Monopoly Market

Monopoly market

                The word monopoly is made up of two syllabus Mono and poly, mono means “single” and poly means “selling”. Monopoly is a form of organization in which there is only one seller of the commodity. There are no close substitutes for the commodity sold by the seller.

Characteristics

Single seller: In a monopoly there is one seller of the monopolized good who produces all the output. Therefore, the whole market is being served by a single firm, and for practical purposes, the firm is the same as the industry.

Market power: Market power is the ability to affect the terms and conditions of exchange so that the price of the product is set by the firm (price is not imposed by the market as in perfect competition). Although a monopoly's market power is high it is still limited by the demand side of the market. A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers.

No close substitutes: The product sold by seller will not have any close complimentary substitute

Price maker:  Since the monopolist controls the whole supply of the commodity, he is a price maker; he can set the price and alter it.

Downward sloppy demand curve -- The demand curve of monopoly slops down from left to right. It means that he can sell only by lower price. 

Sources of Monopoly

Monopolies derive their market power from barriers to entry - circumstances that prevent or greatly impede a potential competitor's entry into the market or ability to compete in the market. There are three major types of barriers to entry; economic, legal and deliberate.

·         Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.

o    Economies of scale: Monopolies are characterised by declining costs over a relatively large range of production. Declining costs coupled with large start up costs give monopolies an advantage over would be competitors. Monopolies are often in a position to cut prices below a new entrant's operating costs and drive them out of the industry. Further the size of the industry relative to the minimum efficient scale may limit the number of firms that can effectively compete within the industry. If for example the industry is large enough to support one firm of minimum efficient scale then other firms entering the industry will operate at a size that is less than MES meaning that these firms cannot produce at an average cost that is competitive with the dominant industry.

o    Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of firms in an industry.^[9] Large fixed costs also make it difficult for a small firm to enter an industry and expand.

o    Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or fiscal muscle to use the best available technology. In plain English one large firm can sometimes produce goods cheaper than several small firms.

o    No substitute goods: A monopoly sells a good for which there are no close substitutes. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits.

·         Control of Natural Resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good.

·         Legal barriers: Legal rights can provide opportunity to monopolise the market in a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control over the production and selling of certain goods. Property rights may give a firm the exclusive control over the materials necessary to produce a good.

·         Deliberate Actions: A firm wanting to monopolize a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force.

In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a firm to leave the market. High liquidation costs are a primary barrier to exit. Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A firm will shut down if price falls below minimum average variable costs.

Natural monopoly

A natural monopoly is a firm which experiences increasing returns to scale over the relevant range of output. A natural monopoly occurs where the average cost of production “declines throughout the relevant range of product demand.” The relevant range of product demand is where the average cost curve is below the demand curve. When this situation occurs it is always cheaper for one large firm to supply the market than multiple smaller firms, in fact, absent government intervention in such markets will naturally evolve into a monopoly. An early market entrant who takes advantage of the cost structure and can expand rapidly can exclude smaller firms from entering and can drive or buy out other firms. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices a profit seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic. Breaking up such monopolies is counter productive^{[citation needed]}. The most frequently used methods dealing with natural monopolies is government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices. To reduce prices and increase output regulators often use average cost pricing. Under average cost pricing the price and quantity are determined by the intersection of the average cost curve and the demand curve.This pricing scheme eliminates any positive economic profits since price equals average cost. Average cost pricing is not perfect. Regulators must estimate average costs. Firms have a reduced incentive to lower costs. And regulation of this type has not been limited to natural monopolies.

Government-granted monopoly

A government-granted monopoly (also called a "de jure monopoly") is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded ffrom the market by law, regulation, or other mechanisms of government enforcement. Copyright, patents and trademarks are examples of government-granted monopolies.