Monopoly and Imperfect Competition Form

Monopoly and Imperfect Competition form part of the market taxonomy and in order to understand them then what a market structure refers to should be understood first. A market structure can be simple defined as the organizational and operational characteristics of a market which have an influence on the competition and pricing (Riley, 2006). These characteristics are significant to both economics and marketing and play a direct role in strategic decision making. The choice behavior of market actors is affected by the characteristics and extent of competition in the market (Kirzner, 1973).

The most significant features that are usually considered in a market are the number of firms, the share of the market occupied by the largest firms, the nature of costs, the vertical integration of the industry, extent of product differentiation, structure of buyers in the industry and the turnover of customers.

Monopoly The term monopoly is a derivation of two Greek words monos which means one and polein which means to sell and it refers to a condition in which a product which has no close substitutes is sold by only one seller in the entire market. It can also refer to a situation where a good or service has only one provider and is usually common with large corporations such as Microsoft.

Such a market is characterized by many buyers and consumers being supplied by one firm, the product being sold by the firm being unique and with no close substitutes, the firm enjoys market power, and a restriction in market entry (Gabszewicz, 2000). The restriction of market entry can be imposed by natural occurrences, which lead to a natural monopoly, or by technical conditions or barriers. The natural barriers to market entry may include high cost to enter a market, exclusive control of a natural resource by a business e.g.

water, and a popular trademark that ensures customer loyalty e.g. Pepsi (Dick and Basu, 1994). The technical barriers may include copyright or patent rights on a product or state restrictions which legalize monopoly. Imperfect competition An imperfect competition is a situation where an individual business or firm has a significant degree of control with regard to the price of its output.

Several factors can enable a firm to have this kind of control including economies of scale, experience of the market over an extended period of time, a well developed brand name, cost advantages that are not dependent on size, and an efficient distribution channel among other factors.

Difference between Monopoly and Imperfect market These two market structures are closely related in that both involve control of a market, however, the main difference that can be noted is that whereas in monopoly only a single firm dealing in that specific production is available, in imperfect competition there are several firms that deal in the same production.

For example, when only one firm provides electricity to a country then the firm will be considered to a monopoly whereas when there are several firms producing soft drinks but one of the firms dominates the market and has the ability to control it product price then the situation will be considered to be an imperfect competition.

The second difference that can be noted is that the product or service that a monopolistic firm is providing does not have a close substitute, whereas that provided in a case of imperfect competition has a close or exact substitute.

For example, when there is only one airline operating in a country or state then this will be considered to be a monopoly since it is impossible to closely substitute air transport services with other means of transport, whereas where there are many mobile operators and only one of them dominates the market then the case will be an imperfect competition.

Another significant difference that exists between a monopoly and an imperfect competition is that in a monopoly there is a possibility of state or government involvement thereby forcefully creating the particular market structure whereas in an imperfect competition the situation is almost entirely created by natural market forces.

For instance it is possible for a government to license only a single Cement manufacturing firm in a region thereby creating a monopolistic market in that region but it is not possible for the same government to prevent other firms to take advantage of the market forces or conditions to rise above the rest in terms of market control.

Impact of monopolies When discussing about the impact of monopolies it is usually common to lay much emphasis on the effects on the consumers rather than on other businesses in the market, this usually brings one question; are monopolies good or bad to consumers? Given the several negative aspects associated with monopolies I would argue that monopolies are generally bad not only for the consumers but to the economy at large since they have a general outcome of restricting free trade which is the only way that prices can be set.

It is very possible for large monopolies to damage not only economies but also democratic governments with the full extent of damage not being very obvious to the general public, who are also the consumers, who in most cases just see the seemingly beneficial effects (Belk, 1975). In extreme cases these harmful effects are successfully hidden by the monopolists. One of the ways that monopolists can harm consumers is by causing substantially higher prices for the products and/or services that they provide (Schwartzman, 1959).

Since monopolists have the power to control the prices of their products/services in the market they may decide to raise them so high that the consumers will not be able to comfortably buy, this is contrary to a situation where the market competition is perfect and the prices are controlled by the market forces of demand and supply.

For instance when Microsoft was still a monopoly in all segments of the computer market the prices were so high but when this monopoly ended in certain segments the prices came down by almost half (Painter, 2003). At the same time there is a possibility of levels of output dropping drastically when compared to a case where there were competitive companies.

This drop in output levels will create an artificial scarcity of the product concerned which impacts negatively on the consumers since they have neither alternative sources nor substitutes for that particular product. Another possible outcome of a monopolistic market is a lower level of product quality than would otherwise be experienced in a competitive market (Mussa and Rosen, 1978). Such lower level quality will also extend to the quality of related goods and services.

What this implies to the consumer is that his needs for the right quality of products will not be met and he will have no choice but to go for the lower quality product (Pacheo, 1989). For instance, if a firm monopolizes the fuel production industry and produces fuel that has damaging effects to engines of motor and other machines then the consumers will be forced to buy the fuel even they know very well the effects of using that fuel.

Such lower level quality may result from the monopolist's bid to reduce on production cost and since he is competing no other product he may resort to lowering the quality in order to meet his target. A monopolistic market will also result in a slower advancement in the development and application of new technology which have always being associated with improvement in quality of products.

New technology usually come with advantages such as durability, user friendliness, and environmental friendliness, and will generally enable a firm to produce better quality goods and lead to a reduction in production costs. However, monopolists do not find it necessary to invest in innovation since it is usually necessary for a highly competitive firm and it can be viewed as a bad business strategy by a monopolist.

This will translate to nonstandard products for the consumers with regard to the current technology and since the production costs will also remain at their level high the consumers will never expect a reduction in product price. Monopolists focus their research and development on ways of suppressing new technologies that may prove to compete them rather than focusing on true innovation. This can be seriously disadvantageous to the growth of an economy which always been associated with innovation.

Conclusion Many individuals, even those opposing monopoly, have argued that monopoly per se is not bad but the harm only comes when the monopoly power is abused, such an argument seriously covers up the harmful effects of monopolies and may be an indication of little understanding of how much harm is experienced from monopolies. When the term abuse is used it simply means unhealthy tactics such as greedy pricing and colluding with suppliers with the aim of creating a monopoly for a particular product.

However, the fact that these monopolies can be harmful even without engaging in such tactics has always been overlooked. It should.