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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.

  1. 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.

  2. 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.

  3. 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 sale 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 Monopoly Market 

Monopolies arise in the market due to the following three reasons.

  1. The firm owns a key resource, for example, Debeers and Diamonds.

  2. 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.

  3. 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

FAQs (Frequently Asked Questions)

Q1. What is Cross Elasticity of Demand and How is It in a Monopoly Market?

Answer: 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.

Q2. What are the Similarities and differences between a Competitive and Monopolistic Market?

Answer: 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.

Q3. What are the different Forms of Monopoly Markets? 

Answer: 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.

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Q4. What are the different Types of Markets?

Answer: 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.