the consumer are now totally relying on the companies to make the right decisions, even during periods of market unrest such as limited availability of a specific component, or escalating prices of raw materials. When the wealth is concentrated in the hands of a few companies, smaller businesses have a harder time being seen as a powerful player in the market. They would have to spend a lot of advertising and sales money to compete with the large powerful oligopoly companies. Creativity. When the knowledge and awareness of a product or service is concentrated in just a few companies, it can be difficult for new ideas to come into play. The existing companies may decide to minimize new products and new distribution methods since they are happy with their current processes and they don’t have any motivation to be competitive by lowering prices or introducing new products or processes. For the individual consumer this lack of creativity leads to out-of-date products and services. Setting Prices. These big businesses have the power to determine what the prices will be, without any concern for competition. This is a negative for the consumer and for other businesses. The whole idea of competitive pricing is thrown out the window when these businesses go about their pricing practices. As you can probably see, oligopolies appear to be beneficial for the companies involved in them, but not so great for the other businesses and consumers in the society. GLOBALISATION Globalization (or Globalisation) is the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture. Globalization describes the interplay across cultures of macro-social forces. These forces include religion, politics, and economics. Globalization can erode and universalize the characteristics of a local group. Advances in transportation andtelecommunications infrastructure, including the rise of the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities. Though several scholars place the origins of globalization in modern times, others trace its history long before the European age of discoveryand voyages to the New World. Some even trace the origins to the third millennium BCE. Since the beginning of the 20th century, the pace of globalization has proceeded at an rapid rate. Benefits of Globalisation †¢ By buying products from other nations customers are offered a much wider choice of goods and services. †¢ Creates competition for local firms and thus keeps costs down. †¢ Globalisation promotes specialisation. Countries can begin to specialise in those products they are best at making. †¢ Economic Interdependence among different nations can build improved political and social links. Drawbacks of Globalisation. †¢ Cheap imports from developing nations could lead to unemployment in developed countries where the cost of production is high. †¢ Choosing to specialise in certain products may lead to unemployment in other sectors which are not prioritised. †¢ Increased competition for infant industry. †¢ ‘Dumping’ of goods by certain countries at below cost price may harm industries in order countries. Economic globalization is the increasing economic interdependence of national economies across the world through a rapid increase in cross-bordermovement of goods, service, technology and capital. Whereas the globalization of business is centered around the diminution of international trade regulations as well as tariffs, taxes, and other impediments that suppresses global trade, economic globalization is the process of increasing economic integration between countries, leading to the emergence of a global marketplace or a single world market. Depending on the paradigm, economic globalization can be viewed as either a positive or a negative phenomenon. Economic globalization comprises the globalization of production, markets, competition, technology, and corporations and industries. Current globalization trends can be largely accounted for by developed economies integrating with less developed economies, by means of foreign direct investment, the reduction of trade barriers as well as other economic reforms and, in many cases, immigration. Support and criticism Reactions to processes contributing to globalization have varied widely with a history as long as extraterritorial contact and trade. Philosophical differences regarding the costs and benefits of such processes give rise to a broad-range of ideologies and social movements. Proponents of economic growth, expansion and development, in general, view globalizing processes as desirable or necessary to the well-being of human society[209] Antagonists view one or more globalizing processes as detrimental to social well-being on a global or local scale;[209] this includes those who question either the social or natural sustainability of long-term and continuous economic expansion, the social structural inequality caused by these processes, and the colonial, Imperialistic, orhegemonic ethnocentrism, cultural assimilation and cultural appropriation that underlie such processes. The basic function of economy system Every economic system provides solutions to four questions: what goods and services will be produced; how they will be produced; for whom they will be produced; and how they will be allocated between consumption (for present use) and investment (for future use). In a decentralized (usually private enterprise) economic system, these questions are resolved, and economic coordination is achieved, through the price mechanism. Allocation Competitive markets — not corporate-dominated oligopolies — can perform well here so long as side-effects, such as externalities, are incorporated into prices. Ecological economists recognize a legitimate role of the market in society based on the efficiency of allocation of resources. A major improvement in markets includes the side-effects, so markets tell the ecological and social truth. However, pollution provides a subsidy to firms who would otherwise have to clean up their mess. They are easy to hide, hard to calculate, so they persist. This is called a market failure. If markets fail, this means becomes a central point of contention. ESS thus should make a big deal over market failure, which then becomes an institutional failure. Externalities. An externality is a consequence, positive or negative, of an economic activity that affects other parties without this affect being incorporated into market prices. Thus, market price deviates from the â€Å"true† social cost, sending the wrong signal. Note also the subtle linguistic trivialization. Interestingly, the economics profession has long neglected to assess the size or significance of externalities or to calculate the damages perpetrated on its victims, who by definition had these harms inflicted upon them without their participation-despite the obvious dysfunctions of industrialization and urbanization. Indeed, the bias of public policy in the USA has been to protect the producers, not the public at large. Daly comments on the trivialization of externalities by neoclassical economics: When increasingly vital facts, including the very capacity of the earth to support life, have to be treated as â€Å"externalities,† then it is past time to change the basic framework of our thinking so that we can treat these critical issues internally and centrally. Global Fairness Read Sachs and grasp his message. This is authentic social ecology. Without a grand social contract, cooperation between the Global North and the Global South will fail. The results will be disastrous. Sachs realizes that copycat development, the replication of the economic development practices of the global rich, will surely lead to global ruin: more poverty within vast ecological catastrophe. Orthodox western economics can neither be extended to the majority of the earth’s human inhabitants nor can it be sustained indefinitely by the 20% or so who enjoy its cornucopia. Sachs reveals the parasitical political character of global capitalism masquerading as shared economic development. The USA enjoys the opportunity to provide leadership here, but this moral authority has been squandered. ESS requires such leadership, soon. A good place to start is Africa. Brown provides much insight here. Left to itself, a market society will produce large maldistributions in wealth and income. In practice, the market-driven returns to capital, as profits and capital gains, accrue to the wealthy few, the capitalist class, while the returns to labor, wages and salaries, go to a multitude, the working class. This dynamic produces a class-based inequality of both wealth and income, which translates into differential political power. In the past, the inequalities were mitigated by redistributive tax policies–anathema to neo-liberalism, as exhibited by the recent Bush tax cuts. In the era of economic globalization, inequality has grown sharply within nations, including the USA, and on the global scene. Yet, economists regard this normative concern as outside the ken of â€Å"scientific economics. † Therefore, when issues of social justice are openly discussed in the context of sustainable development, do not turn to economics for insight. The usual deflection of the fairness discussion,now in play in the USA since the 2006 election, is to promote economic growth. Grow the pie rather than quibble over the size of the slices. But if the ingredients for physical growth become scarce, growth slows down and the quibbles morph into arguments. This can easily spin out of control. Count on it. Innovation Growth remains the engine of economic globalization without which the system as constituted would crash–although with runaway material growth earth’s ecosystems will surely crash. Schumpeter put it this way: Capitalism, then, is by nature a form of economic change and not only never is but never can be stationary. Schumpeter derided the â€Å"textbook picture† that depicted economic progress as the result of market-based competition . Rather, he pointed to innovation in products, sources of supply, organization, and technology that created a new context â€Å"which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives† . Indeed, Schumpeter foresaw that capitalism itself would fall victim to the turbulent task environment of its own making: The capitalist process not only destroys its own institutional framework but it also creates the conditions for another. Destruction may not be the right word after all. Perhaps I should have spoken of transformation . The pivotal move of ESS is to open up a horizon for enormous technical and social progress while maintaining and even restoring harmony with nature. Thus, sustainability offers enormous opportunity. The language of hope must replace the language of despair. There is real opportunity here. ^ Perverse Subsidies A related topic, rarely brought into view, is the plethora of perverse, often hidden, subsidies, including externalities, enjoyed by corporations in such established industries as energy, agriculture, and transportation. Not only do these gifts typically promote older, dirtier, less efficient industries, but they also stymie the development of innovative, cleaner alternatives –depressing prospects for sustainability. For example, subsidies to cotton farmers in the USA disadvantage cotton cultivators in Africa and subsidies to nuclear power generators present an unfair advantage to start-up wind power producers. These often hidden subsidies undermine economic efficiency and promote environmental damage, but go largely neglected in the economic literature. A study released in 2001 by Norman Myers and Jennifer Kent estimates the global cost of perverse subsidies at two trillion dollars, about 5. 6% of the $35 trillion global economy. The subsidy-rich, environmentally poor Bush-Cheney energy policy was formulated behind closed doors with input from energy giants like Enron but with no public disclosure. Eliminating perverse subsidies must be a first step toward building a sustainable economy. Thus, grappling with perverse subsidies and tilting the market toward renewable resources must be high on an ESS agenda. There are multiple components to economic systems. Decision-making structures of an economy determine the use of economic inputs (the means of production), distribution of output, the level of centralization in decision-making, and who makes these decisions. Decisions might be carried out byindustrial councils, by a government agency, or by private owners. Some aspects of these structures include: †¢ Coordination mechanism: How information is obtained and used to coordinate economic activity. The two dominant forms of coordination includeplanning and the market; planning can be either centralized or de-centralized, and the two mechanisms are not mutually exclusive. †¢ Productive property rights: This refers to ownership (rights to the proceeds of output generated) and control over the use of the means of production. They may be owned privately, by the state, by those who use it, or held in common by society. †¢ Incentive system: A mechanism for inducing certain economic agents to engage in productive activity; it can be based on either material reward (compensation) or moral reward (social prestige).