Market Structures: Monopoly and Competition Dynamics

Causes of Monopoly Formation

The anomalous situation of a monopoly is a market economic system based on competition. The main causes involved in its appearance include:

• Exclusive access to a particular product
• Monopoly law
• Possession of a patent
• Natural monopoly
• Collective monopoly

Understanding Monopolistic Competition

In most markets, products do not comply with the principle of a uniform product. In reality, competing products are similar but not identical.

Monopolistic competition is described as being shaped like a perfectly competitive market with many buyers and sellers. The demand curve shows the amount a company can sell at various prices, provided that other competitors do not vary theirs. A clear example of monopolistic competition is the fashion industry.

Characteristics of an Oligopoly

An oligopoly is a market form in which there is a large number of buyers and a small number of sellers who are thus able to influence price. Oligopoly is also characterized by demand confronting a small group of buyers with a large number of sellers. The extreme case of an oligopoly of supply is the duopoly, where two firms are involved in the market. Depending on the characteristics of products, we can distinguish:

• Perfect oligopoly: when the product is perfectly homogeneous.
• Differentiated oligopoly: when products have a degree of differentiation.

The Nature of a Monopoly Market

A monopoly market represents the shape totally opposite to perfect competition. This is a market that is perfect, transparent, and free, depending on the case. There are distinguished three situations:

• Monopoly on offer: when there is only one supplier and many demanders.
• Monopoly or monopsony demand: when there is a single buyer and many suppliers.
• Bilateral monopoly: where there is a unique applicant and a single supplier.

Price Determination in a Monopoly

The market equilibrium price of a monopoly is not determined by the match between supply curves; there is no market supply curve. The price is then formed according to the market demand curve.

• Market demand is formed by the sum of all individual demands.
• There is no market supply curve, as the monopolist is the only bidder.

The monopolist will seek to establish the price or the amount that poses the greatest benefits. This is not achieved by simply raising prices to increase revenue. This could have a secondary effect on the quantity sold, so that what was won by the price increase would be lost by a decrease in sales caused.

Before a price increase occurs, two simultaneous effects happen:

• An increase in revenue generated by the higher unit price.
• A decrease in income caused by the decrease in the amount that the price rise causes.

An inelastic demand curve, as in the previous figure, means the price increase causes a decrease roughly proportional to the quantity demanded.