Monopoly: types, causes, consequences and characteristics

We explain what monopoly is, how it arises and its consequences. Also its main characteristics, examples and more.

In a monopoly, a single company produces and sets the prices for its products.

What is monopoly?

A monopoly is a market situation in which A single supplier or producer is the one who markets a product or service and there are no other suppliers or competitors that can offer the same. It is a market situation of imperfect competition, in which a single monopoly company and many demanders interact.

Etymology: The word “monopoly” derives from Greek monkeys, which means “one” and polein, which means “to sell” and refers to the existence of a single seller who dominates a product category in the market.

A monopoly is the opposite of a free market, where prices are regulated by the law of supply and demand. When a monopoly exists, a single producer can set whatever price he wants for his products, and demanders will buy them anyway because they have no other alternative.

How does a monopoly arise?

A monopoly can arise for a variety of reasons:

• State regulations. When negotiations take place between large companies and the State of a country, regulations may arise that favour the enrichment of a minority group in power, at the expense of the exploitation of natural resources and the displacement of small and medium-sized companies.
• Obtaining raw materials. Natural resources used as raw materials for industry are sometimes difficult to access and obtain, so large investments and structures are required for their exploitation. Companies with the greatest capital and influence are those that usually develop these types of businesses.
• The right of property for the researcher. Patents are a right endorsed by the State and consist of granting the exclusivity of production and marketing of a product for a certain number of years, that is, a monopoly is established for a certain time. After this period, any other supplier can market the same product. The objective is to promote research and innovation and, through the patent, the creator can recover and obtain a profit from all the investment.
  For example: Creating a medicine requires a large investment, research time and testing to confirm the drug’s effectiveness and safety. Once the patent period ends, the medicine can be marketed by other suppliers.
• Imperfect competition. The monopolistic company usually has a large amount of capital to invest and a capacity to produce in series that is very difficult or impossible for any other producer on the market. This advantage of the oligopolistic company can occur through a merger between several companies or links with powerful officials who exert their influence from the State to satisfy individual economic interests.
• The merger between companies. Large companies often buy other smaller companies or merge with another large company that sells other products in the same field in order to capture a larger share of the market.
  For example: A company that produces tea and herbal infusions bought another company that makes coffee and continues to market it under the original brand to keep customers.

Features of monopoly

Among the main characteristics of a monopoly we can highlight the following:

• It is a market structure of imperfect competition in which one supplier has the exclusivity to produce and market a product or service.
• It can arise for various reasons, but the main one is State regulation, which allows the privilege of performing a monopoly in the long term.
• The sole supplier has the power to control market prices and the quantity of goods offered for the category of products or services it offers.
• It sets up a barrier to other bidders who fail to enter the market and become potential competitors, because no one else has the capital, structure or regulatory privileges to compete with the monopolistic companies.

Consequences of monopoly

Today, monopoly situations exist that weaken free market economies because they generate imbalances in prices, quality and quantities of goods available on the market, preventing the free exchange of wealth. As a result, demanders do not have free choice when competing and the only supplier can abuse the situation for their own benefit.

As a monopoly company continues to operate over time, it often decreases the quality of the goods or services it offers to the market in an effort to make more profit at the lowest cost. This happens because it is not under pressure from any other competitor and people have no option to choose another supplier, so they will continue to buy the same goods even if they are of lower quality.

Examples of monopoly

Examples of monopolistic companies:

Telephones of Mexico (TELMEX)

TELMEX was founded in 1947 in Mexico City and in 1950 it bought the American company ITT Corporation and became the only provider of fixed-line telephone service in Mexico. In 1972 the company passed into the hands of the State and in 1990 it was acquired again by the private sector, merging with other smaller companies.

Beginning in 1997, new companies appeared on the Mexican market offering prepaid telephone service (without a monthly fee) with a recharge system. However, they were not direct competitors of Telmex.

Later years, with the development of mobile telephony and the updating of the laws of the Mexican State, Telmex ceased to be a monopoly and today, despite having lost a large part of the market, Telmex continues to be one of the most important companies. from Mexico.

Casinos Austria International

Casinos Austria Internacional is a corporation founded in 1967 in Austria, and one of the most important gaming and entertainment companies. It owns and operates casinos, slot machines, lotteries and online gaming platforms around the world.

Until the 1990s it was a monopolistic company in several countries, but with the appearance of online gaming and casino platforms the market rules changed and new providers were able to join the market, although Casinos Austria continues to be one of the main companies in the market. item.

References

• RAE, (2023). Monopoly, from: RAE
• Economy and development (2017). Why do monopolies arise? chap. 19 – microeconomics (video), from: YouTube
• Lugo López, J. and Zurita Gonzáles, J. (2004). The social cost of the TELMEX monopoly in fixed telephonyfrom: UAEmex

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