GMAT Reading Comprehension - A Monopoly Exists when a Specific Person or Enterprise is the Only Supplier of a Particular Commodity

Reading passage question

Question: A monopoly 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 an oligopoly which consists of a few entities dominating an industry). Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods. The verb "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 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.

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 a business is dominant. A government-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, copyright, and trademarks are sometimes used as examples of government granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly.

“ A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity.”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 3 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analysing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

Question 1
What is the primary purpose of the second paragraph in the passage:

A- To highlight the differences between monopolies and monopsonies and oligopolies.
B- To suggest that monopolies, monopsonies, and oligopolies are very similar.
C- To note some distinctions between and shared characteristics of monopolies and several other similar economic constructs.
D- To help the reader understand when monopolies are illegal and when they are not.
E- To explain what a monopoly is and what distinguishes it from other businesses.

Question 2
According to the passage, which of the following situations would most likely constitute a monopsony, but NOT a monopoly (as defined in the legal sense)?

A- A large computer manufacturing company in this country has several major competitors, but only uses one supplier for its chips and other hardware components.
B- The largest discount department chain in this country has the lowest retail prices in the market, but makes a profit by controlling the suppliers and dictating the prices it pays for the goods it sells.
C- The three largest grocery store chains control the market and collude to keep prices high, but struggle to keep their purchase price for foodstuffs low.
D- The largest airline in the country merges with the second largest airline, allowing it to control a majority of domestic routes and charge higher prices for its flights; simultaneously, it is able to control the purchase prices of planes from the two major aircraft manufacturers.
E- The largest orange juice manufacturer in the country has a complete control on retail prices and has driven up prices by 50% in the past two years; it has simultaneously controlled orange growers and pushed down the prices it pays by over 25% in the same time period.

Question 3
Which of the following can be properly inferred from the passage above?

A- Monopolies that develop through a patent or trademark are rarely illegal.
B- A monopoly could never also be considered a monopsony.
C- Most monopolies are considered illegal and incur government sanctions.
D- A business that is considered a monopoly in an economic sense might not be considered one in a legal sense.
E- A monopoly is distinguished from an oligopoly (or cartel) by the degree of influence over the market.

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