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Analysis of Market

Monopoly

There are different types of markets in an economy, perfect competition, monopoly, monopolistic competition, and oligopoly. In this article, we will look at monopoly definition and features along with the revenue curves under monopoly.

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Monopoly Definition

The term monopoly means a single seller (mono = single and poly = seller). In economics, a monopoly refers to a firm which has a product without any substitute in the market. Therefore, for all practical purposes, it is a single-firm industry.

monopoly definition

                                                                                                                                             Source: Pixabay

Monopoly definition by Prof. A.J. Braff – ‘Under pure monopoly, there is a single seller in the market. The monopolist’s demand is the market demand. The monopolist is a price maker. Pure monopoly suggests a no substitute situation.

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Features of a Monopoly

After monopoly definition, let’s take a look at the features of a monopoly:

Single seller and several buyers

The primary feature of a monopoly is a single seller and several buyers. Also, in a monopoly, there is no difference between the firm and the industry.

This is because there is only one producer and/or seller. Therefore, the firm’s demand curve is the industry’s demand curve. Since there are several buyers, an individual buyer cannot affect the price in a monopoly market.

No close substitute

In a monopoly, the product that the monopolist produces has no close substitute. If a close substitute exists, then the monopoly cannot exist.

Remember, a monopoly can only exist when the cross-elasticity of the product that the monopolist produces is zero. Therefore, the monopolist can determine the price of his own choice and refuse to sell below the determined price.

Strong barriers to the entry of new firms

Even if the monopolist firm is earning super-normal profits, new firms face many hurdles in trying to enter the industry. There are many reasons for this like legal barriers, technology, or a naturally occurring substance which others cannot find. Sometimes, the monopolist works in a small market making it economically challenging for new firms to enter.

Revenue curves under a Monopoly

A monopolistic firm is a price-maker, not a price-taker. Therefore, a monopolist can increase or decrease the price. Also, when the price changes, the average revenue, and marginal revenue changes too. Take a look at the table below:

Quantity Sold Price per unit Total Revenue
(TR)
Average Revenue
(AR)
Marginal revenue
(MR)
1 6 6 6 6
2 5 10 5 4
3 4 12 4 2
4 3 12 3 0
5 2 10 2 -2
6 1 6 1 -4

Let’s look at the revenue curves now:

monopoly definition

As you can see in the figure above, both the revenue curves (Average Revenue and Marginal Revenue) are sloping downwards. This is because of the decrease in price. If a monopolist wants to increase his sales, then he must reduce the price of his product to induce:

  • The existing buyers to purchase more
  • New buyers to enter the market

Hence, the demand conditions for his product are different than those in a competitive market. In fact, the monopolist faces demand conditions similar to the industry as a whole.

Therefore, he faces a negatively sloped demand curve for his product. In the long-run, the demand curve can shift in its slope as well as location. Unfortunately, there is no theoretical basis for determining the direction and extent of this shift.

Talking about the cost of production, a monopolist faces similar conditions that a single firm faces in a competitive market. He is not the sole buyer of the inputs but only one of the many in the market. Therefore, he has no control over the prices of the inputs that he uses.

Solved Question Monopoly

Q1. What is a monopoly and what are its three main features?

Answer: A monopoly refers to a firm which has a product without any substitute in the market. Hence, it is a single-firm industry. The three main features of a monopoly are:

  • Single seller and several buyers
  • No close substitute of the product
  • Strong barriers to the entry of new firms

 

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