Monopoly power indicators indicate that the company has the ability to influence the value of its products by changing the number of goods sold on the market. Moreover, its degree is rather relative if there are not one, but several manufacturers of similar goods on the market at once.
Sources or factors
For a company in a market offer, the following indicators of monopoly power can be distinguished:
- a large share of the organization in the market supply;
- the absence of any full-fledged substitutes for goods manufactured by a company with monopoly power.
In addition, the indicator can be called a slight elasticity of demand for goods of this organization.
Such indicators of monopoly power indicate that the company can set the highest cost of its own products, not being shy about any limiting factors.
Oligopoly
This is a special market structure in which the predominant majority of sales are made by only a few large organizations, each of which has a direct opportunity to influence market value. The following factors can be called its characteristic features:
- there are several dominant organizations on the market;
- companies have fairly large market shares, that is, they have indicators of monopoly power over value;
- the demand curve of each such organization is characterized by a "falling" character;
- firms are closely interconnected and interdependent;
- there are many obstacles to some new companies starting to operate on the market;
- there is no possibility of a normal demand estimate
- unable to determine MR;
- there are consequences of universal interconnection.
Types and types of behavior
Due to the uncertainty of market behavior, a huge number of the most diverse oligopoly models appear, which are divided into formats of non-cooperative or cooperative behavior.
If we are talking about non-cooperative behavior, each individual seller can completely independently solve the problems of determining the cost, as well as the total output of a particular product. With cooperative behavior, all companies with indicators of monopoly power in the market together solve such issues.
There are several types of behavior.
Cartel agreement
Collusion is a certain form of oligopolistic behavior, which ultimately leads to the formation of so-called cartels, that is, groups of firms that agree on different decisions regarding the volume of output of a particular product and its value in such a way as if they are a single organization with monopoly indicators power in the market.
Determining a single price allows you to maximize the revenue of each individual member of this cartel, but at the same time, along with an increase in the price, there is a mandatory decrease in the volume of production. At the conclusion of such an agreement, each company, trying to increase its profit to the maximum, often begins to violate the contract, secretly from others, gradually reducing the cost of its products, which ultimately leads to the destruction of the resulting cartels.
If you ignore the fact that the monopoly power indicators include many different factors, which are rather difficult to prevent, there are several other ways to exclude the possibility of a conspiracy. In particular, this applies to ensuring the following conditions:
- differences in costs and demand;
- a large number of companies in this industry;
- the occurrence of a sudden decline in business activity;
- the possibility of the appearance on the market of this industry of new participants.
Among other things, it is worth noting the fact that companies themselves can also prevent collusion by carrying out fraud based on a hidden cost reduction based on the principle of price discrimination of commodity products.
Price leadership
Leadership in price or, as it is also called, tacit collusion, is an agreement that is concluded between several oligopolists and indicates the establishment of a certain value for their products. The main point here is that various organizations in this area are guided by those prices that are determined by a single leading company. At the same time, accordingly, in the overwhelming majority of cases, the organization that is the largest in its own area is selected as the leader.
Regardless of how the various organizations of the industry are referred to the indicators of monopoly power, the tactics of a leader when adjusting prices can be as follows:
- price changes are periodically carried out if significant changes in costs occur;
- pending price reviews previously announced through the media;
- the price leader does not always choose the highest possible price.
Price containment
This practice provides for the appointment of a minimum cost of production, which creates serious obstacles for some other companies to participate in the market. At the same time, it is worth noting the fact that for a certain time, firms can even give up any profit just to exclude the introduction of a competing organization in the market.
The mechanism of this practice is extremely simple. Initially, companies that have indicators of the monopoly power of the manufacturer, estimate the possible average minimum costs of a future competitor, and then simply put the cost of their products at a level lower.
Cost Plus
Such a pricing option involves following a tactic in which, in the process of determining the cost, the oligopolist first makes a detailed assessment of his own average variable costs at a specific planned level of production, after which a “cape” is added to them in the form of a certain percentage of profit. It should be noted that the cloak should have an appropriate volume in order to fully cover AFC, while ensuring normal profits.
Perfect competition
Perfect competition provides for the creation of a market structure in which there is a huge number of different companies engaged in the production and sale of homogeneous products, as a result of which no one shows the monopoly power of the company. At the same time, the entry or exit of any new market participants is not limited by anything, and the share of each individual organization in the total volume is extremely insignificant, and therefore cannot have any serious effect on the market value of products. Moreover, on the contrary, each individual participant directly depends on the elements of market forces and represents a price receiver.
Monopoly
A certain company has all the main indicators of monopoly power - it resists a huge number of buyers, and at the same time it is the only manufacturer of the product that does not have any approximate substitute goods. This model has several characteristic features:
- the company is the only manufacturer of certain products;
- the main indicator of monopoly power is that the product being sold is completely unique, since there are no substitutes for it;
- entrance to the market is in every possible way limited by the monopolist to all kinds of insurmountable barriers that can be created artificially or be natural;
- the manufacturer has all the indicators of concentration of monopoly power, since it controls the market supply and the value of this product.
In other words, the monopolist is the sole legislator of value, that is, he sets a certain price, and after that the buyer should already determine how much of this product is available to him. At the same time, one must correctly understand that in the overwhelming majority of cases, he cannot designate it too high, because demand decreases with growth.
As an example of organizations that have indicators of market monopoly power, we can cite various public utilities, such as water supply companies, gas and electricity companies, as well as transport enterprises and all kinds of communication lines. In this case, all kinds of licenses and patents are artificial barriers, which provide some firms with the exclusive right to work in a particular market.
Monopolist competition
A fairly large number of manufacturers today offer similar, but not completely identical products, as a result of which a monopoly can no longer be formed easily. Monopoly power indicators are still present, but at the same time there are heterogeneous goods on the market, which already somewhat reduces the influence of each producer.
The conditions of perfect competition provide for the production of standardized products, while monopolistic competition includes the manufacture of differentiated products, and first of all, this refers to the quality of the product or services, which allows the consumer to get certain price preferences. It is also worth noting that the products can be differentiated by the terms of service after purchase, by the intensity of the used advertising, by proximity to consumers and a number of other important factors.
Thus, companies operating in the market of monopolistic competition not only compete among themselves by setting a certain value, but also by differentiating their services and products, which reduces their indicators of monopoly power.
The Lerner index and others clearly reflect this dependence, because each individual company in such conditions has a certain monopoly power over its own products. That is, it has the opportunity to independently increase or decrease the cost depending on certain actions on the part of competitors, but this power is directly limited by the fact that there are manufacturers on the market that manufacture similar products. Among other things, do not forget that monopolistic markets provide for the presence, in addition to medium and small companies, also quite large representatives of the market.
Such a market model provides for a constant desire on the part of its participants to expand their own area of preferences by the fact that their products are maximally individualized. First of all, this is done through the use of trademarks, as well as any names and an extensive advertising company, which allow us to clearly distinguish between several types of marketable products.
Main differences
If we talk about how the perfect polypoly differs from monopolistic competition, when many companies have sufficiently high indicators of the degree of monopoly power, we can distinguish several main signs:
- in a perfect market, heterogeneous, rather than homogeneous, goods are sold;
- there is no complete transparency for market participants, and their actions are far from always subject to economic principles;
- companies are trying to maximize their area of preference, continuously customizing their own products;
- there are difficulties in gaining access to the market for any new sellers due to preferences.
Features of oligopoly
If there are not so many competitors, and only a certain number of companies dominate in a certain field, this model is called oligopoly. As examples of classic oligopolies, the “Big Three” in the USA can be singled out, which includes such well-known organizations as Ford, General Motors and Chrysler.
The oligopoly can produce not only homogeneous, but also differentiated goods. In the vast majority of cases, the predominance of homogeneity occurs in markets where the sale of semi-finished products and all kinds of raw materials is widespread, that is, markets for oil, steel, ore, cement and other similar products, while differentiation is characteristic of consumer goods markets, where indicators (indices a) monopoly powers are not so high.
A small number of companies contributes to the fact that they conclude various monopolistic agreements related to the establishment of certain prices, as well as the division or distribution of markets and other ways to introduce restrictions on competition. It has long been proven that competition in such markets directly depends on the level of concentration of production, so the number of companies plays a decisive role here.
It is also worth noting the fact that a rather important role in the nature of competitive relations in this market is given to the volume and structure of various information about competitors, as well as the basic conditions of demand, which is available to each of the participants. If such information is insignificant, then this contributes to a more competitive behavior of each company.
Differences
The main difference between the oligopolistic market and the form of perfect competition is the price dynamics present here. In this case, each company has a rather high indicator of Lerner's monopoly power, that is, marginal costs are lower than the monopoly price, and each organization has the ability to independently determine the value of its products, minimally succumbing to the influence of its competitors and the market as a whole.
In a perfect market, the value of goods continuously and haphazardly pulsates, since it directly depends on fluctuations in supply and demand, while oligopoly often provides a fairly stable fixation of value, and changes here are a rather rare occurrence.
As mentioned above, the so-called price leadership is typical, when the value of a particular group of goods is dictated by only one company, while the rest of the oligopolists, who have some kind of monopoly power, follow it. Essence, indicators - measurements of these factors are carried out constantly, because each organization is trying to develop and take a leading position in this form.
At the same time, the market is hard to reach for any new entrants, and if oligopolists have concluded an agreement with each other regarding cost, then competition will gradually shift towards advertising, quality and individualization.
