Download Important Study Material on the Topic - Monopoly Market Free PDF
If you break up the word “Monopoly”, you get “Mono” which means single or solo, and “Poly” which means “seller”. Thus a monopoly market is the one where a firm is the sole seller of a product without any close substitutes. In a monopoly market structure, a single firm or a group of firms can combine to gain control over the supply of any product. The seller does not face any competition in such a market structure as he or she is the sole seller of that particular product.
No other firm produces a similar product, and the product is unique. It does not face much cross elasticity of demand with all other products.
What is a Market?
One can define the market as a place where two or more parties meet for economic exchange. It facilitates the exchange of goods and services, and it can be a physical place like a retail store where people meet face-to-face or a virtual one, i.e., online e-commerce websites. There are buyers and sellers in a market which determines the size of the market.
What is a Monopoly Market?
A monopoly market is a form of market where the whole supply of a product is controlled by a single seller. There are three essential conditions to be met to categorize a market as a monopoly market.
There is a Single Producer - The product must have a single producer or seller. That seller could be either an individual, a joint-stock company, or a firm of partners. This condition has to be met to eliminate any competition.
There are No Close Substitutes - There will be a competition if other firms are selling similar kinds of products. Hence in a monopoly market, there must be no close substitute for the product.
Restrictions on the Entry of any New Firm - There needs to be a strict barrier for new firms to enter the market or produce similar products.
The above 3 conditions give a monopoly market the power to influence the price of certain products. This is the true essence of a monopoly market.
Features of a Monopoly Market
Some characteristics of a monopoly market are as follows.
The product has only one seller in the market.
Monopolies possess information that is unknown to others in the market.
There are profit maximization and price discrimination associated with monopolistic markets. Monopolists are guided by the need to maximize profit either by expanding sales production or by raising the price.
It has high barriers to entry for any new firm that produces the same product.
The monopolist is the price maker, i.e., it decides the price, which maximizes its profit. The price is determined by evaluating the demand for the product.
The monopolist does not discriminate among customers and charges them all alike for the same product.
Some of the monopoly market examples are your local gas company, railways, Facebook, Google, Patents, etc.
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Reasons for the Existence of Monopoly Market
Monopolies arise in the market due to the following three reasons.
The firm owns a key resource, for example, Debeers and Diamonds.
The firm receives exclusive rights by the government to produce a particular product. Like patents on new drugs, the copyright for books or software, etc.
One producer can be more efficient than others due to the cost of production. This gives rise to increasing returns on sale. Few examples are American electric power, Columbia Gas.
What are the Sources of Monopoly Power?
The individual control of the market in a monopoly market structure is due to the following sources of power.
Legal barriers
Economies of sale
Technological superiority
Control of natural resources
Network externalities
Deliberate actions
Capital requirements
No suitable substitute
A market can be defined as a place where two or more parties meet up for an economic exchange. A market place facilitates the exchange of goods and services,as in a retail store where people meet face-to-face, or even a virtual one like the online e-commerce websites. In a market, there are buyers and sellers.
FAQs on Monopoly Market: Features and Examples
1. What are examples of monopoly market?
A monopoly market occurs when one company is the sole provider of a good or service with no close substitutes. Common examples of monopoly markets include:
- Local utilities: Water and electricity supply companies often operate as monopolies in specific regions because setting up competing infrastructure is costly.
- Postal services: In some countries, only a government-run postal service can deliver regular mail.
- Technology patents: A business with a patent on a unique product (like a new drug) acts as a monopoly until the patent expires.
2. What are the 4 types of monopolies?
Monopoly markets can be divided into four main types, each based on how and why a single firm dominates. The four types are:
- Natural monopoly: Occurs when high start-up costs make it most efficient for one company to serve an entire market, such as water utilities.
- Government monopoly: Created when the government grants exclusive rights to a business, such as nationalized railways or postal services.
- Technological monopoly: Exists when one company owns a patent or unique technology, preventing others from entering the market.
- Geographic monopoly: Happens when a business is the only provider in a certain location, like a rural store with no nearby competitors.
3. What are the five characteristics of a monopoly?
A monopoly market is defined by five key characteristics that distinguish it from other market structures:
- Single seller: Only one firm provides the product or service.
- No close substitutes: Consumers cannot find similar goods elsewhere.
- High barriers to entry: Legal, technological, or financial obstacles keep out competitors.
- Price maker: The monopoly can set prices rather than follow market rates.
- Restricted information: The monopolist controls product details or technologies.
4. What is a monopoly vs oligopoly?
Monopoly and oligopoly are both market structures, but they differ in the number of firms and competition level. In a monopoly, one firm controls the entire market, while an oligopoly has a few large companies dominating.
- Monopoly: Single seller, high barriers to entry, unique product, price-setting power.
- Oligopoly: Few sellers, some competition, products may be similar or different, strategic pricing.
- Market influence: Oligopolies often react to each other's pricing, but monopolies do not face direct competition.
5. How does a monopoly set prices?
In a monopoly market, the single seller has significant price-setting power because they control supply. The firm maximizes profit by choosing a price where marginal cost equals marginal revenue.
- Market power: The monopolist can raise prices without losing customers to competitors.
- Demand curve: The firm faces a downward-sloping demand curve, allowing for higher prices.
- No substitutes: Buyers must accept the price or go without the good or service.
6. What are the effects of monopoly on consumers?
A monopoly market often impacts consumers in several ways, mostly due to reduced competition. The main effects include:
- Higher prices: A monopolist sets prices above what would occur in a competitive market.
- Less choice: Consumers cannot find alternative products or services.
- Lower quality or innovation: With no competitors, there’s less incentive to improve.
7. What causes a monopoly to form?
A monopoly forms when a single firm gains significant control, often due to certain barriers or advantages. Main causes include:
- Legal barriers: Government grants exclusive rights via patents or licenses.
- Resource control: The firm owns a key resource or input that others can't access.
- Cost advantages: High set-up or operational costs make it hard for new firms to compete.
8. Can a monopoly be beneficial?
Although monopoly markets can limit competition, they sometimes offer advantages, especially in industries with high infrastructure costs. Benefits may include:
- Lower average costs: One provider can spread out expenses, reducing prices for essential services.
- Consistent quality: Standardized production or service delivery can ensure reliability.
- Encouragement of innovation: Temporary monopolies, like patents, can reward inventors and spur technological progress.
9. How do governments regulate monopolies?
Governments regulate monopoly markets to protect consumers from unfair practices or high prices. Common regulation methods include:
- Antitrust laws: These laws prevent one company from becoming too dominant and encourage competition.
- Price controls: Authorities may set maximum prices for essential goods or services delivered by a monopoly.
- Public ownership: In some cases, the government runs the monopoly directly, such as with postal services.
10. What is meant by 'barriers to entry' in a monopoly market?
Barriers to entry are obstacles that keep new firms from entering a monopoly market. These barriers protect the single seller’s dominance.
- Legal: Patents or exclusive licenses prevent competitors from producing similar goods.
- Cost: High initial investments in equipment or infrastructure make it hard to start a new business.
- Resource control: If one company owns all of a crucial input, others can’t compete.
11. Why is competition limited in monopoly markets?
Competition is limited in monopoly markets because high entry barriers prevent other firms from joining. This leads to a single seller controlling supply.
- Exclusive rights: Patents or laws may legally prohibit competitors from entering.
- Large scale: Economies of scale make it inefficient for small firms to compete.
- Control of resources: When one firm owns needed resources, others cannot access the market.
