Download Important Study Material on the Topic - Monopoly Market Free PDF
If you break up the word “Monopoly”, you get “Mono” which means single or solo, and “Poly” which means “seller”. Thus a monopoly market is the one where a firm is the sole seller of a product without any close substitutes. In a monopoly market structure, a single firm or a group of firms can combine to gain control over the supply of any product. The seller does not face any competition in such a market structure as he or she is the sole seller of that particular product.
No other firm produces a similar product, and the product is unique. It does not face much cross elasticity of demand with all other products.
What is a Market?
One can define the market as a place where two or more parties meet for economic exchange. It facilitates the exchange of goods and services, and it can be a physical place like a retail store where people meet face-to-face or a virtual one, i.e., online e-commerce websites. There are buyers and sellers in a market which determines the size of the market.
What is a Monopoly Market?
A monopoly market is a form of market where the whole supply of a product is controlled by a single seller. There are three essential conditions to be met to categorize a market as a monopoly market.
There is a Single Producer - The product must have a single producer or seller. That seller could be either an individual, a joint-stock company, or a firm of partners. This condition has to be met to eliminate any competition.
There are No Close Substitutes - There will be a competition if other firms are selling similar kinds of products. Hence in a monopoly market, there must be no close substitute for the product.
Restrictions on the Entry of any New Firm - There needs to be a strict barrier for new firms to enter the market or produce similar products.
The above 3 conditions give a monopoly market the power to influence the price of certain products. This is the true essence of a monopoly market.
Features of a Monopoly Market
Some characteristics of a monopoly market are as follows.
The product has only one seller in the market.
Monopolies possess information that is unknown to others in the market.
There are profit maximization and price discrimination associated with monopolistic markets. Monopolists are guided by the need to maximize profit either by expanding sales production or by raising the price.
It has high barriers to entry for any new firm that produces the same product.
The monopolist is the price maker, i.e., it decides the price, which maximizes its profit. The price is determined by evaluating the demand for the product.
The monopolist does not discriminate among customers and charges them all alike for the same product.
Some of the monopoly market examples are your local gas company, railways, Facebook, Google, Patents, etc.
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Reasons for the Existence of Monopoly Market
Monopolies arise in the market due to the following three reasons.
The firm owns a key resource, for example, Debeers and Diamonds.
The firm receives exclusive rights by the government to produce a particular product. Like patents on new drugs, the copyright for books or software, etc.
One producer can be more efficient than others due to the cost of production. This gives rise to increasing returns on sale. Few examples are American electric power, Columbia Gas.
What are the Sources of Monopoly Power?
The individual control of the market in a monopoly market structure is due to the following sources of power.
Legal barriers
Economies of sale
Technological superiority
Control of natural resources
Network externalities
Deliberate actions
Capital requirements
No suitable substitute
A market can be defined as a place where two or more parties meet up for an economic exchange. A market place facilitates the exchange of goods and services,as in a retail store where people meet face-to-face, or even a virtual one like the online e-commerce websites. In a market, there are buyers and sellers.
FAQs on Monopoly Market: Features and Examples
1. What is a monopoly market and what are its essential conditions?
A monopoly is a market structure where a single firm is the sole seller of a product that has no close substitutes. For a market to be classified as a pure monopoly, three essential conditions must be met:
- Single Producer: There is only one seller or producer that controls the entire supply of the product.
- No Close Substitutes: The product sold by the monopolist is unique, and there are no similar alternatives available, resulting in low or zero cross-elasticity of demand.
- Barriers to Entry: There are strong barriers that prevent new firms from entering the market and competing with the monopolist.
2. What are the main characteristics or features of a monopoly?
A monopoly market is defined by several key characteristics:
- Single Seller: The entire market is supplied by one firm.
- Price Maker: The monopolist has significant control over the price of its product because it controls the entire supply. It can set the price by determining the quantity to be sold.
- High Barriers to Entry: New firms face significant obstacles, such as legal restrictions (patents), high capital costs, or control over natural resources, which prevent them from entering the market.
- Unique Product: The firm sells a product that has no close substitutes, giving consumers no alternative choices.
- Profit Maximisation: The primary objective of a monopolist is to maximise its profits, which it can achieve due to the lack of competition.
3. What are some real-world examples of monopoly markets, including in India?
Real-world examples of monopolies often exist in specific sectors. For instance, Google dominates the search engine market. In India, a classic example is the Indian Railways, which holds a monopoly over the country's rail network. Other examples include local public utilities, like a city's sole provider of water or electricity (a natural monopoly), or pharmaceutical companies that hold a patent for a specific life-saving drug, giving them exclusive rights to produce it for a set period.
4. What are the different forms of monopoly?
Monopolies can arise from different sources and can be classified into several forms:
- Natural Monopoly: Arises when a single firm can supply a good or service to an entire market at a lower cost than two or more firms could, often due to high fixed costs (e.g., electricity distribution).
- Legal Monopoly: Occurs when the government grants a firm the exclusive right to produce a good, through patents, copyrights, or licenses.
- Technological Monopoly: A firm gains a monopoly because it controls a unique manufacturing method, a proprietary technology, or a specific scientific breakthrough.
- Geographical Monopoly: A monopoly that exists because a firm is the only provider of a product in a specific location (e.g., the only general store in a remote village).
5. How does a firm gain monopoly power?
A firm can establish and maintain monopoly power through several means:
- Control of a Key Resource: If a firm owns or controls a crucial resource needed for production, it can prevent others from competing. For example, De Beers' historical control over diamond mines.
- Government Regulation: The government can create monopolies by granting exclusive rights, such as patents and copyrights, which protect inventors and creators from competition.
- Economies of Scale: In some industries, a single producer can operate so efficiently (natural monopoly) that its cost of production is far lower than any potential competitor, making it impossible for new firms to enter and compete on price.
- Technological Superiority: A firm may possess a technology or production process that is far more advanced than that of any rival.
6. Why is a monopolist considered a 'price maker' and not a 'price taker'?
A monopolist is a 'price maker' because it is the sole supplier in the market. Since it faces the entire market demand curve, which is downward sloping, it can influence the price by adjusting the quantity of goods it supplies. If it wants to sell more, it must lower the price, and if it restricts output, it can charge a higher price. In contrast, a firm in perfect competition is a 'price taker' because it is one of many firms and has no control over the market price; it must accept whatever price the market dictates.
7. How does the absence of close substitutes impact a monopoly's pricing power?
The absence of close substitutes is a critical source of a monopoly's power. When consumers have no viable alternatives, the demand for the monopolist's product becomes highly inelastic. This means that even if the monopolist increases the price, the quantity demanded by consumers does not decrease significantly. This inelastic demand gives the firm substantial freedom to set higher prices and earn supernormal profits without the fear of losing its customer base to a competitor.
8. What is the significance of high barriers to entry in sustaining a monopoly?
High barriers to entry are the primary reason a monopoly can exist and be sustained in the long run. These barriers, which can be legal (patents), financial (high startup costs), or natural (economies of scale), prevent new firms from entering the market to compete. Without these protections, the supernormal profits earned by the monopolist would attract new entrants. This new competition would increase supply, reduce prices, and ultimately erode the monopoly's market power and profits.
9. How does a monopoly market differ from a perfectly competitive market?
A monopoly and a perfectly competitive market are at opposite ends of the market structure spectrum. The key differences are:
- Number of Firms: Monopoly has one firm, while perfect competition has a large number of firms.
- Product: A monopoly offers a unique product with no close substitutes, whereas firms in perfect competition sell identical (homogeneous) products.
- Control over Price: A monopolist is a price maker, while a competitive firm is a price taker.
- Barriers to Entry: Monopoly has high barriers to entry, while perfect competition has free entry and exit for firms.
- Demand Curve: A monopolist faces a downward-sloping demand curve, while a perfectly competitive firm faces a perfectly elastic (horizontal) demand curve.
10. Is it possible for a monopoly to charge different prices to different customers?
Yes, a monopolist can often engage in price discrimination, which is the practice of selling the same product to different buyers at different prices. This is possible if the monopolist can segment its market based on factors like willingness to pay, age, or income, and can prevent the resale of the product between these segments. For example, electricity providers may charge different rates for commercial and residential use, and airlines often charge different fares for the same seat based on when the ticket is purchased.
