Domestic Monopoly Free Trade
Barriers to entry
The most evident property of a monopoly is the barriers to entry which are the blockages and obstacles for new firms for entering the industry. Barriers to entry include factors such as economies of scale this is the reduction of cost per unit as the level of production increases. Since monopolies are the only firms in their respective industries, they cover the entire market demand. To supply for that, the production level is huge which gives the firm an economies of scale unlike other new firms who produce only a small amount. Also, the cost of production for an established firm is always lower than a new firm because the new firm needs to make many expenses before it can settle down properly in the market.
Another barrier to entry is product differentiation which is a clear distinction of one companys product it is unique and the attributes are not shared by any other product produced by any other firm. Additionally, when only one company is supplying the market demand for a long time, the customers start trusting that brand and become loyal to it in a sense that they do not switch to other firms products. A new firms product does not have the experience in the market and does not have credibility because it is new. Moreover, the monopoly has an ownership of the majority of the key factors of production when it is the only firm producing such a huge quantity of output, monopolies not only purchase the factors of production but also the retail and wholesale outlets. Like this, neither do the new firms have enough factors of production, nor do they have retail outlets to sell their products at. Big monopolies are legally protected with copyrights and patents that give only their firm to practice in a particular market or area. A major barrier to entry for the firm is the threat of takeovers or mergers the monopolies are so huge that they easily take over the small firm either by a pact or if they do not agree, by aggressive tactics (Sowell, 2004). Lastly, these big firms intimidate the small firms are heavy advertisements and price wars and by giving threats to the small new firms. Therefore, it becomes difficult for new firms to enter the market with one major monopoly operating in.
Causes of having monopolies
Due to less money being spent in price wars, advertisements and countering the rivals since there are none the monopolies save up a lot on cash which contributes to a rise in profits. Also, with a large output, economies of scale take place which reduces the cost of production for the firm. This can enable the firm to sell at a lower price, but monopolies do not do so. This extra profit that the monopolies earn can be used by these monopolies to invest in research and development and capital products. Normally, firms do not invest in research and development because even after spending so much money, it kind of stays useless reason being, that all the other firms copy the new technique and again all the firms stand at the same level and the firm that spent money on research and development eventually has no edge over the others. Thus, firms wait for rivals to invest in research and development so that they can simply copy off the techniques rather than investing so much money in it themselves. But monopolies are the sole firm and only that firm can enjoy the results concluded from the research, so they invest in it. Also, investment in new capital goods such as assets and machinery improves the quality of work, production efficiency and the end result of the consumer good. Lastly, there is a healthy competition for corporate control competition improves the quality of the firm. This is not the competition in the goods market, but in the financial markets there is always a competition for takeovers and buying of maximum shares in the firm if the firm becomes inefficient, therefore, there is a strong need for effective and proficient running of the firm.
Consequences of monopolies
Monopolies are chiefly considered to be against public interest. In perfect competition, the price is usually set equal to the marginal cost, so that the marginal revenue is also equal to price and perfect competition is achieved at MC MR P. Therefore, perfect competition signifies higher output at a lower price. But for monopolies, the price is way above the marginal cost because the companies can make supernormal profit (profit above zero profit zero profit is at MC MR). Therefore, the public is paying a higher price than normally should be paid for the monopolies take advantage of being the only supplier. Especially, if the good is a necessity and the inelasticity is high, the monopolies take even more advantage of this situation. The firms are well-aware of the helplessness of the customers they will eventually come back to buy the monopoly firms product because of lack of choice and the need of fulfillment of wants. This leads to an extreme unequal distribution of income the rich gets richer and the poor gets poorer. The monopolies keep exploiting the customers and give no chance to the new comers so that the power in the hands of the monopoly can be neutralized. Lastly, these monopolies also practice illegal intimidation practices to scare away the new entrants which causes an increase in corruption along with a lack in competition. With no competition around, the monopoly firm becomes inefficient and the productivity falls with no decrease in prices the inefficiency is extremely harmful for the industry as it collapses as a whole since that is the only firm in the entire market.
Import and Free Trade Areas
In case of a monopoly, it is difficult for a customer to not be exploited. Thus, they need, other companies to come into the market and provide the same product so the monopoly company has competition. The concept of competition brings in the idea of contestable markets a market where there is no cost on entries and exits and they can be freely and easily made. In an import oriented market, naturally, more and more foreign firms would want to enter the market. This would happen if the domestic customers would import products. In order for imported goods to enter the boundary of the country, a tariff or custom tax has to be paid. But in order to enhance import, a free trade area is usually formed a deal between two or more companies to let import and export happen without any custom charges. In case this happens, the monopoly would break in the domestic market because the monopoly would be aware that the customers now have an alternative product and would not agree to whatever the monopoly does, as they are no more the sole suppliers of the product. When there is competition, there is a threat to the firm of their customers switching to other companies if they do not produce goods which are up to the mark. Therefore, this keeps the firm uptight and does not let it become incompetent. Due to price wars between companies, the customers benefit because both the companies try to sell at a lower price to gain a greater customer share. Therefore, the rich and the poor to quite an extent can afford the products. Profits are also distributed evenly in the industry instead of just one firm accumulating all the profit.
Monopolies, being the only firm in the market, can take advantage of this pact and make huge losses or be disadvantageous due to a lack of competition leading to inefficiency. Therefore, it is crucial to have pro-competition policies which, as a first step, reduce the barriers to entry usually set by monopolies. An ideal situation can be achieved in the industry and market if this methodology is followed.