Monopoly

‍Monopoly is a type of market structure in which there is only one seller of a particular good or service.


What Is Monopoly?

‍Monopoly is a type of market structure in which there is only one seller of a particular good or service. That seller has the market power to control prices and exclude competitors. As a result, consumers will generally pay more for the product and have fewer choices available to them. 

What Are the Types of Monopoly?

A pure monopoly is a type of market structure in which there is only one seller of a particular good or service. For example, if there was only one water company in your city that provided water to all houses, it would be considered a monopoly. The company has the market power to control prices and exclude competitors. 

A natural monopoly is a condition that exists when economies of scale are such that one firm can supply the entire market at a lower average cost than two or more firms. An example of this is electricity services. This type exists when it is most efficient for one firm to supply the entire market. 

A legal monopoly is one granted by the government. Examples include patent rights given to inventors to encourage research and development, and licenses given to broadcast companies, cable companies and telecommunications companies. Legal monopolies are granted only when the government determines that the benefits outweigh the costs.

Market Equilibrium in the Presence of a Monopoly

Equilibrium in monopoly occurs under the same circumstances as it does in perfect competition. The MC curve intersects the MR curve from below, meaning that the marginal cost (MC) and marginal revenue (MR) are equal.

There are three possible outcomes for a firm’s equilibrium in monopoly, just like in perfect competition:

  • The company makes normal profits if the average cost equals the average revenue.

  • If the average cost is greater than the average revenue, it makes super-normal profits.

  • If the average cost exceeds the average revenue, it suffers losses.

In the Long Run

A monopolist can alter all the inputs over the long term. Therefore, the AC and MC cost curves are all that is required to identify the firm’s equilibrium in the long run.

Determinants of a Monopoly’s Demand Curve

The following variations of the monopoly’s demand curve can be seen in real-world situations: 

Inelastic demand: When demand remains constant at both high and low prices. This is most likely to occur in industries with few buyers and few substitute products. Monopolies often have price-inelastic demand because they have high barriers to entry. 

Price Elasticity of Demand: When demand changes with the price. This is most likely to occur in industries with many buyers and many substitute products. When companies raise the price of their products in this situation, demand falls and vice versa. 

What Are the Conditions for Monopoly?

In order to be considered a monopoly, a firm must be operating with three characteristics: 

Barriers to Entry: When competition is present, no company has an advantage so great that it can form a monopoly. A monopoly is a market structure where there is only one seller of a particular product or service. 
Barriers to Exit: A firm can exit the market in two ways: by closing the business or selling it to another company. Firms may close their business when demand is low, or when it is unprofitable to sell its core product. If new companies realize that an industry has a barrier to exit, they may be reluctant to enter the industry in the first place, causing a monopoly of the firms that are already operating in that sector.
Differentiated Product: Low differentiation of products form perfect competition in a market. Differentiation can be formed through any characteristics, whether it be price, quality or features. An example is Apple products that differ due to the quality and features they provide to users.

How Is Monopoly Different from Oligopoly and Competition?

Here are a few differences among a monopoly, oligopoly and perfect competition:

  • A monopoly has only one seller, whereas an oligopoly has a few sellers. 

  • A monopoly has significant barriers to entry and exit, whereas an oligopoly or a competitive market does not. 

  • In competition, firms have no control over their prices, whereas, in a monopoly, firms decide their own prices. 

  • There are many firms in a competitive market, whereas there is only one firm in a monopoly. 

What Is Monopolistic Competition?

Monopolistic competition is a type of market structure that combines the features of a monopoly and a competitive market. It has the following characteristics:  

  • There are many sellers. This is the defining characteristic of a competitive market. 

  • There are some barriers to entry. There are some firms that find it difficult to enter the market because of certain factors, such as economies of scale or government regulation.

Firms have control over the quantity of goods produced but not the price.