What is a monopoly and a dominant position?

In one discussion of the first part of a series on the effects of regulation I have encountered one burning problem - people often do not know what is a monopoly and what are the conditions for its creation. Stereotypes prevail in society, which in turn lead to bad conclusions. That's why I will allow myself a smaller nipple in the series on regulations - let's talk now, what is a monopoly.

Czech Post - a monopoly or not?
Czech Post - a monopoly or not?

You may be wondering - what is this nonsense? After all every does he know what a monopoly is or not?

Let's look at the best source mainstream information, let 's look at Wikipediaas she gives us the issue of monopoly:

Monopol is one of the forms imperfect competition, where there is only one offering company on the supply side.

- Wikipedia

Sure, it's just part of the definition, but it's the part that everyone knows and considers final. People then they work only with this rather narrow definition and thus erroneous conclusions.

Monopol therefore, according to the narrow definition of the situation, there is only one company (supplier) on the market on the supply side. The first - but probably the most fundamental problem - is in which market?

If we want to find a monopoly, we must find his market, that is, the place the industry it controls. The industry is determined by the service or product, which is traded in it - that is, in the bakery industry is traded in bread and a monopoly would about could have a bakery. But is the bakery's monopoly on the bakery market a cause for concern? Will the price of donuts not increase, for example, due to the "monopoly" of the bakery? Sure, the price may go up, but then we should instead of donuts, they started buying Tatranky. Tatranka is also a sweetness, as well as a donut and the monopoly of the bakery on the pastry market by far does not meanthat the bakery has a monopoly on the sweets market. It's Tatranka substitute donuts, donuts can therefore be replaced by Tatranky. I bakery them the monopoly on the pastry market did not help as a result, there is still competition in the form of other sweets.

Just define the market is the biggest problemif we want to find a monopoly. We can come to the result that in the commercial sphere of monopolies Temer they do not exist. This is best shown by an example from practice, so let's get to it:

In 1997, the American Federal Trade Commission (FOK) connection of two chains with office supplies - Staples and Office Depot. FOK justified this by saying that the merger of the two companies would create a chain of se 75 % market share. However, the FOK defined that market as the "market for office supply chains". Unfortunately (or rather, God forbid) office supplies are sold not only by "office supply chains", but also by thousands of small shops and also huge non-specialized chains such as Wal-Mart (such as the American Albert or Tesco). If we include these vendors in the relevant market, the combined share of Staples and Office Depot would be mere 5 %. Either way, the court acknowledged the unreasonably narrow definition of the relevant market and stopped the merger.

Almost each product has its own substitute, that is, something that can be replaced. When České dráhy raised fares years ago (they are a "monopoly", why not do that), they only achieved an increase in the profits of bus carriers and petrol stations, people started driving buses and cars.

I Czech Post at a time when it held a "small mail monopoly" on a competitor that was profiting from profits - whether email as a letter competitor, internet banking as a substitute for voucher payments or data boxes today. Despite the fact that Česká pošta had a certain "monopoly" on a narrowly measured market (small letter items), it had a small share in the "communications market" as a result. So was or wasn't the Czech Post a monopoly?

Measure the relevant market is almost impossible whereas we cannot know preferences of individuals, so we cannot know exactly what all the substitutes (substitutes) a certain product has.

Market share - irrelevant figure

Imagine you own a company that makes wood chair. One day you will discover a new production technique that consumes less energy, less manpower, a technology that will reduce your production costs. It's about innovation. Thanks to this innovation, you will reduce the price of your chairs and suddenly you will find that you control 90% of the market. After all, you are a de facto "monopolist"!

But if you fall asleep on your laurels at the moment, you will not enjoy your "dominant position" for very long, for several reasons:

  1. Because you have a dominant position in the market, you make a profit (at least from the beginning). This entices other entrepreneurs to seize opportunities and enter the market, if you start to stagnate, the new ones will quickly "pull" you out of the market.
  2. Even current wooden manufacturers chairs innovate. If you stop innovating, even current manufacturers will catch up with you and maybe overtake you.

But this is a surprise - you are a "monopolist", but the situation is not easy at all.

If the company has achieved a high market share good innovation, cost reduction and price reduction, that means the market competition prevails, to the benefit of consumers. Why else would a "monopolist" reduce costs and innovate if he was truly "without competition"?

Maybe now you're saying that but the company with a significant market share still had to push out competition that there are fewer companies on the market now. Sure, you're right, but just because there are few companies in the market doesn't mean there's a monopoly in the market. Competition is a market process, where successful efficient companies are pushing out of the market unsuccessful inefficient companies, which is to the benefit of society, because as a result an inefficient company will free up capital (resources) for some more efficient use. For example, an inefficient private language school will free up French people to work for an efficient translation company.

So it's not important pin, It is important how. It is not important what percentage share a company has in the market, but how it came to this share.

Market openness and monopoly

It is also an important factor in monopolies market openness, that is, how accessible the market is to new suppliers.

Let's go back to the example with wooden chairs. Let's say that thanks to innovations you have become the only manufacturer of wooden chairs in the Czech Republic. Does that mean you have a "monopoly"? No. Why? Well, because at least I'd guess that the Swedish chairs will be better, so - your company is exposed global competition.

OP Prostějov is almost the only major clothing manufacturer in the Czech Republic, yet it will probably go bankrupt. It has not withstood global competition.

But even if no one else brought any wooden chairs to the Czech Republic, you still couldn't sleep on their laurels. There is competition here office chairs, plastic or metal chairs, exists here potential competition, ie potential other manufacturers and suppliers.

Only a market where barriers to entry are imposed can generate monopoly. But more on this in other articles on regulation.

0 comments

  1. I bought a game of monopoly. And there you gave me two identical figures. You did not give me a car figure

  2. Kaktusaku, the question is, how is it possible that these businesses have been intentionally mismanaged for so many years?

    The answer is simple - it is precisely the state property that is simply too vague within state enterprises (the loss is paid in taxes if they pay for it), ie "no one takes money from their hands".

    Examples of successful state-run companies are exceptions that confirm the rule…

  3. It is reasonable. However, Česká pošta is probably intentionally mismanaged, similarly to ČD, in order to provoke the privatization of these lucrative companies. Their malfunctioning is not the result of state ownership. State-owned companies can be and often are efficient and profitable, they are able to compete with private companies.

  4. Well, for example, the electricity and gas markets (typical network industries) were highly competitive in the United States just before a regulatory body was established in the United States.

    In Chicago, for example, there were 40 (!) Power companies, innovation was driven by this and prices fell. Non-licensing countries (US) that did not regulate the market had a much better electricity grid than licensed ones licence

    How many power companies are there in the former Czechoslovakia?

  5. Dear author, I think you explained both terms quite well, I would just like to point out that a monopoly in the past meant the exclusive right to produce or sell something (I know, it is no longer possible, it might just be worth giving examples of monopolies from history). Then I would say that it is difficult to find a substitute for some products or services, let's say electricity, what will be your answer? Maybe gas, but there are high acquisition costs for equipment that will use electricity to produce electricity. Or am I wrong and all products or services have easily accessible substitutes?

  6. Lukáš Kubec: CP costs me about 500 CZK per month, one of which is mainly a registered letter. I go to the village posts, the level is catastrophic there, especially the opening hours of 8-11 and 12-16 hours, that's something incredible. I consider the privatization of securities a necessity!

  7. Bestmen, it is therefore quite logical that the representatives of ČP complain that people use them little. Personally, the only post office I am willing to go to is the central one near Wenceslas Square in Prague. sure, the services are the same, it costs the same amount of money, but at least it somehow looks there 🙂

    ČP would benefit most from privatization and the private owner. Hopefully we'll see.

  8. The Czech Post does not have a monopoly on the Czech market, however, its services are at the wrong level and overpriced, I am constantly convinced of that 🙁

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