Monopoly: Meaning and Characteristics

Monopoly

The term ‘monopoly’ was derived from Greek word ‘Mono’ which means single (or one) and ‘Poly’ which means seller. Thus, monopoly is a market organization for a commodity in which there is only one seller of the commodity and where the commodity has no substitutes. The seller, being the sole seller, has full control over the supply of the commodity. A monopolist is, thus, a price maker. He is not afraid of the actions of the rivals. The monopolist also considers laws of costs while determining the prices of products. In the long run, output can be produced under law of diminishing, increasing as well as constant costs

Monopoly may use price discrimination which provides benefits to the economically weaker groups of the society.Monopoly can spend to invest in new technology and latest machinery so as to be efficient and for avoiding competition. Under this market structure, consumers may be often charged high prices for the poor quality of goods and services.

Individual control over the market is generated by various sources. Economies of scale, capital necessities, technological advancement or superiority, no substitute goods, legal barriers, network externalities, deliberate actions and control of natural resources are some of the major sources of monopoly power.

According to Leftwich, “Pure monopoly is a market situation in which a single firm sells a product for which there is no good substitute.”

According to A. Koutsoyanis, “Monopoly is a market structure in which there is a single seller, there are no close substitutes for the commodity it produces and there are barriers to entry.”

Reasons for the monopoly in the market

The powerful reasons which lead to a monopoly in the market are as follows:

1. Strategic raw material: The firm controlling or owning raw material, which is essential in the production process, can disallow the creations of rival firms. In other words, a firm may obtain monopoly power because of its single right as well as control over the key sources of raw material, which are used to produce objects such as graphite, diamond, etc. Such monopoly is called natural monopoly as well as a raw material monopoly.

2. Patent Rights: Those rights which are granted by the government to a firm or industry to produce a commodity or product of specified character and standard quality as well as to use a specified technique and technology in the production process is called patent rights. Such monopolies are called patent monopolies.

3. Limiting Price Policy: A monopoly firm may implement the limit pricing policy which may be combined with other policies such as continuous product differentiation, heavy advertising, which makes entry of the new firm unattractive or uneasy. This is the situation of monopoly established by creating blockades to new competitors.

4. The existence of goodwill: Firms which have been operating in the market for a long period of time may enjoy considerable goodwill as well as the loyalty of their buyers. It may be extremely difficult (or impossible) for new potential firms or producers to break this goodwill or loyalty.

5. Legal Restrictions: Most of the public monopoly power operating in the public utility sector such as electricity and power supply, water supply, postal service and electronic communication media are government monopoly that is created by the law of the country or state. The objective of this policy is to work on the behalf public welfare.

6. Local Monopolies: Many local firms may take pleasure in a monopoly position or power because of heavy transport cost. For example, local brick manufacturers and stone quarries enjoy an element of local monopoly because the heavy cost of transportation prohibits the transportation of these products from the surrounding areas.

7. Optimum Scale of plant: If a monopoly firm is set up at the optimal scale of resources, it becomes almost difficult (or impossible) for new firms to enter the industry and survive with profit. Monopolies accessible on account of this factor are known as a natural monopoly. Thus may emerge from the technical condition of efficiency.
In Nepal, Nepal Electricity Authority is an example of monopoly market supplying electricity.

Features of Monopoly

The main features of monopoly are explained as follows:

1. One seller and a large number of buyers: A pure monopolist is one or single firm of the industry in the market. A single firm is the only one producer of a given commodity or product as well as the solitary supplier of given service. Hence, the firm and the industry are identical. But the number of buyers is assumed to be large in monopoly.

2. No close substitutes of products: It follows from the first feature that the monopolist’s product is unique. It is unique in the sense that there is no goods or close substitutes. In other words, a monopoly cannot exist when there is competition. Thus, cross elasticity of demand for a product of a single seller is zero.

3. Barriers or difficulties to the entry of new firms: In the monopoly market, there is a strong barrier to the entry of new firms. In other words, the existence of monopoly depends upon the existence of barriers to entry. Economic, technological, legal or other obstacles must exist to prevent competitors from coming into the industry if the monopoly is to persist.

4. Monopoly is also an industry: Under monopoly, there exists only one firm which represents the industry. Thus, the difference between firm and industry arrives at an end.

5. Imperfect knowledge about the market: It is assumed that both seller and buyers are not fully convinced about the market because of lack of advertising and promotions.

6. Price maker: A firm has full control over its supply, i.e. it exercises considerable control over price. Thus, it is known as price maker as well as price setter. In other words, a monopolist is in a position in the market to fix his desired price for the product as he likes because his price-fixing power is absolute.

7. Nature of demand curve: Under monopoly, it becomes crucial to perceive the nature of demand curve facing a monopolist. In this market situation, there is no vivid difference between firm and industry. Therefore, under monopoly, firm’s demand curve includes the industry’s demand curve as well. Considering the fact that the demand curve of the consumer slopes downwards from left to right, the monopolist encounters a downward sloping demand curve. It means, if the monopolist decreases the price of the product, the demand of that product will rise and vice- versa.

8. Objective of a firm: The main objective or goal of the firm is to earn maximum profit.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan