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JA4. MonoPoly Establishment

Statement

Respond to the following question in at least three well composed paragraphs: What are the necessary conditions for a monopoly position in the market to be established?

Answer

A monopoly is a firm that dominates a monopolistic market to the point that it is the only supplier of a particular good or service. Such domination gives the firm absolute control over the market, allowing it to produce less and charge higher prices increasing its profits (Rittenberg & Tregarthen, 2009).

The establishing of a monopoly is hard especially with laws preventing it, but it all depends on making the market monopolistic. That is, eliminating competition so there is one supplier, making entry barriers very high so no new firms can enter the market, making sure that there are no close substitutes for the good or service being offered, and start manipulating the market price (Banton, 2024).

Eliminating competition can be done by buying out competitors, merging with them, or using harsh pricing strategies to drive them out of business. The less competitors a firm has, the more share of the market it can have. Some location-advantageous firms or natural monopolies can have less to no competition by default.

Elevating entry barriers is used to prevent new market joiners after securing the market. This can be done by enforcing legal restrictions such as patents and copyrights, controlling essential resources and deciding to whom they are sold, or by ensuring economies of scale characteristics that give the firm a cost advantage over new entrants.

Making sure there are no close substitutes eliminates the possibility of close markets sneaking into the monopolistic market. This can be done by giving the good or service unique and advantageous features that make customers happier so they are less likely to switch to close substitutes or other goods or services.

Manipulating the market price ensures that the firm harvests the results of the efforts made to establish the monopoly. This can be done by setting the price high enough to maximize profits, but not too high to drive customers away. Close monitoring of the market and the competition with quick and swift actions are necessary to keep the monopoly position.

The main cause of monopolies is the high entry barriers and then the market dynamics and movements automatically drive competition away and preventing new entrance which ensures market domination and prepares the ground for a monopoly to be established. All the conditions mentioned above are directly or indirectly related to increasing high entry barriers.

Monopolies are usually not liked by the public which caused the existence of laws and regulations to prevent them. However, there are few instances where monopolies are useful. There are also the natural monopolies that are not created due to the firm’s actions but due to the nature of the market; that is, the firm expanded so well to the point that producing the product will be cheaper than if any other firm tried to produce it (Rittenberg & Tregarthen, 2009).

Issues related to monopolies may include higher prices which causes consumer surplus that customers have to pay from their packets; the lack of competition slows down innovation and limits the quality and variety of the supplied goods or services; and the concentration of power creates a risk of exploitation such as influencing political governments for advantageous regulations or policies (Rittenberg & Tregarthen, 2009).

To conclude, the necessary conditions for a monopoly position in the market to be established are eliminating competition, elevating entry barriers, preventing close substitutes, and manipulating the market price. Natural monopolies are usually created due economics of scale and may be intentional or unintentional from the firm. Monopolies are usually not liked by the public, but public opinion may change if the monopoly caused the prices to go down.

Word Count: 601.

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