Reading monopoly and barriers

We finished the previous abstract with discussion of a monopoly. What are the advantages of a monopolist? If a firm becomes a monopoly, that is gains the possibility of considerable influencing the market situation, it chooses such production volumes and prices that most suit it. First of all, the firm determines the highest possible sales amount. This limit is reached at the moment when further increase of sales doesn’t result in profit. In other words, the ultimate profit from sales becomes a zero. Thus the firm determines the sales volumes that produce the highest profit and the firm restricts its supply to this value. As the firm is a monopoly, it means that the total market supply is restricted to the same value. As a result the quantity of goods is not very large, and they are more expensive.

Nowadays it rarely happens when a single firm monopolizes the market. More often there are several large firms producing the same product. Such market is oligopolistic. We can say that a market is an oligopoly if a few firms dominate the sales or production of the industry. The characteristics of oligopoly are:

- heavy expenditure on advertising, caused by the need to maintain market share against rival producers products;

- competition by any means except genuine price cutting;

- strong brand differentiation which is expressed in product design and packaging, corporate logos, corporate store design and décor and the skilled placing of advertisements;

- barriers to the entry of new competitors.

These barriers take many forms. Some arise from the nature of the product and from the technology required to manufacture it. There may be an extremely large investment into the research and development of a new product, for example new airliners which can cost 3-8 billion dollars before an aircraft is granted approval by the aviation authorities. Few firms can afford, or are able to borrow such sums, and the market is left to established players. Eventually as the market matures, or the technology becomes cheaper or more commonplace, more firms may enter. Satellite television broadcasting is an example, as are cellular mobile phones.

The state may create barriers to entry in the form of laws about patents, trade marks, copyright and licensing. The regulatory system is supposed to stimulate and maintain competition but there is still a long way to go before all consumers can choose their gas or electricity suppliers.

Collusion between suppliers has often been an accompaniment of oligopoly. Such co-operate behaviour takes many forms. At one extreme it materializes as the cartel with a formal organization. At the other extreme, collusions take a loose form with tacit, unspoken or unwritten agreements not to compete in certain ways. Most collusive behaviour is illegal and is to be punished. On the practical level it is probably impossible to eradicate all collusive behaviour that is not registered.

Comprehension check

I. Can you say that your previous idea of a monopoly has changed? What new information did you learn? Can you name monopolistic companies in Russia? What sector of economy do they operate in?

II. Answer the following questions.

1. What is the difference between a monopoly and an oligopoly?

2. What possibility does the firm-monopoly have?

3. Why does the firm restrict its market supply?

4. Why do firms spend large sums on advertising?

5. How is brand differentiation expressed?

6. How does the nature of the product influence the barrier creation?

7. Does the regulatory system work well as far as competition is concerned?

8. Do you think the state should fight collusive behaviour? Why?

III. Complete the sentences.

1. When the firm is a monopoly, it has the chance of …

2. The increase … doesn’t always result in …

3. The term “oligopoly” means …

4. New competitors can’t easily enter the market because of …

5. The design and production of high-tech products usually requires …

6. Patents and licensing are barriers …

7. Tacit co-operative behaviour can be called …

8. The cartel is an example of …

9. Before putting a new airliner in production, the manufacturer must get …

10. As collusive behaviour is not registered, it is difficult to …

IV. Translate into English.

1. Захватить рынок и стать на нем монополистом очень сложно, но удержать этот рынок в своих руках еще сложнее.

2. Определенные барьеры мешают проникновению новых конкурентов на монополизированный рынок.

3. Государство осуществляет лицензирование определенных видов деятельности.

4. Важнейшим видом юридических барьеров, рождающих и защищающих патенты, являются патенты на изобретения и научно-технические разработки.

5. Существуют монополии двух видов – природные и технико-экономические.

6. Сегодня в России уровень монополизации многих отраслей чрезвычайно высок.

7. Наиболее крупномасштабными монополиями обычно являются энергетические и транспортные.

8. Российские монополисты не изобрели ничего нового – они лишь воспользовались огромным арсеналом явных и тайных методов, с помощью которых монополисты издавна защищают себя от конкурентов и увеличивают размеры получаемой прибыли.