When you step inside a grocery store and are scanning the aisles for your favourite food items, what are the things you reach out for every single time and are an avid consumer of? Let me guess- coffee, Maggi, ketchup, chocolates like munch and KitKat etc etc. But have you noticed that all these things are products of Nestle and how when you think of the respective category of food, these products pop up in your head in an instant? That is because Nestle has created a monopoly in the market. This article explains what a monopoly is and how monopolies function with examples from companies and firms in India as well as the world.
WHAT IS A MONOPOLY?
Monopoly refers to a company, a firm, or their products dominating the industry or the market with little or no competition. It can be said that monopolies have total or at least close to complete control over the market. Monopolies have a vantage in deciding the price of the goods and regulating the industry since there is no competition.
Most monopolies have the same characteristics. They have high barriers of entry which restricts competitors to enter the industry, eliminating any competition. These barriers can be in the form of licenses, patents, strong brand identity, etc. Due to the lack of competitors, there is mostly a single seller in the market. They have absolute domination of the supply of that product.
Since there is only a single seller, it becomes the sole price maker. Monopolistic firms can lower the prices as much as they want by reducing the cost of production, leading to small competitors not being able to match the prices and eventually running out of business.
HOW IS A MONOPOLY CREATED?
Besides the existence of the aforementioned barriers, there are various other ways and reasons by which companies turn into monopolies. The most common and probably the easiest way to become a monopoly is through government approval. When the government gives explicit rights to a firm, it becomes a monopoly. For example, in India, the railways are a monopolized industry as only the Ministry of Railways controls and operate them. From deciding the route to finalizing the ticket cost everything is an arbitrary decision of the ministry.
Secondly, the ownership of an exclusive resource that is required for the production of certain goods can also lead to the creation of monopolies. An example of a monopoly based on scarce resources is De Beers. De Beers Consolidated Mines were an amalgamation of multiple diamond mining operations and had a monopoly over the production of diamonds for almost the entirety of the 20th century.
Moving on from resources, intellectual property in the form of patents or copyrights can also create a monopoly. These can be assisted by exclusive rights from the government or independently as well. This is commonly seen in the pharmaceutical industry where companies that device the formula to a certain medicine achieve monopolized control of it as well.
Lastly, markets may naturally convert into monopolies as it may be more cost-effective to have one big firm rather than several small firms operating in the industry. The basis of natural monopolies thus is the size of the firm and economic efficiency. The mergers of banks are an example of natural monopolies.
MONOPOLIES IN INDIA
Besides the railways, there are many other private, government, and upcoming monopoly firms in India. In the finance sector, the central bank or the Reserve Bank of India has a monopoly over the issue of currency notes in the country. It also makes credit control and liquidation policies.
The Indian Space Research Organisation (ISRO) is a monopolized organization in the field of space research in the country. However, the government is planning to allow private companies to be involved in the area which might end ISRO’s monopoly. Recently the government also ended the monopoly it had over coal mining in India by letting private firms take charge of mines and mining activities.
As mentioned in the beginning, Nestle is one of the most well-known monopoly companies. In India as well, its products enjoy huge popularity, and because of which it exercises a certain extent of control over the pricing of similar products in the market. It has a share of approximately 96.5% despite the industry being open to all.
We have all used Fevicol or Fevistick growing up and no matter which companies glue it was, we would always refer to it as Fevicol, that is because its production company, Pidilite, has created a monopoly in the adhesive industry which has led to its immense popularity. It has a 70% share in the adhesive as well as industrial chemical markets.
Indian Tobacco Company or ITC has a 77% share control over the cigarette business in India. Although the company has diversified its product line, its widespread distribution network and expertise in the field has given it monopolized control in the market.
ARE MONOPOLIES GOOD?
As much as the creation of monopolies benefits the company and gives it unprecedented control over the market, it is unfair to the consumer to not have a variety of options to choose from and being forced to buy goods at unjustifiable prices. They are also harmful to small companies and small business owners as they eliminate them from the competition. However purposefully created monopolies, for example government-controlled industries, are there to protect the consumer and exercise necessary control in that market. Therefore, monopolies are sometimes a necessity and are therefore not all bad, but with proper regulation, it can become a more inclusive industry.
Times of India
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An aspiring civil servant, a curious mind but also an avid binge watcher- Prerna is currently pursuing BA Prog in English and Political Science from Kirori Mal College. She belongs to Chandigarh but really enjoys the hustle of Delhi. Her favourite pastime is taking naps and recognises herself as a pro at it.