Welcome back to my blog! Last time, we finished the discussion of the perfect competition market. In Today’s blog, I will begin to introduce the Monopolistic market.

Monopoly is completely opposite to perfect competition, there is only one firm in the whole market, and the single supplier constitutes the entire industry.

The Monopoly market have four features:

• A single seller
• No close substitutes
• High barriers to entry
• The monopolist is a price make

There is a term named natural monopoly, which describe the market situation where a monopolist has overwhelming cost advantage. This situation Usually happens when there is only one person have the ownership of scarce resources, or there is a public ownership of essential goods and services (water, electricity, gas, railway, canals, etc). For example, Chinese government is the only institution which control the the water, electricity, and gas resources in the country, thus we can say that Chinese government is the natural monopolist of water, electricity, and gas in China.

Why could the monopoly market exist? Well, the first reason is the Legal rights given by the government. Like the important public service, government will control those products with high scarcity but are essential to people’s lives, so as to avoid the emergence of sky-high prices of necessities. Secondly, First mover advantage. The first one who entry the market will take the advantage of monopoly. Thirdly, Economies of scale. With the expansion of the company, they will have a high output with low average costs. The branding effect can also be the reason for the existence of monopoly, due to the extremely high brand Loyalty.

Economics believes that the monopoly market structure also create problem. A monopoly may abuse its market power to restrict market supply in order to force up market price and consumer choice. What’s more, monopolist may cut product quality to save costs. Monopoly will also cause x-inefficiency, because People may become unmotivated due to lack of competition. Just a reminder! I mentioned in my pervious blogs that X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. [1] Moreover, monopolist will artificially create barriers to restrict competition. For example monopolist will threaten major suppliers that it will stop buying from them if they supply rival firms, and it will threaten retailers to stop supplying them with their product if the retailer stock rival products. Thus the situation of monopoly need to be regulated.

Reference:

[1] https://www.economicshelp.org/blog/glossary/x-inefficiency/#:~:text=X%20Inefficiency%20occurs%20when%20a,will%20not%20be%20technically%20efficient.