PRINCIPLES OF ECONOMICS

WITH LAND REFORM AND TAXATION

Monopoly: A Research about the Structure
of this Market and its Example
By: Adrian Angel Capinpin
A306B

I. MONOPOLY AND ITS DEFINITION

A monopoly (from Greek mnos ("alone" or "single") and plen ("to
sell")) exists when a specific person or enterprise is the only supplier of a particular commodity
(this contrasts with a monopsony which relates to a single entity's control of a market to purchase
a good or service, and with oligopoly which consists of a few entities dominating
an industry). Monopolies are thus characterized by a lack of economiccompetition to produce
the good or service, a lack of viable substitute goods, and the possibility of a high monopoly
price well above the firm'smarginal cost that leads to a high monopoly profit. The
verb monopolise or monopolize refers to the process by which a company gains the ability to
raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a
monopoly is a business entity that has significant market power, that is, the power to
charge overly high prices. Although monopolies may be big businesses, size is not a
characteristic of a monopoly. A small business may still have the power to raise prices in a small
industry (or market).
A monopoly is distinguished from a monopsony, in which there is only one buyer of a
product or service; a monopoly may also have monopsony control of a sector of a market.
Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which
several providers act together to coordinate services, prices or sale of goods. Monopolies,
monopsonies and oligopolies are all situations such that one or a few of the entities have market
power and therefore interact with their customers (monopoly), suppliers (monopsony) and the
other companies (oligopoly) in ways that leave market interactions distorted
Monopolies can be established by a government, form naturally, or form by integration.
In many jurisdictions, competition laws restrict monopolies. Holding a dominant position
or a monopoly of a market is often not illegal in itself, however certain categories of behavior
can be considered abusive and therefore incur legal sanctions when business is dominant.
Agovernment-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often
to provide an incentive to invest in a risky venture or enrich a domestic interest
group. Patents, copyrights, and trademarks are sometimes used as examples of governmentgranted monopolies. The government may also reserve the venture for itself, thus forming
a government monopoly.

II. ITS MARKET STRUCTURE

In economics, the idea of monopoly will be important for the study of management
structures, which directly concerns normative aspects of economic competition, and provides the
basis for topics such as industrial organization and economics of regulation. There are four basic
types of market structures by traditional economic analysis: perfect competition, monopolistic
competition, oligopoly and monopoly. A monopoly is a structure in which a single supplier
produces and sells a given product. If there is a single seller in a certain industry and there are
not any close substitutes for the product, then the market structure is that of a "pure monopoly".
Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the
goods being produced, but nevertheless companies retain some market power. This is termed
monopolistic competition, whereas in oligopoly the companies interact strategically.
In general, the main results from this theory compare price-fixing methods across market
structures, analyze the effect of a certain structure on welfare, and vary technological/demand
assumptions in order to assess the consequences for an abstract model of society. Most economic
textbooks follow the practice of carefully explaining the perfect competition model, mainly
because of its usefulness to understand "departures" from it (the so-called imperfect
competition models).
The boundaries of what constitutes a market and what doesn't are relevant distinctions to
make in economic analysis. In a general equilibrium context, a good is a specific concept
entangling geographical and time-related characteristics (grapes sold during October 2009 in
Moscow is a different good from grapes sold during October 2009 in New York). Most studies of
market structure relax a little their definition of a good, allowing for more flexibility at the
identification of substitute-goods. Therefore, one can find an economic analysis of the market
of grapes in Russia, for example, which is not a market in the strict sense of general equilibrium
theory monopoly.

III. ITS EFFICIENCY

According to the standard model, in which a monopolist sets a single price for all
consumers, the monopolist will sell a lesser quantity of goods at a higher price than would
companies by perfect competition. Because the monopolist ultimately forgoes transactions with
consumers who value the product or service more than its price, monopoly pricing creates
a deadweight loss referring to potential gains that went neither to the monopolist nor to

consumers. Given the presence of this deadweight loss, the combined surplus (or wealth) for the
monopolist and consumers is necessarily less than the total surplus obtained by consumers by
perfect competition. Where efficiency is defined by the total gains from trade, the monopoly
setting is less efficient than perfect competition.
It is often argued that monopolies tend to become less efficient and less innovative over
time, becoming "complacent", because they do not have to be efficient or innovative to compete
in the marketplace. Sometimes this very loss of psychological efficiency can increase a potential
competitor's value enough to overcome market entry barriers, or provide incentive for research
and investment into new alternatives. The theory of contestable markets argues that in some
circumstances (private) monopolies are forced to behave as if there were competition because of
the risk of losing their monopoly to new entrants. This is likely to happen when a
market's barriers to entry are low. It might also be because of the availability in the longer term
of substitutes in other markets. For example, a canal monopoly, while worth a great deal during
the late 18th century United Kingdom, was worth much less during the late 19th century because
of the introduction of railways as a substitute.

IV. EXAMPLE OF MONOPOLY

The Meralco Electric Company is a perfect example of
monopoly in the Philippines. Meralco, the only supplier of
electricity in the country.
The Manila
Electric
Company also
known
as Meralco (stylized in its logo as MERALCO), is the
Philippines' largest distributor of electrical power. It is Metro
Manila's only electric power distributor and holds the power
distribution franchise for 22 cities and 89 municipalities, including the whole of the National
Capital Region and the exurbs that form Mega Manila.
By 1915, electricity generation and distribution became the main Meralco's main income
generator, overtaking its public transportation operations in terms of revenue. In 1919, it
changed its official name to Manila Electric Company. By 1920, the company's power capacity
had grown to 45 million kWh.
In 1925, Meralco, was acquired by the utility holding company Associated Gas and
Electric or AGECO (reorganized as General Public Utilities Corporation or GPU in 1946),
which had begun a massive expansion throughout the United States and the Dominion of

Canada. With AGECO's financial backing, Meralco began acquiring a number of existing utility
companies in the Philippines, enabling the company to expand beyond Manila.
By 1930, Meralco had completed construction of the Philippine's
first hydroelectric power plant, the 23MW Botocan Hydro Station, At the time, this plant was one
of the largest engineering projects in Asia and constituted the largest single private capital
investment in the Philippines. The additional capacity allowed the company to begin hooking up
customers throughout the metropolitan area.
V. CASES OF MONOPOLY
MERALCO, ABUSE OF POWER: A CASE OF MONOPOLY, RIGHTLY OR WRONGLY
- By: Manila Times (February 6, 2014)
Despite obvious lapse in judgment on the part of the power distribution company Manila
Electric Co. (Meralco), resulting into unnecessary expense and cost increase, still they have the
temerity to pass to the consumers a cost that they themselves wrongly misjudged. Because of
what seemed to be the companys greed for profit, in the guise of customer service, it looks
inevitable that consumers of Meralco have no other recourse but to bite the bullet, resulting
into the expected increased cost of electricity.
Such is the case of a monopoly; the ability to abuse and exploit the need of the consumers
despite reasonable schemes. The absence of a direct competitor that characterizes this 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, which
for all intent and purposes will be detrimental to the consumers.
Government as well as the private sector authorities have their both hands tied and caught
in a bind as regards their obscure position in this issue. 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.
The mere fact that it has been on a deregulated status because of its privatized nature, the
government through the Energy Regulatory Commission (ERC) is merely an approving agency
meant to accept its entire clamor for a price adjustment, short of saying the ERC is a stamp pad
agency. That is how the system works in ERC, but we cannot entirely blame them because it is
a component of their very limited, if not inutile duties.
Meralco, for its part, is not the agency to blame for such actions for it is self-mandated
that a business should be profit maximizers, first and foremost. And this drive for profit should
supersede other objectives of the company; in the first place it is the goal for its existence. This

incessant clamor for maximum earnings will be a customary dilemma and should be resolved,
lest it becomes a lingering social crisis far more extensive in the years to come.
Economically and socially as well, a monopolys disadvantages outweigh its advantages.
The social implication of monopoly redounds to abuses that obliterate decent social structures,
because of inability to cope up with living conditions that should be rightfully enjoyed by
average individuals. This, however, cannot be blamed on the monopoly, because that is how this
stuff is made of; a benefit it enjoys because of the absence of competition, excessive profit and a
threat of service interruption if its whims and caprices are not granted.

Eliminate the monopolistic structure

In other countries, power service providers are not a complete monopoly; consumers
have the privilege to choose what kind of power company they would want to serve them. In
Australia for instance, power cost was not much of a problem and expenses for such was not
much of a concern. In fact, because of the affordable nature of power, the power companies
collect and consumers pay their bills every quarter.
On the local front, the country has had its share of experiences as regards services that are
monopolized. Gone are the days when the Philippine Long Distance Telephone Co. (PLDT), a
telephone company was monopolized, where application for telephone lines would either be
forgotten or may take the shortest reply, a year; when its services were mired with malady
because of its monopolistic nature. The advent of the 1980s proved to be the turning point for the
industry upheaval against PLDT that eventually led to the entry of other more if not equally
capable telephone service companies into the country.
The industry has never been better because of the competition that other companies have
offered. It put PLDT on its toes that eventually led to greatly improved services that it offered.
Whereas previously, you have to literally beg for telephone lines to be installed in your homes;
now it is the telephone company that practically knocks at your door to offer their telephone
services.
Why not for Meralco?
If that is possible for some areas of the industry, it will also be possible for the power
distribution company. The government should declare and develop an open market, where
technically and financially competent and capable investors can bid and invest on this sector.
This may not be possible in the short run, but with the local economy enjoying a certain degree
of economies of scale, there is no doubt that many interested investors would show and manifest
their interest in this investment.

It may be difficult, but it can be done. It would be much better than forever be immersed
in the quagmire of economic agony brought rightly or wrongly by the nature of a monopolistic
market structure.