Features of monopoly companies are those distinctive attributes you would identify such a company with.
Features of Monopoly
1. Single supplier
A single company supplies the product or service in question to the market. The existence of a single supplier could emanate from being the sole controller of certain raw materials. When a monopoly controls such a resource input, other potential competitors are barred from engaging in such production. This is because they are missing one of the vital factors of production.
Monopolies being single suppliers comes at a disadvantage to you, the consumer. The monopoly firm may increase prices to regulate its demand. Thus, there is no organic interplay of forces of demand and supply. The monopoly company determines how much to supply and triggers price changes as the monopoly would wish.
Also, they may lower the commodity’s quality at the consumer’s expense. The monopoly company knows you have no alternatives as a consumer. If the alternative is there, they know it won’t keep up with your demands or meet your expectations. This assurance that you will choose them regardless of options available to you makes some reduce the quality of their product or services.
For instance, a monopoly company that supplies you with electricity at home, in your office, or workshop certainly knows you can use solar energy. However, solar energy will likely be insufficient to keep up with the high power demands of your heavy machinery and equipment. You will choose the power-supplying company over and over regardless of its reliability.
2. Barriers to entry and exit
These costs you incur while setting up a business include licensing fees, insurance, equipment, hiring, and setting up premises. These costs are extremely high if you try to enter an industry served by a monopoly.
The already existing monopoly company has solved the puzzle of raising these funds. They have established a sizable capital inflow in years of operation to sustain and grow their business operations.
Deciding to venture into such an industry will demand too much money and an extensive support system of lawyers, accountants, auditors, and other professionals. This is an exceptional system that could take you significantly longer to establish. Before you have everything in place, the industry has undergone significant market changes, and the single player has grown even stronger.
The government protects some monopolies. If you were to try and venture into their industry, the government would bar you by all means. Government regulations will make it hard for you and your support system to venture into the industry in question successfully.
The same barriers also apply to the monopoly companies themselves. In case of exit, this is often lengthy and procedural. It attracts many stakeholders and makes it quite hard for the established monopoly to exit from the market.
3. Profits maximization
In a monopoly market, prices are usually set by the monopoly company. They often set high prices that will earn them higher profits. This happens because there is little or no competition in existence.
Monopoly companies try as much as possible to produce just enough to earn them profits. They balance marginal cost and marginal revenue to determine what is just enough. They make sure the marginal cost do not surpass the marginal revenue.
If the marginal cost exceeds the marginal revenue, the cost of manufacturing an extra unit will be more than the profit generated from this unit. Monopoly companies maximize their profit this way in the short run.
Provided they can earn sizable profits in the short run, they are in more control of their profitability in the long run.
4. Unique outputs
Since only one firm provides goods or services, their output is often unique. Of course, you would expect these products or services to be unique because there are no close substitutes.
Product or services supplied by these monopolies enjoys absolute product differentiation. As a consumer, there are no comparable products or services. This absolute product differentiation enhances brand choice and repeated purchases.
At times, monopolies are so dominant that consumers do not differentiate between the company and the industry. They tend to mistake the monopoly firm for the industry.
For instance, Google, even though it is not a pure or natural monopoly, it is often confused to be an industry. Google is rather a company offering internet search services. Most people do confuse the industry of internet search engines with Google itself.
5. Price discrimination
Monopoly companies charge different prices to different customers for the same product. Among other features of monopoly, price discrimination is possible since there is little or no competition.
Geographical segmentation of customers is one thing that monopolies company uses to exercise price discrimination. They charge customers in some geographical regions more than in others. This is possible by limiting the supply of their output in question to targeted geographical regions. It creates some sense of scarcity for their output and justifies a price hike.
If you are an infrequent customer of monopoly output, expect to be charged higher than a regular consumer. You are, in this case, segmented based on your purchase behaviors. Monopoly knows you will only consume their products or services occasionally. It will not hurt your pocket if they overcharge you once in a while.
At times you, the customer, force monopolies to exercise price discrimination. Customers with high-income associate high prices with better quality. Monopoly will segment your perception of their products using psychological segmentation.
Monopolies will not hesitate to charge you higher if you are such a customer. This is how they will build customer loyalty with you. You will perceive the expensive product or service you buy as premium.
6. Economies of scale
Monopoly companies use the marginal cost of production to ascertain the production point at which they will enjoy economies of scale. Using the marginal cost and marginal revenue equilibrium, a monopoly firm will know how many profitable units should be produced.
These units are just as many to lower the fixed cost of production per unit. However, they are not necessarily produced in excess to a point where the variable cost per unit is again high than it should be.
If your sole proprietorship or a partnership were to try the same thing, competition would overwhelm your production model.
7. Price maker
Being a price maker, a monopoly will charge you as a customer based on your financial ability and wiliness to buy their output. They will charge you as much as you are willing to pay if you have the financial capacity to buy.
If a monopoly company ignores your ability and willingness to pay, they will get pricing all wrong. It will be too high for you as a customer. You would probably feel there is little value for money for the charged price of monopoly’s output.
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- Examples of Monopoly: 20+ Worldwide
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