Monopoly

Monopoly

Definitions

Some of the definitions of monopoly are given below:

1. Prof. Thomas: “Broadly the term is used to cover any effective price control whether supply or demand of services or of goods it is used to mean a combination of manufactures of merchants to control the supply price of commodities or services.”
2. Lerner: “A monopolist is a seller who is confronted with a falling demand curve for their product.”
3. K.E. Boulding: “A pure monopolist therefore is a firm producing product which has no effective substitutes among the products of other firms, effective in the sense that even though the monopolist may be making abnormal profits, other firms cannot encroach on these profits by producing substitutes-commodities which might entire purchasers away from the product of the monopolist.”
4. John D. Sumur: Pure monopoly implies zero elasticity of demand in contrast to the infinite elasticity of demand which is characteristic of pure competition.
5. Benham: “A monopolist is literally a seller and monopoly power is based entirely on control over supply.”

Thus, we can define monopoly as “a market structure in which a single firm is selling a product for which there are no close substitutes.”

Features of Monopoly

1. Single seller:

   Under monopoly there should be a single producer of the commodity

2. Monopoly is also an Industry:

   There being only one firm, the distinction between firm and industry no longer exists. Monopoly firm is also an industry.

3. Substitute of the commodity:

   All the units of a commodity are identical and there are no close substitutes of that commodity.

4. No entry of new firms:

   There is restriction on other firms to enter the market.

5. Prices Control:

   Another distinct feature is that it enjoys freedom and independence in fixing the price of the commodity or the output, it can fix either the price or output but not both.

6. Different Average and Marginal Revenue curves :

   Under monopoly average revenue or Demand curve and Marginal revenue curve are separate and downward sloping.

7. Selling Costs are very Small or Marginal:

   This is so because if a buyer has to buy that product, he has to buy it from the monopoly firm only. Therefore, there is no competition and hence, no need of incurring selling costs, i.e., costs on advertisements.

8. The demand curve:

   The demand curve facing a monopolist slopes downward. This means if he sets a lower price of his product, he can sell more. On the other hand, if he sets a higher price of his product he will be able to sell less quantity of his product.

Classification of Monopoly

1. Pure and imperfect monopoly:

   In pure monopoly a firm has complete control over the supply and market. The cross- elasticity of demand with every other product is zero. According to Triffin, “pure monopoly is that where the cross- elasticity of demand of the monopolists’ product is zero.” He has no fear of the entry of rivals. Under imperfect or simple monopoly the producer has to face competition from potential rivals. The cross-elasticity of demand for the product of the product of a simple monopolist is low but not zero. In other words, a simple monopoly is an imperfect one. It is a strong monopoly but not prefect..

2. General versus discriminating monopoly:

   Under general monopoly the monopolist does not differentiate between two buyers in changing price. He fixes a uniform price for all buyers. Discriminating monopolist on the other hand differentiate between two buyers. He fixes different prices for the same product for different consumers.

3. Private and public monopoly:

   Private monopoly exists when the ownership of the firm, producing a monopolist commodity is in the hands of an individual entrepreneur or an organisation. The sole aim of a private monopolist is to maximise the monopoly profit. On the other hand, the ownership of public monopoly lies with the government or public corporation.

Difference between monopoly and perfect competition

The distinction between monopoly and perfect competition is only a difference of degree and not of kind. Following points make a clear difference between both the competitions :

1. Number of buyers and sellers:

   Under perfect competition there are a large number of buyers and sellers who are free to compete with one another. The price for the product of an industry is fixed by the forces of demand supply. The price so fixed is adopted by the firm and each firm adjusts its production according to this price. Thus, there is a single price for a single commodity. On the contrary, in monopoly the distinction firm and industry ceases because there is only a single firm selling a particular commodity. The firm is also the industry. The firms can independently fix the price of its product. Therefore, the firm is a price setter.

2. Demand curve:

   The average revenue curve under perfect competition is a horizontal straight line parallel to the X-axis. In other words, the demand curve under perfect competition is perfectly elastic. On the contrary the demand curve under monopoly is negatively sloping it slopes down from left to right throughout its length. Similarly the marginal revenue curves also differ. Under perfect competition the marginal revenue curve coincides with the average revenue and merges with it. On the other hand, under monopoly the MR curve slopes down from left to right and lies below the average revenue curve.

3. Equilibrium:

   Under perfect competition it is possible only when MR-MC and MC cut the MR curve from below. But under simple monopoly Equilibrium can be realized whether marginal cost is rising constant or falling.

4. Nature of product:

   Under perfect competition the products or various firms are homogeneous but in the case of monopoly the product which is produced by the monopolist has no close substitutes.

5. Entry:

   Under perfect competition, there exists no restriction on the entry or exit of firms into the industry. Under simple monopoly there are strong barriers on the entry and exit of firms.

6. Control over price:

   In perfect competition the firm is a price-maker. On the other, hand a monopolist is a price maker he can fix the prices of his product himself he has full control over the supply of his product.

7. Profit:

   Competitive firms in the long run earn only normal profit. In the short run it may earn super normal profit when new firms cannot enter the field. However, new firms are sure to be attracted to the industry in the long run to take advantage of the super normal profits. This will result in the disappearance of super normal profits. On the other hand, a monopoly firm can earn profit in the short as well as long period because the entry of new firms is not easy due to technical and institutional reasons.

Important links

• Market- Definition, Features & Factors Affecting its Size
• Traditional Theory of Costs- Short-run & Long-run
• Perfect Competition- Definition, Equilibrium firm & Conditions
• Equilibrium of an Industry in the short remand Long-Run
• Equilibrium of Monopoly- Short & Long Period Equilibrium

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