MONOPOLY MARKET
Introduction
The word monopoly is made of two words MONO+POLY. Here ‘Mono’ means one and ‘Poly’ means
seller, thereby the literal meaning of the word monopoly is one seller or one producer. Monopoly
refers to a market situation where there is a single seller selling a product which has no close
substitute. For example, Railway in India.
Features of Monopoly:
1. Single Seller: - Under monopoly, there is single seller selling the product. As a result, the
monopoly firm and industry is one and the same thing and monopolist has full control over the supply
and price of the product.
2. No close substitute: - The product produced by a monopolist has no close substitute. So, the
monopoly firm has no fear of competition from new or existing products.
3. Restrictions on Entry and Exit: - There exists strong barriers to entry of new firms and exit of
existing firms. As a result, monopoly can earn abnormal profits and losses in long run. These barriers
may be due to legal restrictions like licensing or patent rights or due to restrictions created by firms in
the form of cartel.
4. Price Discrimination: - A monopolist can sell its product at different prices to different customers.
It is known as ‘Price Discrimination’.
5. Price maker: - In case of monopoly, firm and industry are one and the same thing. So, firm has
complete control over the industry output. As a result, monopolist is a price-maker and fixes its own
price. It can influence the market price by changing the supply of the product
Reasons for Emergence of Monopoly
The various reasons for emergence of monopoly are:
i. Government licencing – It means that before a firm can enter an industry it needs to take
permission from the government. By not granting licences to new firms, government aims to assure
that only one firm operates in the market.
ii. Patent Rights – When a firm or producer gets official recognition that no one else can produce the
product or technology developed or invented by this firm, it is patent rights. It is to promote and
recognise the research and development work by the firms and to cover their risk. The period for
which patent rights are granted is known as patent life. It may be for 15 to 20 years.
iii. Cartel – In order to earn the maximum profits, sometimes producers of a particular product,
keeping their individual identity, come together and make one organisation, which is termed as cartel.
The most famous example of cartel is ‘Organisation of Petroleum Exporting Countries (OPEC)’,
which led to virtual monopoly in the market for oil.
Iv Baby Markets
Another cause of monopoly occurs in new ‘baby markets’. During the infancy of a market,
the first entrant will be able to establish an initial monopoly position. This is because they are
the first company in the market, without competition.
Legal barriers
Economies of sale
Technological superiority
Control of natural resources
Network externalities
Deliberate actions
Capital requirements
No suitable substitute
Types of Monopoly
There are three types of monopoly: Natural, Un-natural, and State. All three have unique
characteristics and causes. So let us look at the 3 types of monopoly below:
1. Natural Monopolies
One type of monopoly is the natural monopoly, which is called ‘natural’ because there is no
direct government involvement. This derives from the fact that its creation originates from
variables that are not man-made.
For instance, railways are a prime example of a natural monopoly. This is because the cost to
build another track would be over and above what a competitor would make back in profit.
2. State Monopolies
Another type of monopoly is the state monopoly. This covers industries where the state has
full ownership. Notable examples include postal services, utilities, television, and the supply
of money.
3. Un-natural Monopolies
The third type of monopoly is un-natural monopolies which are a combination of natural and
state monopolies. They are natural monopolies in the traditional sense but are re-enforced by
the state. Patents are a clear example of an unnatural monopoly.
AR (Demand curve), Revenue Curves and MR curves of a Monopoly firm: -
Demand of the product is not in the control of monopoly firm. In order to increase the output
to be sold, monopolist will have to reduce the price. Therefore, monopoly firm faces a
downward sloping demand curve. As we know, in monopoly market there is no close
substitute for its product; The AR (or Demand Curve) is STEEPER.
Cost Curve
Traditional Cost curve
Relationship between Average Revenue, Marginal Revenue and Price Elasticity under
Monopoly
Equilibrium of the monopoly firm: price and output decision
Under monopoly, for the equilibrium and price determination, two different conditions need to be
satisfied:
1) Marginal revenue must be equal to marginal cost.
2) MC must cut MR from below
However, there are two approaches to determine equilibrium price under monopoly viz.;
1) Total Revenue and Total Cost Approach.
2) Marginal Revenue and Marginal Cost Approach.
Total Revenue and Total Cost Approach
Monopolist can earn maximum profits when difference between TR and TC is maximum.
Marginal Revenue and Marginal Cost Approach
According to marginal revenue and marginal cost approach, a monopolist will be in equilibrium when
two conditions are fulfilled i.e.,
(i) MC = MR and
(ii) (ii) MC must cut MR from below.
The study of equilibrium price according to this analysis can be conducted in two time periods.
1) The Short Run
2) The Long Run
Short Run Equilibrium under Monopoly
Short period refers to that period in which the monopolist has to work with a given existing plant. In
other words, the monopolist cannot change the fixed factors like, plant, machinery etc.
Monopolist can increase his output by changing the variable factors. In this period, the monopolist can
enjoy
Super-normal profits,
Normal profits
Sustain losses.
Shutdown
Super-normal profit
Normal profit condition
Losses condition
Shutdown condition
Long Run Equilibrium under Monopoly
Long-run is the period in which output can be changed by changing the factors of production. In
other words, all variable factors can be changed and monopolist would choose that plant size which is
most appropriate for specific level of demand. Here, equilibrium would be attained at that level of
output where the long-run marginal cost cuts marginal revenue curve from below.
The monopolist is a single seller for a particular commodity and faces an inelastic demand
curve. The monopolist in the long-run can take advantage of its monopoly power and earn
super normal profit by producing less than optimum level of output and charging higher
prices.
