What is the Monopoly? The word Monopoly has been derived from the combination of two words i.e., “Mono” and “Poly”. Mono refers to a single and poly to control. “Mono” means one and “Poly” means seller. A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. Thus monopoly refers to a market situation in which there is only one seller of a particular product. This means that the firm itself is the industry and the firm’s product has no close substitute. So, what is the question we are going to discuss; What does Monopoly mean? Understand Monopoly control Methods. Read in Hindi.
Here are explained What does Monopoly mean? after Understand Control and Regulation of Monopoly Methods.
The monopolist is not bothered by the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve. In this way, monopoly refers to a market situation in which there is only one seller of a commodity.
There are no close substitutes for the commodity it produces and there are barriers to entry. The single producer may be in the form of an individual owner or a single partnership or a joint-stock company. In other words, under monopoly, there is no difference between firm and industry. The monopolist has full control over the supply of the commodity.
Having control over the supply of the commodity he possesses the market power to set the price. Thus, as a single seller, the monopolist may be a king without a crown. If there is to be the monopoly, the cross elasticity of demand between the product of the monopolist and the product of any other seller must be very small.
Can there be the complete monopoly in the real commercial world? Some economists feel that by maintaining some barriers to entry a firm can act as the single seller of a product in a particular industry. Others feel that all products compete for the limited budget of the consumer. Therefore, no firm, even if it is the only seller of a particular product, is free from competition from the sellers of other products.
Thus complete monopoly does not exist in reality. The monopolist is the sole seller of a particular product. Therefore, if the monopolist is to enjoy excess profit in the long run that must exist certain barriers to the entry of new firms into the industry. Such barriers may refer to any force which prevents rival firms (competing producers) from entering the industry.
Learn Control and Regulation of Monopoly:
There are three methods of controlling and regulating monopoly:
First, the government may adopt anti-monopoly laws and restrictive trade practices legislation. Second, the government may either run natural monopolies directly or regulate monopolies by imposing price ceilings. Third, the government may regulate monopolies through taxation.
Besides, there are certain fears that prevent the monopolist from charging a very high price in order to earn large super-normal profits.
They are discussed as under.
Fear of Potential Rivals:
The fear of potential competitors may prevent a monopolist to charge a very high price to his customers. If he sets a very high price, he will earn large super-normal profits. Attracted by these monopoly profits, new entrants may force themselves into the monopolized industry. The monopolist, being averse to the entry of new firms, would prefer to charge a reasonable price and thus earn only a modest profit.
Fear of Government Regulation:
The same consideration applies to potential government regulation. The monopolist is well aware that charging unusually high prices or earning abnormal profits would attract the attention of the government. Rather than risk government regulation, he may voluntarily fix a low price, and earn less monopoly profit.
Fear of Nationalisation:
The fear of nationalization also prevents the monopolist to wield absolute monopoly power. If the product or service which the monopolist provides is a public utility service, there is every likelihood of the state taking over the monopoly organization in public interest. This consideration may prevent the monopolist from charging too high a price.
Fear of Public Reaction:
The monopolist is also aware of public reaction if he charges a very high price and earns huge profits. Voices may be raised against the monopoly firm in parliament to press for anti-monopoly legislation.
Fear of Boycott:
People may even boycott the use of monopolized service and start their own service instead. For instance, if in a big city taxi operators combine to charge high rates, people may boycott taxi service and even start operating their own services by forming a cooperative society. Naturally, such a fear compels monopoly firms to charge reasonable prices and earn only nominal profits.
Fear of Substitutes:
Then there is the fear of substitutes. In fact, the fear of substitutes is the most potent factor which prevents monopoly firms from charging very high prices and thereby earn super-normal profits. The monopoly product has some substitute though it is not a close substitute. Therefore, the fear of the emergence of very close substitutes is always uppermost in the mind of the monopolist which acts as a restraint on his absolute power.
Differences in Elasticities of Demand:
The differences in the short-and long-run elasticities of demand for the monopoly product also limit monopoly power. In the short-run, the monopolist can charge a very high price because customers take time to adjust their habits, tastes, and incomes to some other substitutes.
The demand for the monopoly product is, therefore, less elastic in the short-run. But in the long-run, the fear of public opinion, the emergence of substitutes, government regulations, etc. will force the monopolist to set a low price. He will view his demand curve as elastic, and sell more at a low price.
1. Control of Monopoly through Legislation:
Government tries to control monopoly by anti-monopoly laws and restrictive trade practices legislation.
These measures tend to:
- Remove restrictive trade practices and fixation of high prices.
- Reduce the incidence of market-sharing agreements.
- Remove unfair competition.
- Restrict the control of a very large share of the market.
- Prevent unfair price discrimination.
- Restrict mergers in order to avoid market domination, and.
- Prohibit exclusive agreements between the producer and retailer to the detriment of other traders.
2. Control of Monopoly through Price Regulation:
We now take the case where the government feels that monopoly price is very high and tries to bring it down by price regulation. To regulate monopoly, the government imposes price ceiling so that monopoly price should be near or equal to competitive price.
This is done when the government appoints a regulating authority or commission which fixes a price for the monopoly product below the monopoly price, thereby increasing output and lowering the price for the consumer.
Before the regulation of monopoly price, the monopolist is making PF * OM profits by selling OM output at MP (=OA) price. Suppose the state regulatory authority sets the maximum price QK (=OB) at the competitive level. The new demand curve facing the monopolist becomes BKD. Its corresponding MR curve becomes BKHMR. Now the monopolist behaves like a perfectly competitive producer. He produces and sells OQ output at point К where the MC curve cuts the BKHMR curve from below.
As a result of price regulation, the monopolist increases his output to OQ from OM. He still makes supernormal profits equal to KG * OQ that are smaller than the monopoly profits (PF * OM) at the unregulated price MP. If the price regulatory authority fixes the monopoly price WS equal to the average cost where the AC curve cuts the D/AR curve at point S, the monopolist would be able to place a greater quantity of output OW in the market.
At this level, the monopolist would earn only normal profits. In such a situation, the monopolist would continue to produce so long as he is getting a fair return on his capital investment. But the regulatory authority cannot force him to increase output beyond OW because the monopolist would not be operating at a loss.
3. Control of Monopoly through Taxation:
Taxation is another way of controlling monopoly power. The tax may be levied lump-sum without any regard to the output of the monopolist. Or, it may be proportional to the output, the amount of tax rising with the increase in output.
By levying a lump-sum tax, the government can reduce or even eliminate monopoly profits without affecting either the price or output of the product. A lump-sum tax imposed on the monopoly firm is shown in suppose where AC and MC are the average cost and marginal cost curves before the tax is levied. The monopolist earns APRT super-normal profits by selling OM product at MP Price.
The imposition of the lump-sum tax is, in fact, a fixed cost to the monopoly firm because it is independent of output. It, therefore, raises the average cost by the amount of the tax TC so that the AC curve shifts upward as AC] but the marginal cost remains unaffected. So the imposition of a lump-sum tax has the effect of reducing monopoly profit from APRT to APBC.
The entire burden of the tax will be borne by the monopolist himself. He cannot shift any part of it to his customers at any stage by raising the price and reducing output. Since the monopolist’s marginal cost curve and the marginal revenue curve remain unaffected by the tax imposition, any change in the existing price-output combination would only lead to losses.
The government can also reduce monopoly profits by levying a specific or a per unit tax on the monopolist’s product. A per unit tax on monopoly output has the effect of shifting both the average and marginal cost curves upward by the amount of the tax.
Illustrates this case. AC and MC are the monopoly firm’s average cost and marginal cost curves before the tax imposition. It earns BPGK monopoly profits by selling OM quantity of the product at the UP price. Suppose a government levies a specific tax which is a variable cost to the monopoly firm tends to shift the cost curves upward to AC1 and MC1.
The monopolist’s new equilibrium point is E1 where the MC1 curve cuts the MR curve. The new price is M1P1 >MP (the old price) and the output is OM1
Since the monopolist has to bear a portion of the tax burden him, his profits are also reduced from BPGK to RP1CF. Such a tax does not help in regulating monopoly price and output. For the higher, the demand elasticity of tax, the higher the price for the product and the lower the output. The ultimate loss will be borne by the public rather than by the monopolist.