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Monopoly: Definition & How Companies become one
Monopoly is a market status in which only a producer provides the entire supply of an item (also known as a monopoly - the exclusive right to sell a certain product). This one is the most common type of monopoly. However, monopoly is also divided into other types of monopoly such as monopsony - many people sell the same product but only one person buys and oligopoly - the monopoly is held by a group instead of an enterprise). Monopoly markets exist in many different sectors, most of which are related to the ownership of the state. Some industries related to the monopoly market can be mentioned like electricity and water, weapons trading and mineral exploitation, and so on.
What leads to the monopoly?
There are many reasons that result in the monopolistic production:
First, monopoly can derive from control of production inputs. If an individual, business or nation can control inputs materials, fuel, etc, then they will become a monopolist. For example, South Africa possesses a vast majority of diamond reserves; thus, it holds a monopoly on the diamond markert.
Secondly, monopoly originates from copyright issues. Copyright ( provided by authorities) will help an individual or business hold control over industry technology and create barriers for other competitors. For example, the pharmaceutical industry owns a copyright in manufacturing drugs that can last for 15-20 years, and no other manufacturers can therefore produce these drugs before the drug copyright expires.
Third, monopoly comes from natural factors formed in the process of enterprise’ s development (natural monopoly). In this case, the larger the scale of the production is, the lower the cost is needed. Thus, a business which possesses this advantage will create barriers that restrict competitors from joining the market. For example, in e-commerce activities, Amazon is gradually taking the monopoly compared to other competitors, and this can be attributed to its large customer size, gradually reduced transportation costs and thus better negotiation of prices from suppliers.
Monopoly regulated by the government. In this case, the government stated that offering the monopoly brings about benefits for the society. For instance, in some Nordic countries, governments in these countries hold the right to produce alcoholic beverages to ensure the citizens’ health, hence making this market monopoly. In Vietnam, the electricity industry is managed by the government and assigned to EVN exclusively in order to ensure a reasonable electricity supply and prices.
Finally, monopoly is the result of free competition. In other words, monopoly is the result of big fish eats little fish, where weak businesses will be acquired and merged in. Eventually, once most businesses are merged, the market will become a monopoly.
The need to limit monopoly?
Monopoly is discouraged by countries since monopoly can lead to serious consequences. For example, when the market has a monopoly company, then consumers will have to pay a higher price to buy the monopoly product. Or based on the power of monopoly, the monopoly enterprise will earn more profits and widen the gap between the rich and the poor. This worsens the poverty of countries and also results in stability phenomena in society ( such as social evils, violence, and so on). Besides that, monopoly also restricts the ability to innovate the economy. Enterprises which have monopoly power will find ways to create entry barriers to protect their stand in the industry (mainly due to price) and have no incentives to develop or compete new technologies. In terms of small businesses, it’s the entry barriers that limit accessible resources as well as limits the output market, making the innovation stagnant.
Looking back in the 1990s, once Microsoft first launched the Microsoft Office suite of products. Microsoft became a monopoly on technological products at that time, and the assessment of products’ pricing depended on their desire, In fact, Microsoft Office was first launched into the market with a price of 995$ as a complete set, and if you buy each software separately, then you have to pay up to 1485$. But in this modern society, when there are more competitors and the market power of Microsoft dwindled, Microsoft softwares has been adjusted to a reasonable price for consumers ( raging around 150$- 250$) and made most people accessible to this software.