What is monopoly? Definition, Features, Types, Price-output determination

  • Post last modified:20 February 2022
  • Reading time:13 mins read

What is monopoly?

The term monopoly has been derived from Greek term Monopolian that means a single seller. Thus, monopoly is a market condition in which there is a single seller of a particular commodity who is called monopolist and has complete control over the supply of his product.

Definition of Monopoly

The term monopoly is used to cover any effective price control, whether of supply or demand of services or goods; narrowly it is used to mean a combination of manufacturers or merchants to control the supply price of commodities or services.Prof. Thomas
“Monopoly is a market situation in which the firm is independent of price changes in the product of each and every other firm.”Prof. Robert Triffin

Features of Monopoly

The characteristic features of a monopolistic firm are:

  • The monopolist is the single producer in the market. Thus, under monopoly firm and industry are identical.

  • There are no closely competitive substitutes for the product. Therefore, the buyers have no alternative or choice. They have either to buy the product or go without it.

  • Monopoly is a complete negation of competition.

  • A monopolist is a price-maker and not a price-taker. In fact, his price fixing power is absolute. He is in a position to fix the price for the product as he likes. He can vary the price from buyer to buyer. Thus, in a competitive industry, there is single ruling price, while in a monopoly there may be price differentials.

  • A monopoly firm itself being the industry faces a downward-sloping demand curve for its product. That means it cannot sell more output unless the price is lowered.

  • A pure monopolist has no immediate rivals due to certain barriers to entry in the field. There are legal, technological, economic or natural obstacles, which may block the entry of new firms.

  • Since a monopolist has complete control over the market supply in the absence of a close or remote substitute for his product, he can fix the price as well as quantity of output to be sold in the market.

Though a monopolist is a price-maker, he has limited power to charge a high price for his product in the market. This is because, he cannot disregard demand situation in the market. If buyers refuse to buy at a very high price, he has to keep a lower price.

He will produce that level of output, which maximises profits and charge only that price at which heis in a position to dispose of his entire output. Thus, a monopolist sets price for his production in relation to the demand position and not just fix up any price he likes.


Types of Monopoly

Monopoly is the antithesis of competition. There are various types of monopoly.

Natural Monopoly

It arises due to economies of scale. Natural monopolies arise due to concentration of raw materials in a particular region. An example of natural monopoly is the nickel supply of Canada (about 90% of world‘s supply). Factors like, climate, environment nearness to market may also create natural monopolies.

Social Monopolies

These are owned and managed by the government. The main objective of such monopolies is to serve society. So they are called welfare monopolies i.e. railways, electricity, etc.

Private Monopoly

It is owned and operated by a private individual or companies. The main objective is to maximise profit.

It is conferred on certain firms and is protected by the law for them to enjoy the fruits of their labour. The special trademarks, copyrights and patents are the examples.

Service Monopoly

It arises in service also. If there is only specialist doctor in a particular area, he becomes the monopolist.

Simple Monopoly

When a monopolist charges the same price for a particular product for all the customers, it is a simple monopoly.

Fiscal Monopoly

Sometimes some activities such as minting of coins or printing of currencies will be undertaken only by the government for various reasons. Such monopolies are known as fiscal\ monopolies.

Discriminating Monopoly

It is one in which different prices are charged for the same product for different customers.

Voluntary Monopolies

These are created to eliminate competition and to earn huge profits i.e. Cartel, Trust and Holding Company etc.


Price Determination under Monopoly

Under monopoly conditions, too, there is bound to be interaction between the forces of demand and supply. However, the difference is that supply is not free to adjust itself to demand. It is under the control of the monopolist. A monopolist is the sole producer of his product, which has no closely competing substitutes. In other words, the cross-elasticity of demand between the product of the monopolist and the product of the closest rival must be very low i.e. the product of a rival cannot take the place of the monopolised product.

Monopolist is a sole producer of the commodity and he can easily influence the price by changing his supply. The monopolist can influence the price. In fact, he sets the price. Being in control of supply, the monopolist can

(a) fix the price and offer to supply the quantity demanded at that price or

(b) he can fix the supply and then let price be determined by demand in relation to the supply fixed by him.

However, he cannot fix both the price and force people to buy a pre-determined quantity at that price.

He can only do one of the two things i.e. either fix the price or fix the supply. Equalising Maginal Revenue and Marginal Cost The aim of the monopolist, like every other producer, is to maximise his total money profits. Therefore, he will produce to a point and charge a price, which gives him the maximum money profits. In other words, he will be in equilibrium at the price-output level, at which his profits are maximum. He will go on producing so long as additional units add more to revenue than to cost.

He will stop at that point beyond which additional units of production add more to cost than to revenue. In other words, the monopolist will be in equilibrium position at that level of output at which marginal revenue equals marginal cost. He will continue expanding output so long as marginal revenue exceeds marginal cost. He does so because profits will go on increasing as long as marginal revenue exceeds marginal cost.

At the point where marginal revenue is equal to marginal cost, profits will be maximised. If the production is carried beyond this point, the profits will start decreasing. The price-output equilibrium of the monopolist can be easily understood with the help of figure1.6 on the next page. AR is the demand curve or average revenue curve facing the monopolist. MR is the marginal revenue curve, which lies below the average revenue curve AR.

AC is the average cost curve and MC is the marginal cost curve. It can be seen from the diagram that up until OM output, the marginal revenue is greater than marginal cost, but beyond OM the marginal revenue is less than marginal cost.

Therefore, the monopolist will be in equilibrium at output OM, where marginal revenue is equal to marginal cost and profits are the maximum the price at which output OM is sold in the market can be known from looking at demand curve or average revenue curve AR. It can be seen from Fig. 1.6 that corresponding to equilibrium output OM, the price or the demand or average revenue is MP‘ ( = OP).

Price-output equilibrium

What amount of actual total profits—however maximum they would be in the given cost-revenue situation—will be earned by the monopolist in this equilibrium position? This can be found in the following way. At output OM, while MP‘ is the average revenue; ML is the average cost Therefore. P‘L is the profit per unit.

Now the total profits = Profits per unit x total output sold

=-P‘L x OM
=P‘LXTL
=P‘LTP

Thus, the total profits earned by (he monopolist in the equilibrium position will be equal to the rectangle P‘LTP i.e. the shaded area in figure1.6. Monopoly Price Not Necessarily a High Price Monopoly price is not necessarily a high price. It may sometimes be even lower than the price under competition, because the monopolist is spared the expenses of advertisement.

Besides, he gains from the usual economies, resulting from large-scale production. It is also not necessary that the monopolist should always charge the highest possible price. He is afraid of public opinion, government interference and of substitutes being adopted for the commodities he produces.

Thus, the monopoly price is not necessarily a high price. However, it generally is high. The monopolist cannot help exploiting his monopolistic position and charging a high price.


FAQ

What is monopoly?

Monopoly is a market situation in which the firm is independent of price changes in the product of each and every other firm.

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