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Monopoly: The Source of Monopoly Power Essay

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Updated: Dec 18th, 2021

A monopoly is a market condition where only one firm can operate and produce profitably due to structural reasons (Mosca 2008). The textbook diagram of a monopoly firm is given in figure 1. Figure 1 shows how a monopolist assumes monopoly power and charges extra price. The source of monopoly power is by curbing production to price its products higher, creating barriers for competitors to enter the market, and by capitalizing on key resources in the industry.

Monopoly
Figure 1: Monopoly

A firm can curb production and price its product at higher than competitive price. This allows the monopolist to gain “rent” and impose a deadweight loss, characterized as “inefficiency” over the market (Mckenzie 2010). In this way, the firm may raise the price of its product at a price that is above its marginal cost of production. Further, it can create barriers for entry for new entrants or competitors and gain power over overpricing its product. The barriers created by the organization are different means employed to gain market dominance. For instance, Microsoft created a dominance in operating systems market, by bundling Internet Explorer browser and windows media player (Mckenzie 2010). Another example for gaining market dominance is that done by AT&T, by contracting with Apple for iPhone. This allowed iPhone to operate only in AT&T network. Further, Apple rejected the proposition of Google for allowing Google Voice, an application for Internet Phone, to operate in iPhone. This gave AT&T monopoly power to provide service to millions of iPhone users (Mckenzie 2010). A monopoly extends its profit by taking the consumer surplus in order to increase its profit. Another source of monopoly power is to gain control over the resources. For instance, an organization may have exclusive rights over a particular ingredient required to make a drug.

According to Mckenzie (2010), all monopoly-related theories are based on a situation when the monopolist has been created. He states that a firm may have gained monopoly power by innovating a better product or selling it at a price lower than its competitors. The use of patents, trademarks, or copyrights may also become a source of monopoly power to organizations. For instance, Apple has a patent over the designs of the iPod and iPhone which gives the company monopoly power. Marketing tools like exceptional promotional campaigns, as was done by DeBeers, create monopoly power (Sundie, Gelb & Bush 2008).

The patent is discussed in this section is titled “Three Dimensional Construction using Unstructured Pattern” (Intellectual Property Office 2010). Google, under the patent number US7660458B1, reserves the right to use it. The object is a system that can be used in processing images of documents. The object uses an unstructured infrared pattern on a target object and it captures stereoscopic images of the patterns that are projected on the desired object. This object operates like an infrared camera. Thus, the objects create a three-dimensional image of the target document, and can be used for rectification or realignment of the image of the object. This object is supposed to be useful in scanning books, magazines, or any other kind of printed material into digital format with better imaging, storage, and distribution capabilities (Intellectual Property Office 2010). This device will help in the digitization of bound volumes of books, journals, periodicals, etc. that would help libraries, or archives to allow multiple usages. This object aims at allowing Google to increase its power over the digital books market. This would allow them to create a legal monopoly over the digital book market. This system is more effective and better than previously used scanners as books need not be pressed to the scanner to scan the pages, which may damage old books. This system allows the infrared projector to read as well as correct the curvature of the page (Intellectual Property Office 2010). As a part of the company’s Google Book project, Google is trying to gain control over the digital book market. Further, the company’s association with the authors’ guild in the US will allow it to gain greater power over the eBook market.

The traditional book market was competitive due to many publishers and libraries, set prices for different kinds of books. Then the digital book market was underdeveloped with only a few offering eBooks for sale. Therefore, Google has created a barrier to entry initially by patenting the 3D scanner so that new entrants have either to buy it from them at a very high price or make another scanner with similar or better capability to make the library. Digital library is a novel industry with Google having the legal right over the scanner that is used by the company. Thus, the market structure presently will be similar to the diagram drawn in figure 1, as Google is the dominant player, and thus, a monopolist in it. Thus, with the patent, Google has created a market or industry for the company to operate as a monopolist.

Reference

Intellectual Property Office 2010.Web.

Mckenzie, RB. 2010. ‘In Defense of Monopoly’, Regulation , vol. 32, no. 4, pp. 16-19.

Mosca, M 2008. ‘On the origins of the concept of natural monopoly: Economies of scale and competition’, European Journal History of Economic Thought, vol. 15, no. 2, p. 317 – 353.

Sundie, JM, Gelb, BD & Bush, D 2008. ‘Economic Reality Versus Consumer Perceptions of Monopoly’, Journal of Public Policy & Marketing, vol. 27, no. 2, p. 178–181.

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