Monopoly

A Monopoly is said to exist when a person/firm/company is the only supplier of a product/commodity or service.

  • Pure monopoly – where only one producer exists in the industry
  • In reality, rarely exists – always some form of substitute available
  • Monopoly exists, where one firm dominates the market
  • Firms may be investigated for examples of monopoly power when market share exceeds 25%
  • Monopoly power – refers to cases where firms influence the market in some way through their behaviour determined by the degree of concentration in the industry
  • Influencing prices
  • Influencing output
  • Erecting barriers to entry
  • Pricing strategies to prevent or stifle competition
  • May not pursue profit maximization – encourages unwanted entrants to the market
  • Sometimes seen as a case of market failure
  • Origins of monopoly:
    • Through growth of the firm
    • Through amalgamation, merger or takeover
    • Through acquiring patent or license
    • Through legal means – Royal charter, nationalisation
  • Characteristics of firms exercising monopoly power:
    • Price – could be deemed too high, may be set to destroy competition (destroyer or predatory pricing), price discrimination possible.
    • Efficiency – could be inefficient due to lack of competition or could be higher due to availability of high profits
    • Innovation – could be high because of the promise of high profits, Possibly encourages high investment in research and development
    • Collusion – possible to maintain monopoly power of key firms in industry
    • High levels of branding, advertising and non-price competition
  • Diagrammatic representation

Monopoly

  • This is both the short run and long run equilibrium position for a monopoly
  • Given the barriers to entry, the monopolist will be able to exploit abnormal profits in the long run as entry to the market is restricted.
  • AR (D) curve for a monopolist likely to be relatively price inelastic. Output assumed to be at profit maximising output

 

  • Example:

Perfect monopoly is also an extreme of market structure and is not seen in today’s time. One of the examples of a market showing monopoly structure can be considered to be that in mining of coal where Coal India Ltd. has the monopoly in the market.

Read about: Monopolistic Competition, Perfect CompetitionGross Domestic Product, Oligopoly

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