Monopoly: Meaning and Characteristics

The word "monopoly" is derived from the Greek words "mono" and "poly," which both imply "single" or "one." Therefore, a monopoly is a market structure for a good or service where there is only one supplier and no substitutes are available. The seller has complete control over the supply of the good because they are the only sellers. Therefore, a monopolist sets prices. He is unafraid of what his competitors do. When setting pricing for his items, the monopolist also takes into account the rules of costs. Long-term production is possible under the laws of reducing, growing, and constant costs.

Price discrimination is a tactic that monopoly may utilize to help the economically disadvantaged sections of society. Monopoly might invest in the newest equipment and technologies to increase efficiency and prevent competition. Consumers may frequently pay high rates for subpar goods and services under this market arrangement.

Numerous factors contribute to individual market domination. Some of the main sources of monopoly power are economies of scale, the need for capital, technological innovation or superiority, the absence of competing products, legislative restrictions, network externalities, intentional activities, and control over natural resources.

According to Leftwich, “Pure monopoly is a market situation in which a single firm sells a product for which there is no good substitute.”

According to A. Koutsoyanis, “Monopoly is a market structure in which there is a single seller, there are no close substitutes for the commodity it produces and there are barriers to entry.”

Reasons for the Monopoly in the Market

The following are the key factors that contribute to a market monopoly:

• Strategic raw material: The company that controls or owns the raw materials, which are necessary for the production process, has the power to forbid the products made by other companies. In other words, a company may be granted monopolistic power due to its exclusive right and control over the major raw material sources that are required to create items like graphite, diamonds, etc. Such monopolies are referred to as natural monopolies and raw material monopolies.

• Patent Rights: Patent rights refer to the privileges granted by the government to a business or industry to manufacture goods or services of a particular type and caliber as well as to employ a particular production method and technology. Patent monopolies are what are known as such monopolies.

• Limiting Price Policy: A monopolistic firm may use a limit pricing policy, which may be supplemented with other measures such ongoing product differentiation and extensive promotion to discourage or make uncomfortable the arrival of a new firm. This monopoly was established by erecting barriers to potential competitors.

• The existence of goodwill: Businesses that have been in the market for a long time may benefit from significant customer loyalty and goodwill. For new prospective companies or manufacturers, it may be very difficult (or impossible) to sever this goodwill or loyalty.

• Legal Restrictions: The majority of government monopolies that control the public utility sector, including energy and power supply, water supply, postal service, and electronic communication media, were established by national or state laws. Working for the general good is the goal of this policy.

• Local Monopolies: A monopoly position or power may be enjoyed by many local businesses due to high transportation costs. For instance, local stone quarries and brick producers have a certain amount of local monopolistic power since the high cost of transportation makes it impossible to transfer these goods from the surrounding areas.

• Optimum Scale of plant: It becomes nearly impossible (or impossible) for new enterprises to enter the industry and thrive with a profit if a monopolistic firm is established at the optimal scale of resources. Natural monopolies are those that can exist due to this circumstance. Thus may result from the efficient technical situation.

The monopolistic market for the delivery of electricity in Nepal is represented by the Nepal Electricity Authority.

Features of Monopoly

Following is an explanation of monopoly's primary characteristics:

• One seller and a large number of buyers: One or just one company from the industry dominates the market as a pure monopolist. A single company is the sole manufacturer of a particular good or service and the sole provider of a particular service. As a result, the company and the sector are the same. However, with a monopoly, it is believed that there are many purchasers.

• No close substitutes of products: The first characteristic implies that the monopolist's product is distinctive. It is distinctive in that there are no comparable products or services. In other words, when there is competition, a monopoly cannot exist. As a result, the cross elasticity of demand for a single seller's product is zero.

• Barriers or difficulties to the entry of new firms: New businesses have a significant barrier to entry in monopoly markets. In other words, the presence of entry barriers is necessary for monopolies to exist. If the monopoly is to last, there must be barriers in the form of economic, technological, legal, or other restraints on entry into the market.

• Monopoly is also an industry: In a monopoly, the industry is represented by just one company. The distinction between a firm and an industry is therefore eliminated.

• Imperfect knowledge about the market: It is presumable that a lack of advertising and promotions has left both sellers and consumers with some skepticism about the market.

• Price maker: A company has complete control over its supply, so it has significant price control. Therefore, it is referred to as both a price maker and a price setter. In other words, a monopolist has complete control over pricing, thus he can set the price he wants for the good anywhere he pleases. 

• Nature of demand curve: It is vital to understand the type of demand curve a monopolist faces when there is a monopoly. There is little distinction between a company and its industry in the current market environment. As a result, in a monopoly, the firm's demand curve also takes into account the industry's demand curve. The monopolist runs into a downward sloping demand curve because the consumer's demand curve slopes downward from left to right. It implies that if the monopolist raises the price of the good, demand for it will fall, and vice versa.

• Objective of a firm: The company's primary aim is to make the most profit possible.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan