A monopoly is an economic structure characterised by one seller who sells a distinctive product, with the limitation for an entrepreneur to join the market. A monopoly is the type of market in which only one person sells a specific product with no comparable alternatives.
In a market monopoly, the entry of new firms is not possible in the market in a free manner due to several reasons, including government licences and regulations, huge capital requirements, complicated technology and economies of scale. These barriers to economic growth hinder firms from entering the market.
Did You Know?
IRCTC is a state-owned company and is the only one in Indian markets operating within the industry. It has an absolute monopoly since consumers are left with no alternative. The company was established in 1845. Globally, it's among one of the largest railways and the largest employers in the world.
What Is a Market?
Markets are gathering places where buyers and sellers meet and exchange value. There are many types of markets, and some are physical, while others are virtual. A market is simply a group of people who buy or sell similar items. And if you want to sell something or buy something, you need a market.
A market is a group of consumers who share similar characteristics. Businesses usually target a niche market, a group of consumers who share certain demographic characteristics. Generally, markets are of three types: small, niche and mass. You can also expand a market by entering another market and selling to a different group of users. Whether the market is small or large, the definition of the market depends on the characteristics of the business and consumers.
Another kind of market definition is needs-based. If consumers are buying a product for the first time, they will probably opt for a different one. This might be because they prefer one product over another, or perhaps they cannot buy it. Sometimes people will make substitutions because of price or some other marketing activity. This kind of market is often referred to as a jobs-to-be-done market.
What Is a Monopoly Market?
Let's talk about a monopoly market structure and how it works. A monopoly market is a situation in which one company controls all or nearly all of the output of a particular industry. As a result, prices and output are set by this one seller. This type of market is also known as a monopoly market because other companies do not have near competition. Price discrimination occurs when one corporation sells the same product to one kind of shopper while other companies are forced to compete with them to survive.
A monopoly market occurs when there is no competition in a specific industry and no substitutes for the goods produced. In such a market, the price of a product is fixed by the monopolist, and no other firm can produce similar products. Competition is restricted by copyright laws, which prevent the production of new products or processes. Pharmaceuticals, for example, are monopolies. Geographic monopolies arise when one company controls all the producers of a particular product in a geographic area. Walmart has the largest market share globally and is the world's largest retailer, with a 60% share of grocery sales. This dominance results from superior products and various proprietary technologies that help them gain a competitive advantage.
The company benefits from network effects created by consumers and developers. Monopolies have the potential to change the way we do business. This is why we must be aware of how to recognise and avoid monopolies when we see them.
Features of a Monopoly Market
There are many different types of monopoly markets, but all have one common feature: a downward sloping demand curve. In other words, the demand curve of a monopoly market is not perfectly elastic. Monopolies are the opposite of oligopolies; multiple, smaller firms compete for a single market. As a result, each firm can exercise some monopoly power over the other firms in the market.
- A monopoly market is one in which a single firm controls the supply of a particular good. This means that any change in output greatly affects the price.
- Monopolies also eliminate the difference between a firm and an industry since there are no close substitutes for one product.
- In a monopoly market, the cross-elasticity of demand is zero. Therefore, the price of a product in a monopoly market is largely fixed, with no room for variation in the supply.
- There is only one seller in a monopoly market, and there is no competition. There are no substitutes for that product, and a monopolist firm can set a higher price than its competitors.
- In a competitive market, all products are substitutes. Therefore, the firm that dominates a monopoly market will be able to maximise its profits while maintaining its position as a dominant seller.
- A monopoly market is when one firm dominates a particular industry and controls a large portion of its productive capacity. The firm's price-setting power is largely dependent on its superior knowledge and low barriers to entry.
- A monopoly market results in higher prices, which allows the monopolist to set their prices. This makes the prices of certain products higher.
- The monopoly can raise or lower prices to attract customers.
- In addition to being negatively sloped, the MC curve is also U-shaped. The MC curve is higher than the MR curve at equilibrium in a monopoly, but this does not imply a positive slope at equilibrium.
- Monopoly markets are characterised by entry barriers that prevent new firms from entering. Such barriers can be legal, like patents or copyright. In addition, they must also be low enough to discourage new firms from entering the market.
- The single seller can't raise prices above their costs of production. If they raise prices below their costs, the competition is forced to lower theirs.
- The monopoly has information and a lack of substitutes, which makes the firm's price curve more elastic.
Reasons for the Existence of Monopoly Market
Why does the monopoly market exist? Monopolies have significant market power, and they can restrict the quantity sold and raise prices beyond the competitive level without losing customers.
Unlike a perfectly competitive market, monopolies are less likely to cause consumer harm, and they can also prevent competition from growing. These monopolies are often a product of exclusive dealing agreements between one company and the customers of another.
Natural monopolies occur when a single entity serves the whole demand. A natural monopoly has a common thread. It implies that competition within a market cannot be sustained and, therefore, inefficient. Monopolies are also more likely to have proprietary information about their customers. As a result, they are more likely to set their prices higher than competitors. This, in turn, limits competition and increases prices.
Monopoly Market Examples
In the 1930s, the ALCOA controlled most of the bauxite supply, a key mineral in the manufacture of aluminium. Other firms were unable to complete it because the cost of building another track was higher than the profit of the monopoly. From this example, it's easy to understand that if a natural monopoly is formed in a market, it may be necessary to create additional competition to create a healthy economy.
What Are the Sources of Monopoly Power?
These variables influence monopoly power:
- Barriers to entry
- Competition number
- Differentiation of the product's characteristics
- The higher and more costly the barriers to enter, the more powerful the monopoly gets
- The less competition in the market, the higher the power of the monopoly
- The more advertising related investment and more well-known the brand name, the higher the power of the monopoly
- The more differentiation of the product, the greater magnitude of the power of monopolies
In this post, we discussed what monopoly means, the sources of monopoly power and the reason behind its existence. If your business includes a lot of collaborations with other companies, many online transactions will take place.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.