By Cpa Emmanuel Adoli
What you stand to gain
How many of us have interacted with the board game called monopoly? Monopoly is a real-estate board game for two to eight players, in which the player’s goal is to remain financially solvent while forcing opponents into bankruptcy by buying and developing pieces of property ying and developing pieces of property. If a player acquires a monopoly—that
is, all of a particular group of properties—that player may purchase improvements for those properties; improvements add substantially to a property’s rental fee. This makes it expensive for other players landing on those properties. A player continues to travel around the board until he or she is bankrupt. Bankruptcy results in elimination from the game. The last player remaining on the board is the winner A monopolistic firm can be compared to this last player. In some instances a firm can beat others out of the market, and in some cases monopoly is predetermined. In the Bible, God said to man,
Be fruitful and multiply; fill the earth and subdue it; have dominion over the fish of the sea, over the birds of the air, and over every living thing that moves on earth. (Genesis 1:28).
For there to be order on earth, man had to be given monopoly over other beings. Let us start by briefly looking at market structures in general. In a market, price and output are determined under four main market structures: perfect competition, monopoly, monopolistic competition and oligopoly. Competitive markets consist of many small buyers and sellers who are price takers. In contrast, a monopolized market is supplied by a single seller, who restricts output and holds prices above marginal cost. Marginal cost is the change in total cost per unit change in output, e.g. the cost involved in producing an extra bag of cement for a cement producer.
Sources of Monopoly
The firm may control the entire supply of raw materials required to produce the product.
The firm may own a patent or copyright which precludes other firms from using a particular production process or producing the same product (like the Coca-Cola Company).
In some industries, economies of scale may operate over a sufficiently large
range of outputs and leave only one firm supplying the entire market. Such a firm is called a natural monopoly. Examples of these are public utilities (e.g., power generation and supplying companies). To have more than one such firm in a given market would lead to duplication of supply lines and to much higher costs per unit A monopoly may be established by a government as the sole producer and distributor of a product or service
(e.g., the post office). This is known as legal or statutory monopoly. A legal
monopoly offers a specific product or service at a regulated price and can either be independently run and government regulated, or government run and regulated. A legal monopoly is also known as a “statutory monopoly.”
Sometimes a monopoly is necessary. It ensures consistent delivery of a product or service that has a very high up-front cost. For example it is very expensive to build new electric plants or dams, so it makes economic sense to allow monopolies to control prices to pay for these costs.
Advantages of Monopoly
Research and development –
Monopolies can make supernormal profit, which can be used to fund high-cost capital investment spending. Successful research can be used for improved products and lower costs in the long term. This is important for industries like telecommunications, aero plane manufacture and pharmaceuticals. Without monopoly power that a patent gives, there may be less development of medical drugs. In developing drugs, there is a high risk of failure; monopoly profits give a firm greater confidence to take risks and fund research which may prove futile
Economies of scale – Increased output
will lead to a decrease in average costs of production. These can be passed on to consumers in the form of lower prices. This is important for industries with high fixed costs, such as tap water and steel production.
International competitiveness – A
domestic firm may have monopoly power in the domestic country but face effective competition in global markets. For example, Kenya Airways has a domestic monopoly but faces competition globally. With markets increasingly globalized, it may be necessary for a firm to have
a domestic monopoly in order to be competitive internationally
Monopolies can be successful firms – A
firm may become a monopoly through being efficient and dynamic. A monopoly is thus a sign of success, not inefficiency. For example – Google has gained monopoly power through being regarded as the best firm for search engines. Apple has a degree of monopoly power through successful innovation and being regarded as the best producer of digital goods.
In Kenya, the mobile service provider Safaricom, has enjoyed majority market share due to their innovation and brand loyalty.
It is easier for government to regulate the market through monopoly regulation. The government sets up a regulator to prevent the excesses of monopoly power. For example, utilities like water and electricity are natural monopolies so it makes sense to have one provider. The regulator can limit price increases and ensure standards of service are met.
Subsidize loss-making services –
Another potential advantage of a monopoly is that they can use their supernormal profit to subsidize socially useful but loss-making services. For
example, a train company can use its monopoly power to set high prices on
peak services, but this allows the firm to subsidize unprofitable late-running services on off-peak times. In Kenya, the Standard Gauge Railway prices can be adjusted to meet different classes of citizens
Avoid the duplication of services – In
some areas, the most efficient number of firms is one. For example, if a city
deregulates its bus travel, then rival bus companies may compete for profitable peak-hour services. This may lead to increased congestion as several buses turn up at once, like it happens in Nairobi city. It is more efficient to have a monopoly and avoid this inefficient duplication of
Source of revenue for the government
– the government gets revenue in form of taxation from monopoly firms. Since the firms operate across major segments of the economy, the government has appointed these firms as VAT withholding agents. This ensures that the government collects 6% VAT in advance from all suppliers dealing with these companies e.g. Kenya Power
Industries where monopoly is the
best option Electricity distribution. To distribute electricity to every home in a country, it is most efficient to have a monopoly provider. There are significant economies of scale in having a comprehensive network. There is no point in having two electricity cables running up the same street
Bus travel in a city. Avoids duplication and enables efficient timetabling. This would be of help to the congestion in urban centres in Kenya such as Nairobi, Mombasa, Kisumu, Nakuru, Eldoret, Kakamega among others.
Pharmaceutical drug provision. The promise of a patent on a drug is
sufficient to encourage firms to invest in developing new drugs.
Why the Government regulates
monopolies The benefits from monopoly market depend on the quality of regulation. There is a danger of regulatory capture and the regulator allowing the firm to be too profitable. The government may wish to regulate monopolies to protect the interests of consumers. Reasons for
government regulation include:
To prevent excess prices – Without government regulation, monopolies
could put prices above the competitive equilibrium. This would lead to
allocative inefficiency and a decline in consumer welfare.
To improve quality of service – If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. Government regulation can ensure the firm meets minimum standards of service.
Monopsony power – A firm with monopoly selling power may also be in
a position to exploit monopsony buying power. For example, supermarkets may use their dominant market position to squeeze profit margins off farmers.
Promote competition – In some industries, it is possible to encourage competition, and therefore there will beless need for government regulation.
Promote competition – In some industries, it is possible to encourage
competition, and therefore there will be less need for government regulation.