Monopoly Power

Monopoly Power

When a firm is the sole supplier of a particular product or service

then we say that it is a monopolist. A monopolist is able to prevent

the entry of competitors by means of barriers and for whose product or

service there is no very close substitute therefore no one can compete

against him. An example of this is the Water Services Corporation

which is the only supplier of tap water in Malta and it is very

difficult for other firms to start offering the same services because

a lot of capital in terms of land, labour and machines are needed thus

it will not be affordable. Since WSC is a natural monopoly (that is

since it is under monopoly in the long-run its average costs would be

lower than if it were shared between two competitors), it benefits

from economies of scale and if a firm would enter the industry, and

both firms would supply half the industry output, they would both face

the demand curve D2 in Fig1.1. Thus there is no price that would allow

them to cover costs.

A monopoly can also be an integration of firms that have joined

together to benefit from a monopoly power. A dominant position in the

market is associated with monopoly because in pure monopoly the firm

is able to determine the price and when this fluctuates there will

only be a small change in demand. Not all monopolies can enjoy this

benefit, for example Malta Post is a monopoly in Malta but if it had

to make an high increase in the prices of its services consumers will

utilize more their telephones, e-mails and faxes. This means that

Malta Post also have substitutes to its services. Therefore not all

monopolies have the same power....

... middle of paper ...

...he market which will push the monopoly

to be more efficient and decrease prices. In Malta this happened in

the liberalization of the market once we became European members. For

example Benna which produces milk, which was a monopoly now faced

competition and is trying to keep up with them with advertising and

improvement on the existing products. If a privately owned monopoly

is found abusing a lot of its power, it may in certain cases be wise

to transfer the company in the hands of the state. Competitive

tendering may also reduce monopoly power. For example when the

government needs to buy machinery he will issue a tender, not go

always from the same company. This will give incentive to the

companies to supply quality products at the minimum possible price.

Odette Caruana

Intermediate

Group