Monopoly Market: Forms of Market
Meaning of Monopoly:
Monopoly is a market structure in which there exist only a single seller or sole producer of the product, which has no close substitutes.
Or
A monopolistic market is a market where only one supplier provides a particular good or service to many consumers, and has full control of market, so it sets the price and supply of a good or service.
Purely monopolistic markets are scarce and theoretical in the absence of absolute barriers to entry of new firms and exit of the existing firms.
Monopoly is completely opposite of Perfect competition market, is derived from two Greek words, ‘Monos’ and ‘polus’. ‘ Monos’ means single, and ‘polus’ means a seller.
For example, we get our electricity supply from one agency, i.e., State Electricity Board like Punjab Electricity Board in Punjab. Similarly, we travel by railways owned and run by the Government of India.
Features of Monopoly:
1. Single Seller
2. Absence of Close Substitute
3. Closed Entry
4. Price – maker
5. Possibility of Price Discrimination
1. Single Seller:
- Monopoly is characterised by a single seller.
- In monopoly there is only one seller or firm which control the overall market supply of the commodity.
- The monopolist firm would have a significant influence on the market price since it can control the price by changing the amount of output produced.
- Since there is only firm in monopoly, therefore the difference between the firm and the industry disappears.
- In monopoly, the number of buyers of the product is large. Consequently no buyer can influence the price of the product under monopoly.
2. Absence of close substitute:
- The second essential feature of monopoly is that no close substitutes should be available of the product or service that the monopolist offers.
- The goods which can be easily used for each other and are available at nearly the same price are known as close substitutes.
- In monopoly, the monopolist firm produces such a commodity which has no close substitute.
- Since, monopoly is a market, devoid of competition. If there are other producers producing close substitute of the commodity produced by monopolist firm, there will be competition among them. In this case monopoly can not exist.
- In monopoly, the consumer has no choice but he has to buy the commodity from monopolist only.
- There can be distant substitutes which are costly, inconvenient and poor.
- Example, State Electricity Board has the monopoly of supplying electricity in the city but there may be distant substitute in the form of generator sets are available.
3. Restricted Entry and Exit :
- Monopoly is characterised by barriers and restricted entry of new firms into the monopoly industry.
- In monopoly, the new firm or entrepreneurs will have to face obstacles while joining a profitable industry, these obstacles may be natural, man – made or legal restrictions.
- These restriction may take several forms – copy right, government laws, patent rights, licence etc.
- As a result of closed entry, the monopolist can earn abnormal profit in long run.
- The motive of closed entry in monopoly is to earn abnormal profit in long run.
4. Price Maker:
- A monopoly firm is a ‘price maker’ or ‘price – setter’.
- Due to the restricted entry of new firm, the monopolist firm is sole producer of the commodity, therefore it has a considerable influence on the market supply and thereby the market price of the commodity.
- Hence monopoly represents a situation of a high market power.
- In contrast of Perfect competition market, where a competitive firm is a ‘price – taker’ with zero market power, a monopolist firm is a ‘price – maker’ with high market power.
5. Possibility of Price Discrimination :
- In monopoly, the monopolist firm has full influence on price of commodity.
- It may charge a uniform price for its product or it may charge different prices for the same commodity from different prices for the same commodity from different sets of customers.
- This situation when a producer sells the same product to different buyers at two or more different prices for reasons not associated with difference in the cost of supplying the product to different consumers is called ‘Price Discrimination’.
- In monopoly, there is a high possibility of price discrimination by the monopolist firm.
- Example, many hospitals charge lower operation fees from poor patients and higher fees from rich patients. The situation of charging different price for same treatment from different patents is referred to as price discrimination.
- Similarly, Indian Railways charge lower freight rates for transporting essential products like food products, coal, etc. as compared to transportation of other products.