(1). I'll use the following analogy to explain the first concept. Suppose you run a grocery store and bouth six cases of Del Monte green beans from a grocery wholesaler. Breaking down the price per can, let us say that each can costs you 50 cents. In order to make a 100 percent profit, you have to sell each can for one dollar. A 100 percent profit sounds fantastic. Your competitor down the street bought the same number of cases from the same wholesaler, but plans on selling his green beans for 75 cents a can. He's getting a 50 percent profit, so he'll make less mony. But here's what happens. Both you and him prepaid for your six cases of green beans, and since he's selling his cheaper, he'll selll all six cases and have money back in his pocket. Your green beans aren't selling an the cans are collecting dust on your grocery shelves. You are actually LOSING money.
Using this same analogy. If a manufacturer buys enough raw goods for a setr price, over a period of time, as long as the price remains relaticvely steady for the raw goods and the demand for a product utilizing these raw goods increases, the manufacturer can increase his manufacturer's recommended retail price (law of supply and demand). The company that furnishes the raw goods to the manufacturer may actually have an abundant surplus. Wishing to encourage the manufacturer to continue buying raw goods from the company, the company sells them at a reasonably low price because a low price ensures repeat business.
2) Monopolies are disadvantageous to the customer because the monoploy has near absolute control over the supply of a product. Suppose a pharmaceutical company produces a "one-of-a-kind" drug that is capable of savbing someone's life. The company has spent millions of dollars in research developing the drug---and no competitor produces anything like it. The pharmaceutical company, wishing to recoup losses, as well as make a profit, posits the question to healthcare providers "How much is it worth to you to be able to save sombody's life?" It's only when a comppetitor comes up with a rival drug that the pharmaceutical company lowers its price.
3) A trust or a holding company may create an "unofficial monopoly" because they become the primary source of a commodity--often unwittingly. Usually once the Federal Trade Commission gets reports on such activities, the trust is forced to liquidate or relinquish control.
· 7 years ago