Economics

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.

You might be interested in  Perfect Competition

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

Leave a Reply