We explain what a monopoly is, its types, characteristics and examples in different countries. Also, differences with an oligopoly.

Monopolies are considered to impoverish economic activity.

What is a monopoly?

In economy, the term monopoly is used (composed of the Greek voices bow, "one and polein, "Sell") to designate the situation in which a single producer or seller has total control of a market, being able to impose conditions on it with impunity, and making it difficult or impossible for new competitors to enter.

Monopolies constitute situations of market failure or legal privilege, they are contrary to the idea of ​​free economic competition. For a monopoly to exist, the entirety of the offer must correspond to the same producer, without there being products substitutes. Thus, the consumer It must accept the conditions of price and production that the monopolist determines, and that respond only to its convenience.

In general, this type of situation is considered harmful and impoverishes economic activity, which is why many countries have laws that explicitly prohibit monopoly, or allow research to reveal any covert monopolies that may exist.

Characteristics of monopolies

Monopolies are usually characterized by:

  • Direct control of a single business over the whole (or almost) of the market, imposing conditions that benefit only it and guarantee the perpetuity of its power, by excluding possible competitors.
  • They allow the concentration of wealth (and therefore of economic power) in a single actor, making it increasingly difficult to reverse the situation, given that the more money, the more can, and more power, more money.
  • They are contrary to free competition, since the monopoly company is not subject to pressure to improve its products or to compete in any way for the favoritism of the consumer, since they have no alternatives.

On the other hand, they can occur according to the following forms:

  • Trust. With this term taken from English, the corporate consortia controlled or owned by a single company, which directs its commercial activity and covers its respective markets of consumption.
  • Cartels. These are formal or informal agreements between companies in the same productive sector, in order to reduce or limit the rest of the competence, thus constituting a central power distributed among them. This usually leads to multiple monopolies, that is, oligopolies.
  • Corporate mergers and acquisitions. The largest and most powerful companies are often able to buy from their competition, unifying the main economic players in a sector under their command, either openly or through discreet methods.
  • State privileges. Formerly known as “seats”, it is about the transfer of special privileges to a company by the state, through tenders or through more or less formal negotiations, in order to favor its economic growth. In many cases this involves acts of corruption.

Types of monopoly

In a watertight monopoly, the State assumes the production or sale of a good.

Usually the following types of monopoly are distinguished:

  • Linear price monopoly. Also known as a pure monopoly, it occurs when there is literally only one company in charge of a business niche. This does not usually occur in the real economy, since it is actually a theoretical monopoly, in which there are no price changes, no substitute products, no government intervention of any kind, or margins of uncertainty in the market, and there is a perfect mobility in production factors.
  • Artificial monopoly. This is the name given to the monopolies arising from the intervention of the monopolist or some other fiscal means or of any other type (the violence, for example) to prevent products other than yours from reaching the market.
  • Natural monopoly. In this case, the monopolist monopolizes the demand of the market, producing at a lower cost than that of different competing companies. Usually this happens in cases where it is much more efficient for a single company to exist, such as in certain public services, and there are no incentives for the entry of competing companies, which would have to face a investment risky initial.
  • Watertight monopoly. It is known as watertight when the Condition assumes the production or sale of a certain good, or grants them to an individual in exchange for tax revenue. It is common in situations of shock, in which the State must guarantee the continuous production of inputs, for example.

Examples of monopoly

Examples of monopoly are the following:

  • The growing monopoly of Facebook. The company behind the social network, which has been buying other popular smart cell phone application companies, such as Instagram, Whatsapp, FriendFeed, Ascenta and Oculus VR, moving towards becoming a digital trust of social networks.
  • The airport rates of Spain. Imposed on the airlines by the public company AENA, they allow the monopolistic operation of the company, since it manages all the Spanish airports and heliports.
  • Venezuelan oil extraction. For decades it operated in this nation under the figure of the monopoly of the state company, Petróleos de Venezuela (PDVSA), nationalized in the 1970s, removing the transnational companies that were in the field from the market.

Monopoly and oligopoly

In an oligopoly few companies can agree to avoid competitors.

Strictly speaking, an oligopoly is a form of monopoly in which few firms have control or significant influence over the market. There are usually 4 or 5 firms that can agree to prevent the entry of new competitors, while competing with each other in a market in which they are reciprocally influential.

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