Monopoly – The Power Player

The term monopoly has been derived from a Greek word Monopolian, which means a single seller.

Monopoly market is the extreme opposite of Perfect Competition.

According to Prof. Thomas, “Broadly, the term monopoly is used to cover any effective price control, whether of supply or demand of services or goods; narrowly it is used to mean a combination of manufacturers or merchants to control the supply price of commodities or services.”

Monopoly is a form of market in which there is only one seller of a product with no close substitutes and a large number of buyers. For example – Railway is a monopoly industry in India.

Features of Monopoly

1. One seller and a large number of buyers

There is only one seller and a large number of buyers and there are no close substitutes of the product, So there exists Price Discrimination and Full Control Over Price, this makes the Monopolist a Price Maker.

2. No Substitutes of the Product.

3. Price Discrimination

When a producer or seller charges different prices to different buyers for the the same product, it is called price discrimination.

Full Control over Price

Monopoly firm is a Price Maker

4. Independent Decision Making

There is only one firm in the industry and has no competitor, so it can increase or decrease price of its product, it has full control over price, so it has Independent Decision Making Power.

5. Earns Extra normal profits (AR>AC)

Monopolist can fix any price he wants, This gives Extra-Normal Profits or Abnormal Profits to the monopolist in Long Run as well as in the Short Run.

6. Imperfect Knowledge

Information is restricted to the organization and people working within the organization. This information is not available to others, so the other firms and buyers have no perfect Knowledge about it.

7. Monopoly firm lacks the Mobility of factors of production

8. Barriers to the Entry of new firms

There are some barriers to the entry of the new firms in the industry. Mostly monopoly firm has exclusive control over the production or over the raw material needed for production, There can be patent rights secured by the monopoly firm, to prevent new firms from entering in the industry.

There can be other barriers like technical, legal, natural, very high initial investment etc.

9. No Advertisement Cost

There is only one firm or producer so there is no need to advertise product, so there is no advertising cost.

10. Downward sloping demand curve  (AR>MR)

There is an inverse relationship between the the price and quantity sold by the monopoly firm, so that demand curve of the monopoly firm slopes downward.

11. Low Elasticity of Demand

There is only one seller of the product and buyers have to have the product, so they will buy it, maybe in a less quantity if the price is increased, which results in the low elasticity of demand.