Good Vs Bad Monopoly

What is Monopoly?

A monopoly, as defined by Irving Fisher, is a market where there is "no competition," resulting in a situation where one specific person or firm is the only supplier of a certain commodity or service. 
Since we're talking about it, let's also consider the definition of a monopolistic market. One company has total control over the supply and cost of an item or service in monopoly markets. A market is considered to be a monopoly when a single supplier controls the whole supply of a certain good.

What is Bad Monopoly?

When one company dominates a market, leading to limited competition, a bad monopoly business occurs. The result of bad monopoly could be prices getting higher, quality getting lower of the product, minimal innovation, & customer service getting poorer. Economic growth and entrepreneurship will most certainly get hinder by Barriers to entry for new competitors.

So How to Differentiate Between Good and Bad Monopoly?

1. Keep away from stocks with dim or questionable growth prospects

• Future profitability is more important to the company's share price than present profitability. Investigating the potential for growth is crucial in this. Controlling the market within a certain sector does not necessarily imply rapid expansion. For Example, BHEL and ITC.
• BHEL is not rewarded for raising prices, acquiring new clients, or reducing expenses. Private businesses like ITC are similarly prone to growth uncertainties. Even after expanding into the FMGC and hotel businesses, the tobacco sector still generates the majority of income.
• Due to its significant sensitivity to taxes, this market's growth prospects are murky. Despite having good performance over the years, shares of ITC haven't changed all that much as a result of this uncertainty.

2. Avert industries with heavy government interference.

• While certain monopolies are aided by government regulations, too much of interference might be altering the company's overall worth. Although firm doing well on the stock market, the company's future gets significantly impacted by the government.
• Let’s look at example of Coal India. When the government decided that commercial coal mining will be conducted by the private sector, shares of Coal India came under strong pressure.
• Government restrictions on employee termination, which prevent personnel rationalization, also harm PSU profitability.

3. Stay away from pricey PSU stocks

• A primary goal of PSU is to boost the growth of the nation. Some businesses are not profit-driven, even after possessing a competitive advantage.
• Look at the Air India, it’s the prime example. The firm operated a lot of loss-making routes, some with less than 30% occupancy, as part of its objective to increase accessibility. This caused it to accrue huge debt.
• Similar to this, PSU banks construct and run loss-making branches in far-off locations to enhance their network. This diminishes profitability generally. Although facilitating access is excellent from a social standpoint, it provides nothing to produce profits for an investment.