Monopoly and Competition

MARKET MODELSFebruary 2, 2016

MONOPOLY A monopoly is a market structure in which there is only one

producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other

impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to

control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that

oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra.

Read more: Economics Basics: Monopolies, Oligopolies and Perfect Competition | Investopedia http://www.investopedia.com/university/economics/economics6.asp#ixzz3yl6Nbg3H Follow us: Investopedia on Facebook

A patent (/ˈpætənt/ or /ˈpeɪtənt/) is a set of exclusive rights granted by a sovereign state to an inventor or assignee for a limited period of time in exchange for detailed public disclosure of an invention. An invention is a solution to a specific technological problem and is a product or a process.

MANILA—Gloria Santos gets her electricity from one monopoly, the Manila Electric Co., and her water from another, the Manila Water Co.

The result of having no choice, she and other backers of a new antitrust law contend, is far higher bills and poor service.

Manila Electric Co.—commonly called Meralco—and Manila Water Co. say their rates are reasonable. On their websites, both companies say they strive to meet the highest possible service standards.

However, utilities like them face no competition, or incentive to improve their services, and have frequently raised prices. Water bills alone have shot up sixfold since 1997—around the time the government was privatizing national state-run monopolies including utilities—which is way ahead of inflation.

“These things need to be cheaper,” said Manila resident Ms. Santos, 49, who with her mechanic husband supports four children on $580 a month, of which $65 went toward power and water last month.

GOOD NEWS??? The Philippines’ new Competition Act–signed

into law in July—creates a commission tasked with rooting out anticompetitive business practices, policing mergers and filing antitrust cases.

But in a country in which the government has given exclusive contracts to the utility subsidiaries of some of the country’s biggest companies, it remains unclear just how aggressive the panel will be—or how effective.

GOOD NEWS??? “The idea that there should be economic

justice [is new to the Philippines],” Yet the law’s backers worry about how much

power the Competition Commission will have to lower bills, since utility companies operate through legally binding service agreements signed with the government. The operating contract of Manila Water, which is controlled by Ayala Corp., one of the Philippines biggest conglomerates, lasts until 2037, for example.

Ms. Santos said that if the new commission doesn’t intervene, then no one will. “They have to tell these companies what the people of the Philippines want,” she said.

PURE MONOPOLY A pure monopoly has pricing power

within the market. There is only one supplier who has significant market power and determines the price of its product. A pure monopoly faces little competition because of high barriers to entry, such as high initial costs, or because the company has acquired significant market influence through network effects, for instance.

One of the best examples of a pure monopoly is the production of operating systems by Microsoft. Because many computer users have standardized on software products that are compatible with Microsoft's Windows operating system, most of the market is effectively locked in, because the cost of using a different operating system, both in terms of acquiring new software that will be compatible with the new operating system and because the learning curve for new software is steep, people are willing to pay Microsoft's high prices for Windows.

OLIGOPOLY In an oligopoly, there are only a few firms

that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry.

The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces.

ILLUSTRATION: Assume, for example, that an economy needs

only 100 cellphones. Company X produces 50 cellphones and its competitor, Company Y, produces the other cellphones. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the cellphones at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well.

PERFECT COMPETITION Opposite of monopoly characterized by many buyers and sellers,

many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand.

Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. 

The best examples of a purely competitive market are agricultural products, such as corn, wheat, and soybeans.

EFFECT OF LACK OF COMPETITION The effect of lack of

competition due to Philippine protectionism on end consumers is lesser income. Consumers have lesser income because of higher costs charged by monopoly businesses - telephone, electricity, water, entertainment, and transportation.

What consumers need to know about the PH Competition Act

PICTURE THIS: You are at a supermarket, and you find that

prices of garlic have more than doubled almost overnight.

 investigation he findings showed that due to loopholes in

the Bureau of Plant Industry (BPI) system of issuing plant quarantine clearances, along with collusion, a cartel was able to control 75% of all garlic imports in the country.

Cartel – is an agreement between competing firms to control prices or exclude entry of a new competitor in a market. It is a formal organization of sellers or buyers that agree to fix selling prices, purchase prices, or reduce production using a variety of tactics.

Garlic prices caught the attention of Malacañang when they reached a high of P287 ($6.58) per kilo in June 2014 – a 74% increase within a one-year period and more than 100% increase from average prices.

About 73% of garlic demand is supplied by imports, while the remaining 27% comes from local sources.

The NBI found that the BPI seldom gave permits to importers who were not members of Vieva Philippines and denied applications to non-Vieva affiliates without sufficient reasons.

Senator Paolo Benigno “Bam” Aquino IV  is the principal author of the 2014 Philippine Competition Act, which seeks to prevent this type of unfair business practice.

Benefits to consumers The act seeks to level the playing field

by prohibiting anti-competitive agreements, abuses of dominant positions, and mergers and acquisitions that limit, prevent, and restrict competition.

airline industry as an example Nokia 

The end goal is to provide benefits to consumers through more choices and lower prices which, Aquino said, market competition provides.

ASEAN Membership: 10 States — Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. 1 Observer — Papua New Guinea.

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