Research Paper on "Monopolistic Market"

Research Paper 5 pages (1801 words) Sources: 1+

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Monopolistic Markets

Pure monopoly exists where a single firm is the seller in a market with no other competing firms (or a significantly majority market share with very few, competitors). In a pure monopoly situation, the firm can set prices in the market to capture the maximum amount of revenue possible, as long as prices are not set so high that many consumers will simply decline to buy (i.e. A price above the demand line, operating in the elastic region).

Monopolistic competition exists where many competing producers are selling products that are very similar or comparable (can be substitutes for each other) but with some element of differentiation that sets them apart. In a monopolistic competition market, each company has a small market share (as opposed to pure monopoly, where the dominant firm has a large market share). Because differentiation of products is needed, marketing plays an important role in setting products apart in the buyers' minds. New firms can also enter the market more easily, because the market is open to competition, as long as they can offer a comparable, differentiated product. New entrants into the market may even enjoy an advantage in the short-run, as the differentiation in a product that other existing products don't offer may increase the demand for the new product and cause buyers to choose it over others. This can also allow the new entrant to charge a higher price (enjoying short-run profits). However, in time, the other firms in the market will adopt a similar product feature, once again evening out the competitive differences and causing the new firm to drop its to match others. In other words, the market will settle back at the long-run equilibrium.

The U.S. Postal Service is an example of a monopoly on the delivery of mail. There are some competitors in the market such as DHL and FedEx who will also deliver to both homes and businesses, except their delivery models focus on packages and express mail, and they charge higher prices for those "premium" services. Due to the economy of scale of the U.S. Postal service (a post office in every community in the nation, millions of letter carriers, trucks, etc.) they can offer a lower price on the delivery of letters than any competitor, thus the other companies are competing in the segments of the market where speed and customer service allow them to have factors other than economy of scale and low price. Additionally, the U.S. Postal service is the only place consumers can obtain a Post Office box. There are other mail box service stores, but with them a consumer must list the address of the store, then a box number. The U.S. Postal Service is the only option for a true "P.O. Box #."

Exclusivity deals are another way that monopolies can be established. For example if Walmart is selling a CD only available at Walmart, then the company has a monopoly on the market for that CD. For example, in 2009 Walmart was the exclusive seller of a new Miley Cyrus CD, the Time of Our Lives. Although in this case, Walmart did not use its monopoly advantage to raise the price of the CD beyond comparable market levels, e.g., to charge $20 for it compared to an average CD price of approximately $11. In fact, the CD was priced at only $8.00. This perhaps would be a case of a downward sloping demand curve. Despite its monopoly, the customers of the CD were only willing to pay a certain price, for example, many fans of Miley Cyrus are young "tweens" who are on a limited budget such as a weekly allowance. Knowing that there would be a large volume of sales of the CD and given its monopoly position, Walmart was assured of making money on it, even at the lower price.

Patent protections can also be used to establish and maintain a monopoly position in the market. For example, Monsanto has a monopoly for many strains of genetically modified corn because of patents on the specific genetic components of the corn. Roundup Ready corn is a Monsanto strain that is resistant to the herbicide, Roundup, which is also produced by Monsanto (Morris). In this case, Monsanto not only uses its patent on the genetic modification that created Roundup Ready corn, but also uses its exclusive access to the chemical formula of Roundup to protect its monopoly position. Monsanto enforces its monopoly through additional measures such as forbidding farmers to save and store seed for the next year; instead the farmers must purchase new seed from Monsanto the following year. Monsanto is using its monopoly position and the high demand for Roundup and Roundup Ready to keep raising the prices it charges for the corn. Farmers report that seed costs went up by 50% from 2009 to 2010. In this case, Monsanto has the opportunity to be the "price maker" in the monopolistic market.

The Hudson News concessions in many airports represent what could be considered a "geographic monopoly." Hudson News has been granted leases to install its stores (offering magazines and sundries, news and books) in the airport terminals beyond the security gates. Passengers (customers) have no other options (or very limited) if they decide they want to purchase reading matter, tourist trinkets, travel pillows, or other similar products before getting on a flight. Once they have passed through security screening, they are essentially "trapped" in the terminal without access to other "geographies" or outside markets. In particular, Hudson News is one of the only places that customers can get bottled water, because water bottles are not even allowed to pass through security due to terrorism screening measures. The Transportation Safety Administration did not intend to "regulate" the market to provide Hudson with a monopoly on bottled water, but that has been the net effect. Additionally, Hudson has expanded its types of establishments to include some restaurants and product shopping to capture a greater proportion of the dollars that customers spend while in the terminal.

In some areas, Comcast operates as a monopoly provider of cable services, as a more direct intention of government licensing activity (as opposed to the accidental government action in the case of Hudson). Comcast is the only licensed provider of cable in certain neighborhoods or communities. This gives Comcast the ability to be a price setter of cable, to some extent. However, there are other options available for customers for entertainment, such as Direct TV and Satellite TV, so Comcast must pay attention to market pricing forces and demand curves. In the area of high-speed internet, however, there are locations where Comcast is indeed the only option available, for example the Central District neighborhood in Seattle (Alben), because no other comparable providers have been issued licenses. The effect of the government action is to create barrier to entry and thus a geographic monopoly.

In the natural gas industry, for many years regulation created a monopolistic market. There was "limited flexibility and few options for natural gas delivery." (NaturalGas.Org). Exploration and production companies explored and drilled for natural gas, then sold it to pipelines and then it passed to distributors who then sold the gas to the customers. "The prices for which producers could sell natural gas to transportation pipelines was federally regulated, as was the price at which pipelines could sell to local distribution companies. State regulation monitored the price at which local distribution companies could sell natural gas to their customers." (NaturalGas.Org). As a result, prices remained relatively low and stable.

However, since deregulation of the natural gas industry in the 1980's the market has changed. More companies were able to get into the market and begin processing and distributing natural gas, thus there is more competition among companies, and more choice for consumers. Most significantly, "the price of natural gas is dependent on supply and demand interactions." (NaturalGas.Org). Under the earlier regulated market, prices were held low. At the same time, gas companies faced no competition, so they had no incentive to improve service or technology. However, in the natural gas market now, "end users may purchase natural gas directly from producers or LDCs [local distribution companies]." (NaturalGas.org). In other words, customers have a choice of who to purchase natural gas from. Additionally, there are now marketers acting as middlemen in the industry, also affecting price, distribution and offering customers more purchase options.

At the same time, producers are free to respond to market conditions by producing more or less gas, depending on the marginal revenue/profit they can obtain. When demand rises, so do prices, thus producers have an incentive to increase production. Then as more supply of gas becomes available on the market, prices will tend to drop, thus production will drop, over time decreasing supply. When the supply is lower, demand will begin to push the prices back up again, and producers will start to respond by increasing production, and the cycle will repeat,… READ MORE

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