Understanding Monopolies: Types, Characteristics, and Examples

Posted on Nov 15, 2024 in Economy

Prices of Related Goods

Substitute Goods

The quantity demanded of a good depends on changes in the prices of related goods. If the price of one good increases, the quantity demanded of a substitute good will also increase. Substitute goods satisfy the same consumer need, such as margarine and butter, tea and coffee, or sugar and saccharin.

Complementary Goods

If the price of one good increases, the quantity demanded of a complementary good will decrease. Complementary goods are typically used together, such as buses and fuel, or coffee and milk.

Long-Term Business Strategies in Less Profitable Markets

In the long term, companies facing lower profits have two primary options:

  1. Transform or restructure production processes: This involves increasing efficiency and potentially copying successful production functions to boost profitability.
  2. Liquidate or relocate: Companies may choose to close down facilities and move to more profitable economic sectors.

The Operation of Monopoly

The term “monopoly” originates from the Greek words mono (one) and polein (to sell). Several types of monopolies exist:

Monopoly of Offer

This occurs when there is only one seller (bidder) in the market, giving them significant power to determine the price. There are many buyers (applicants) in this scenario. The monopolist understands that higher prices typically lead to lower demand. Examples include RENFE, ALTADIS, SEVILLAMA EMDESA, and LINDECO WATERS AND SERVICES.

Monopoly of Demand (Monopsony)

This occurs when there is only one buyer (plaintiff) and many suppliers. Sellers are limited to selling to this single buyer. An example is the defense industry’s reliance on purchases made by the state.

Bilateral Monopoly

This occurs when there is only one buyer and one seller. An example is a wage negotiation between an employer and a trade union.

Reasons for the Emergence of Monopoly

Several factors can contribute to the formation of a monopoly:

  1. Exclusive control of a commodity: A single company may gain exclusive control over a specific commodity, leading to a monopoly.
  2. Patents and utility models: These grant temporary monopolies. A patent gives an inventor exclusive rights to manufacture a product for a set period (20 years, non-renewable). A utility model protects an invention that provides an object with an advantageous configuration for use or manufacture (10 years, non-renewable).
  3. State control over services: Government control can create state monopolies. Examples include RENFE, Tobacco, and Telefonica, although EU legislation now prevents state monopolies in many countries.
  4. Natural monopolies: These arise when it’s more efficient for a single company to provide a product or service due to market size and fixed cost structures. Examples include water and electricity supply or garbage collection, where a single provider minimizes resource waste. RENFE can be considered a natural monopoly.