Question

1. A monopoly is an enterprise that is the only seller of a good or service. Meralco or Manila Electric Company is a perfect example of monopoly in the Philippines because it is the major distributor of electricity without major competition here in the country.

The absence of a direct competitor characterizes the monopoly market; a monopoly ultimately provides the “authority” to act in any manner deemed appropriate for its welfare despite destructive or disadvantageous to the consumers. These are the common perceptions circulating among disgruntled consumers of the power distribution business in the country which affects consumers. The company with all its rights as a monopoly, has all the power to bring inconveniences to the people if ever their desire for a price increase is not approved. What are your thoughts on this?

Answer 1

The reasons market power becomes concentrated in the hands of a monopolist in an industry can be brought down to one major point - barriers to entry. These barriers to entry can be of different types:

1) Price barrier: Monopolist's existing scale of operations is so large that they can reap the efficiency gains from Increasing Returns to Scale to price undercut any new competitors, driving them out of business
2) Contractual barriers: If the firm is also a monopolistic buyer in the input market (i.e. the sole buyer of an important input) then the firm can prohibit its suppliers from supplying to competitors.
3) Technological and knowledge barriers: Monopolist may have unique knowledge or patented production technology
4) Legal barrier: The firm may be a government sanctioned monopoly e.g. East India Company
5) Customer loyalty: Monopolist may be positioned in existing prospect's minds as the reliable authority brand, making it extremely difficult for new entrants to get a foot in the door

When any of these factors come into play, the competitive drive towards cost-cutting and quality-improvement is stifled. In other words the detrimental effect of neglect towards proper (competitive, price-cutting, quality-improving, efficient) utilization of resources is passed on to consumers through imposition of higher prices.