Free Market Competition and Monopoly

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Businesses in the modern market are required to continuously adapt and adjust to the changes in the market in order to stay competitive. Competition is an important aspect of a market and is widely known to be the process of operating in a market concurrently with other competitors in order to gain profit (Riggs, 2015). In order for competitors to stay competitive, they complete through various means which will be discusses in this paper. However, if a monopoly is introduced into a market, this can significantly hamper other competitors’ ability to compete. The purpose of this paper is to explore how competition operates in the free market, what it means for a business to have monopoly powers, ways and reasons businesses use political means to gain a competitive advantage, and finally discuss whether governments should act to create monopolies to encourage competition.

According to Stucke, some consumer benefits that competition contributes may include lower costs, higher quality goods and services, more variety, etc. (Stucke, 2013). Thus, it is essential for an entrepreneur to discover the gaps in the market which they consider have not been satisfied in order to maximize their profit (Heyne et al., 2014). Entrepreneurial profit is the gain that an entrepreneur receives for satisfying consumer demands in a market (Heyne et al., 2014). This can be achieved through entrepreneurs engaging in arbitrage which involves rearranging products to where they are more highly valued (Heyne et al., 2014). Also, they can use innovation to earn profit by constantly investigating better ways to satisfy consumer demand through improving quality of goods and services, lowering costs, etc. (Heyne et al., 2014). Lastly, entrepreneurs often imitate other entrepreneurs who were successful in the hopes that it will reciprocate the same benefits (Heyne et al., 2014). Although competition may seem beneficial, there are some downsides that need to be considered for both the consumer and the producer. Some downsides to competition for businesses may include being obligated to lower prices to the point where expenses are exceeding income, as well as, becoming overwhelmed with too much capital that is not earning them any profit which could be allocated elsewhere (Gartenstein, 2018). In addition, competition may be a disadvantage to consumers as it may lead to producers exploiting or manipulating customers to believe that their product is of better quality because of its high price (Stucke, 2013).

Moreover, since competition is highly relative to consumer demands, businesses compete by serving consumers better than their competitors (Heyne et al., 2014). However, businesses often pursue restrictions to sustain their profit opportunities, a common this is achieved is through the creation of a monopoly (Heyne et al., 2014). A monopoly is known as a market structure where there is a sole seller, with no close substitutes for the product produced and there are barriers to entry (Koutsoyiannis, 1975). Most often, they occur because the government has involved itself to provide one firm the exclusive rights to produce a particular good or service (Gans, King & Mankiw, 2012). If a firm has monopoly power, this means that they have the capacity to control supply and price regardless of the market (Galbraith, 1936). As a result, there is no supply curve for a monopoly because a monopolist is a price maker, and so it would not be useful to consider the number a firm would produce, because they set prices at the same time as they choose the quantity to supply (Gans, et al., 2012). Governments can create monopolies through regulation and taxes which constricts competition (Paul, 2016). Big businesses are able to better comply with government regulations as they can afford the costs as well as hiring lobbyists to assure that any new laws or regulations favor them (Paul, 2016). Patents, copyright laws and trademarks are all examples of the government creating a monopoly in order to serve public interests (Gans et al., 2012). Businesses use political means to hamper or eliminate their competitors because a monopoly allows them to produce any quantity for any price chosen (Gans et al., 2012). Big businesses often attempt to use political means to hamper their competition through interacting with the government which leads to “lower costs, enhanced bargaining power in supply relations, trade promotion and protection, and protection from entry and product substitution” (McWilliams, Van Fleet & Cory, 2002).

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Furthermore, monopolies can be attained in a free market through natural monopolies. A natural monopoly develops when a one business is able to supply a good or service to the whole market at a lower cost than multiple other firms (Gans et al., 2012). Most often, firms operating in a natural monopoly are not overly worried about new entrants penetrating their monopoly power, rather they are concerned with ensuring that the government is protecting them in order to maintain their monopoly position (Gans et al., 2012). This is because potential entrants are less likely to be able to produce that the same low costs as the monopolist, therefore, they will only have a small effect on the market (Gans et al., 2012).

There is considerable debate surrounding whether governments should act to create monopolies in order to encourage competition, or to take no action either way. Monopolies have been shown to be detrimental to smaller businesses, however, as long as the government is acting to serve the public interest, there will be benefits for the market (Gans et al., 2012). An example of this can be seen where the Australian government, up until October 2001, gave monopoly of the .com.au interest addresses to the Melbourne IT company which is beneficial for the market because it ensures consistency (Gans et al., 2012). In addition, another widely accepted reason why governments should act to create barriers to entry is the requirement of licenses for different business ventures (Manier, 2010). Licenses are vital as they protect the public’s interests as well as protecting existing businesses from potential competition (Manier, 2010). On the other hand, creating monopolies could negatively affect consumers as monopolists can provide lower quality goods for a high price because they dominate the market and so they are not threatened to produce better and cheaper goods or services (Leigh, 2019).

To conclude, free market competition can be beneficial to the consumer in a number of ways and thus entrepreneurs can earn profits by ensuring that these benefits are improved and maintained. Businesses often seek to restrict competition in order to preserve their own profit opportunities and this can be down through creating a monopoly by providing businesses with grants. However, the grants are beneficial to competition if they aim to protect the public’s interests.

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Free Market Competition and Monopoly. (2023, March 01). Edubirdie. Retrieved April 18, 2024, from https://edubirdie.com/examples/free-market-competition-and-monopoly/
“Free Market Competition and Monopoly.” Edubirdie, 01 Mar. 2023, edubirdie.com/examples/free-market-competition-and-monopoly/
Free Market Competition and Monopoly. [online]. Available at: <https://edubirdie.com/examples/free-market-competition-and-monopoly/> [Accessed 18 Apr. 2024].
Free Market Competition and Monopoly [Internet]. Edubirdie. 2023 Mar 01 [cited 2024 Apr 18]. Available from: https://edubirdie.com/examples/free-market-competition-and-monopoly/
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