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 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.
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.