Market Structure Monopoly

The term monopoly is derived from two greek words, ‘monos’ means single and ‘polus’ means a seller.
Thus, monopoly is a market structure in which there exists only a single seller of a product who is the sole producer of the product which has no close substitutes.

For example, Railways in India are a monoply industry of the government of India.

Since there is only one producer of a product in the market, the distinction between ‘firm’ and industry disappears.

Also electricity in India are a monoply industry of the government of India.

Features of Monopoly

1) One seller and large number of seller :

Under monopoly, there is a single producer of a commodity.

He may be alone, or there may be a group of parteners or a joint stock company or state.

However, there is a large number of buyers of the product.

Since there is only one seller, any change in the amount of output produced by the monopolist would have significant influence over the market price.

As the number of buyers are large, so no buyer can influence the price of the product under monopoly.

2) No close Substitutes :

A monopoly firm produces a commodity that has no close substitutes.

Monoploy is a market devoid of competition.If there are some other producer who are producing close substitutes for the product produced by the monopolist, there will be competition between them.Monopoly will not exist in case there is competition among producers.

For example: there is no close substitute of railways as a ‘bulk carrier’.

However, the product may have distant substitutes, i.e. substitutes which are costly, inconvenient and poor.

For instance, electricity board in a particular city may have the monopoly of supplying electricity in that city because there are no close substitutes of electricity.

But distant substitutes may be available in the form of generator sets.

3) Closed Entry:

Monopoly is caused by very high barriers to entry,which exist when entrepreneurs find obstacles to join a profitable industry.

There are some barriers or restrictions on the entry of new firms into the monopoly industry. 

The closed entry may result from natural, legal or man-made restrictions.

These restrictions may take several forms, such as patent rights, copy rights, governmen laws and economies of scale, etc.Restrictions bring about market power resulting in earning abnormal profits.

4) Price – Maker :

Being a single seller of the product, a monopolist has full control over its price.

A monopolist thus, is a price maker. He can fix whatever price he wishes to fix for his product.

This is in contrast to a competitive firm, which is a price – taker.

It happens because of the following reasons:

a) A monopolist is a single seller of the product in the market. There is no competition.

b) There are no close substitutes of the monopoly product.

So that, there is no fear that the buyers would shift from one product to the other to any significant extent.

c) There are legal, technical or natural barriers to the entry of new firms. So that, there is no fear of increase in market supply.

5) Price Discrimination :

“Price Discrimination refers to the practice by a seller of charging different prices from different buyers for the same good.”

A monopolist may charge single price for the product he sells or in certain cases he may charge different prices for his product from different sets of consumers.

For instance, many hospitals charge lower operation fees from the poor patients and higher fees from the rich patients.

Similarly, Indian railways charge lower freight  rates for transporting essential goods like food product, coal, etc. compare to other products.

Similarly, electricity board sells electricity at a cheaper rate for agricultural use than for home use.

Monopoly Demand Curve

Full control over price under monopoly does not mean that the monopolist can sell any amount of the commodity at any price.

When the monopolist fixes price of the commodity, quantity demanded will entirely depend upon the buyers.

At the higher price, quantity demanded will be low, and vice versa.

There is an inverse relation between price and quantity sold by the monopoly firm.

Thus demand curve facing a monopoly firm slopes downwards.

monopoly demand 

D_M is the demand curve for the monopoly firm.

OQ quantity is sold when price is OP

When the price reduced from OP to OP₁, quantity sold by the monopolist rises from OQ to OQ₁.

Thus, monopolist firm has ro reduce to the price to sell more.