Microeconomics is a branch of economics that studies the way individual businesses conduct their affairs in relation to the management and allocation of finance. Monopoly refers to a situation in which one business has cornered a market to the exclusion of other businesses. The role of monopoly in microeconomics is the fact that monopoly affects the manner in which individual businesses can effectively conduct their business and financial affairs.
One of the roles of monopoly in microeconomics is the effect it has on the pricing of goods and services. Companies that have a monopoly over a particular market can set the prices for the goods and services in that market. For instance, in some countries where some government-backed companies have the monopoly over certain utilities and services like gas and electricity, such companies are able to fix prices for the use and consumption of these services. In a market without a monopoly, competition will lead to more variety and will serve as an effective tool for the regulation of prices.
Another role of monopoly in microeconomics is the fact that a monopoly serves as a barrier to the entrant of new businesses into a market sector. This is due to the fact that the monopolists have a goal of protecting their interests in the market. The interests under consideration vary, and they include a desire to preserve the power the monopolist wields in the market or a desire to maintain current high levels of profits. Such high profits will inevitably drop if competition is introduced into the market.
These barriers may be structural, meaning that they are the consequence of a wide gap in the cost of production. The barriers may be strategic, or they may be statutory. Statutory barriers that create a monopoly are those that have been created due to the effect of the law. The effect of monopoly in microeconomics is increased by the microeconomic concept of sunk costs.
Sunk costs occur when a new firm decides to remain in an established market rather than take advantage of a new one. The reluctance to venture into a new and potentially lucrative market is due to the cost of leaving the old one. For instance, a company that sees a reduced profit in its current market may be reluctant to exploit the advantages offered in the new one after considering the costs that will accrue from such a move. Such costs include loss of investments in advertising, material structures, research and market analysis.