Sample Essay on Monopoly

Monopoly

A common description of a monopoly is a corporation that has such effective and full control of its market to an extent where it can dictate prices, and suffocate innovation by depriving rivals of any chance of revenue.  The offending corporation only has to maintain its character to perform well in its practice regardless of what opposing regulators have to say.  For some time since the inception of economic markets, monopolies have been viewed as greedy, and evil.  However, the current economic environment stipulates that monopolies have to be reviewed in a different light.  This paper aims to examine monopolies, and their characteristics in relation to their initial view and how they are currently taking part in today’s market systems.

             A Monopoly market configuration is a market structure that has a solitary seller of an invention that has no equal substitute, the seller has complete control over the market price, there is a restriction on entry of new firms to the market, and price differentiation is practiced.  Research has shown that some of these characteristics have been held responsible for the negative press monopolies have received in the past.  It follows that early economist and policy architects have always favored perfect competition instead.  In their view, ‘Perfect competition’ is regarded as both the most idyllic, and the default market position in Economics 101.  This is so since the supposed perfectly competitive markets realize equilibrium when a producer supply meets customer demand, by producing homogeneous goods, and allowing free entry of new firms unlike monopolies.

The most controversial characteristic of monopolies as explained by early economists is that the sellers have complete control over market prices.  Many of these policy architects have viewed Monopolies as companies that are always been driven by profit and greed.  On the other hand, contemporary economists such as Mr. Peter Thiel suggest that “If you want to create and capture lasting value, look to build a monopoly” (Peter Thiel. 2014).  Mr. Thiel views monopolies as not just companies that restrict competition to maintain high profits, but corporations that are so effective at what they do hence no other company can offer an equivalent substitute.  This means that these companies have a right to determine market prices since they offer an entirely new category of profusion to the world.  Mr. Thiel’s view is supported by current developments in the airline industry, which is currently going through a challenging period in determining ticket prices.  In his description, he states that such a problem is largely brought about by perfect competition characteristics of not allowing firms determine market prices.

Another controversial characteristic of a monopoly is the restriction of entry into the market economy.  Early economists view every monopoly similarly, to them whether the offending corporation deceitfully eliminates competition, secures an authorization from the state, or works its way to the top all monopolies are evil.  Most of the early monopolies such as IBM and Microsoft have been branded as such for restricting competition.  For example, the Justice Department went after these companies in the 1970s and in the 1990s without consideration of their dynamic market.  Both companies did business in an environment where the government did not protect incumbents, new companies were free to displace old innovators, consequently this saw the decline of IBM and a drop in share value and returns in Microsoft.  On the other hand, present economists view perfect competitive market structures as the death of thriving economies.  Through his article in the wall street journal, Mr. Thiel explains that issues such as the lack of firms with market power, free entry, and price determination being dependant on demand and supply are all current market problems.  In his statement, he suggests that in cases where there is profit to be generated, new firms will invade the market,  as a result increasing supply, and thus drive prices down, thereby eliminating the returns that attracted them initially.  If too many companies enter the market, they will suffer losses, some of the like IBM will fold, and prices will rise back to the lucrative levels.  Under perfect competition structure, no company generates an economic profit in the end (Peter Thiel. 2014). 

            In both his arguments, Mr. Thiel suggests that though perfect competition was ideal before, it does not hold the same credentials in the long run.  In his description, Mr. Thiel uses Google as a creative monopoly.  Google is a monopolist, by character, because as of May 2014, the company holds about 68% of the internet search market, its closest rivals, Microsoft, and Yahoo!  Hold about 19% and 10%, market share, respectively (Peter Thiel. 2014).  Research shows that the online advertising industry that has a value of about 150 billion dollars in the U.S and 495 billion dollars globally yearly.  From this perspective, Google is a monopoly since it is the youngest in incorporation from its competitors.  The fact that Google is so excellent at what it does makes it a creative monopoly offering customers with a wide range of products that include an easy platform as a search engine and advisement avenue.  These kinds of monopolies are being encouraged by Mr. Thiel to protect the profitable markets in the end.

In conclusion, Mr. Thiel description of creative monopolies stands to redefine how monopolies are viewed in the current economic system.  The characteristics of restricting entry and determining prices have always been argued as an evil, however, through his article these two qualities are well described and approved.  It may be that perfect competition is still in favor by most contemporary economists, but as explained by Mr. Peter Thiel, monopolies are not as bad as they have been viewed.

Reference

Peter Thiel, Sept. 12, 2014.  Competition Is for Losers.  Article retrieved from The Wall Street Journal.

http://online.wsj.com/articles/peter-thiel-competition-is-for-losers-1410535536