Friday, May 25, 2012

Natural Monopoly Essay

Natural Monopoly Essay

This paper studies monopoly as an economic category. The research is mainly focused on the distinctive features of natural monopoly as a type of monopolistic structure of the market economy. The author came to the conclusion that the concept of natural monopoly remains to be a disputable issue, since in spite of all advantages of the productive efficiency, in the absence of competition there is a high probability of the abuse of monopoly for the purpose of profit maximization.

In the beginning of new millennium the development of infrastructure, international commercial relations, and information networks inexorably involves creation, and development of the huge international companies. The turnover of the biggest of them exceeds even the gross domestic product of some countries. And there is nothing strange, that such companies hold leading positions on national and international markets, and at times, excluding competitors, become monopolists.
Company has a monopoly, if it is the only supplier of a product, and if it does not have any substitutes. The principal reason for the occurrence of monopoly is barriers at the admission to the market, which do not allow other companies to compete with a monopolist. Such barriers appear in following cases: only one company owns a key resource of manufacture; a government has given exclusive rights for manufacture of certain production to one company; because of the production costs the highest efficiency of output is only possible in the presence of one manufacturer on the market.

The monopolistic market is considered to be the market of the seller. The profits of the manufacturer are in this case guaranteed by the production volume, and by the high prices. Actually, in the given conditions the buyer is always forced to accept the price, which is considerably above cost.

There are very few examples of pure monopoly. It is rather one of the ideal concepts, as far as all companies aspire to full monopoly, but cannot reach it, or reach it only for a certain period. Though, this rule has one exception- natural monopolies. In case of natural monopoly the scale effect allows one monopolist to serve all market, having costs lower, than in the presence of two or more competing managing subjects in the given market. Such monopolist uses its resources the most effectively. Being a large enterprise, it possesses high technical equipment and big capacity. These factors conduct to the higher labor productivity and the decrease of the product unit costs. Thanks to the lowest possible cost price of the manufacture of the given goods, natural monopoly is a desirable phenomenon for a society. Otherwise the government interferes for the purpose of regulation of the monopolists activity. Practically, the natural monopoly can be resulted by availability of unique property (power supply systems, pipeline and rail transport, unique natural resources, post), necessary for branches, where long-term average costs are minimum only in case, when the market is served by one manufacturer.

The naturalness of monopoly can be determined by its attitude, or to be more precise, by its fear of competition. Genuine natural monopoly knows, that size matters, and if competitors enter the market, they will not manage to seize the greater share. A typical example of all mentioned above are railways in Sweden. The government of this country conducted a classical vertical division into an infrastructure and rail transportation, and the free competition in the market of transportation was allowed. For 10 years the new companies managed to win from monopoly only about 10 % of the market. The scale effect protects monopoly better than any entry restrictions.

Monopolies have natural advantages in those markets, where the action of entire branch as a single mechanism is important. Though, such situation can has its disadvantages. Companies have no stimulus for self-restriction of monopolistic abuse, since the client cannot leave them for other competitors on the market. It often leads to such inevitable consequences, as overpricing, uneconomical treatment of expenses, indifference to the requirements of the clients, artificial understating of the production volume, and a full set of other consequences of the monopoly, accompanied by ultrahigh monopolistic profit earning. Such conditions indicate the classical fiasco of the market, the contradictions, which the market is not able to overcome without state intervention. For this reason in all countries natural monopolies are either state companies, or are under tight state control.

World practice of the state regulation of natural monopolies has more than a century of history. In the USA, first federal control commissions were set up in ХІХ century. For example, the Federal Power Commission was organized in 1930. Today in the USA under the state regulation remain such spheres of natural monopolies, as railway, aviation and other types of transport; a number of fuel and energy manufactures (gas supply, power generation); rendering of numerous public services. State regulation concerns mainly those aspects of business activities in these areas, which make a direct impact on the interests of the consumers: price-level, production volume, bounds of the outlets, requirements to the quality of the goods and services. The most widespread method is that the prices of certain goods and services are established by state structures.

Natural monopoly in the market economy is considered to be a contradictory phenomena. As a type of monopolistic structure, it combines all negative displays of market monopolization, and can result the abuse of the unlimited market power. At the same time, acting as a necessary element of the production process, and representing socially significant branches of the national economy, the natural monopoly plays the important positive role in the market economy. The state regulation of natural monopolies should be aimed first of all at the termination or control of price growth of the natural monopolies production on the domestic market, and simultaneous preservation of these prices at the level, which allows extended reproduction. In this case the national policy can ensure further prosperity of both monopolies and citizens of the country.

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