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
1. What are the reasons for a Monopoly Market?
Monopoly Markets happen due to three reasons:
i) The firm owns a key resource.
ii) The firm gets the exclusive rights granted by the government in order to produce a particular product, like patents on new drugs, copyright for books or software, etc.
iii) Due to the cost of production,one producer can be more efficient than others which in turn, gives rise to increasing returns on sale.Some examples are American electric power and Columbia Gas.
2. Give three characteristics of a Monopoly Market?
Some characteristics of a Monopoly Market are:
i) All the monopoly markets possess certain information that is not known to anyone else apart from them alone.
ii) Price maker in a monopoly market is the Monopolist which means that the price is decided, which in turn, maximizes its profit. The price is determined by evaluating the demand for the product.
iii) There is no discrimination among buyers and customers. Everyone is charged similarly, for the same product.
3. Give the different forms of Monopoly market?
The different forms of Monopoly market are:
i) Natural Monopoly, when the monopoly markets arise due to natural causes.
ii) Local or Geographical Monopoly , when markets arise due to a particular location of a town and there is no one else offering the same product.
iii) Government or Legal Monopoly, where the business is owned either by the government or by a legal firm.
iv) Technology Monopoly where a firm introduces new techniques of production.
4. Name different types of Markets?
i) Perfect Market, which has many buyers and sellers and here no single seller can change the current market price of products.
ii) Monopoly Market, which has only a single seller who is responsible for the product pricing.
iii) Oligopoly, the structure of a market where there are a few sellers of a product, but they do not have the pricing policy like the monopoly market.
iv) Monopsony system of market where the market is differentiated on the basis of sellers and buyers. There is only one buyer of a particular product.
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8. What is Cross Elasticity of Demand and How is It in a Monopoly Market?
The cross elasticity of demand is a concept in economics where one measures the responsiveness of quantity demanded of one product when the price of another product is changed. Another name for this is the cross-price elasticity of demand. This is determined by calculating the change in the percentage of the quantity demanded of a product divided by the change in the price of another product. Since in a monopoly market, there is a total lack of close substitutes, the cross elasticity of demand is zero in its case.
9. What are the Similarities and differences between a Competitive and Monopolistic Market?
Monopolies and competitive markets are two extreme types of market structures. However, they have the following similarities.
Cost functions are the same.
Both aim to maximize profit and minimize cost.
The decision to shut down a firm in any of these markets is the same.
The noticeable differences between a competitive and monopoly market are as follows.
The number of competitors in a competitive market is more than that in a monopoly market.
The demand slope in Monopoly is downward sloping, whereas, in a competitive market, the demand curve is flat. In a competitive market, a firm can sell as much as it wants at the market price. Irrespective of the market curve, in a competitive market with thousands of firms, the residual demand curve of an individual seller is mostly flat. At the same time, a monopolist would have to accept a lower price if it desires to sell a significantly high number of products.
10. What are the different Forms of Monopoly Markets?
A monopoly market is divided into the following forms.
Natural Monopoly - When a monopoly arises due to natural conditions, it falls under the category of a monopoly market. For example, India has a monopoly in mica production.
Local or Geographical Monopoly - This monopoly is due to the location of a town. There is no other business that offers that product.
Government, Legal or Regulated Monopoly - In this case, either the government owns the business or gives the firm legal provisions for producing a product. Due to this law, others are forbidden to imitate the design of the product in forms of patents, trade-marks, copyrights, etc. This kind of monopoly safeguards the interests of the firm which has done a lot of research in producing the commodity.
Technological Monopoly - When a firm invents a new technique of manufacturing or creates something very unique, it gives rise to technological monopoly.
11. What are the different Types of Markets?
The market can be classified into 4 different types as follows.
1. Perfect Market - This system has an infinite number of buyers and sellers, and no one seller can dominate or change the prevailing market price.
2. Monopoly - This type of market has a single seller who governs the pricing of the product.
3. Oligopoly - In this market structure, there are a handful of sellers of a product. Though the marketers of this type of market do not have the same power over pricing like a monopoly market, they can still bypass regulations and collude with one another to influence pricing to their benefit.
4. Monopsony - A market system is not just differentiated based on the number of sellers but also the number of consumers or buyers. In a monopsony market, there is a single buyer of a product that gives him or her extreme power over determining the price of the commodity.