- Monopoly is a market situation where only one producer exists in the industry with no close substitutes
- There are barriers to entry
- In reality, Monopoly rarely exists ,always some form of substitute is available.
- Indian Railways is an example of Monopoly.
- Monopoly power refers to cases where the monopolist firms influence the market in some way through their behaviour. A monopolist firm can show its power by
- Influencing prices( A monopoly firm can set its prices as high as it wants)
- Influencing output ( A monopoly firm can set its output level as high or as low)
- Raising barriers to entry
- Pricing strategies to avoid competition ( A monopoly firm has the complete control on market)
- May not pursue profit maximisation ( It is not always true that a Monopoly firm will aim at profit maximisation.)
- A firm having more than 25% of total market share can considered as a monopoly.
Why Monopolies Arise?
The fundamental cause of monopoly is barriers to entry and Economies of Scale. Barriers to entry have three sources:
- Ownership of a key resource.
This tends to be rare. De Beers ( diamonds) is an example
- The government gives a single firm the exclusive right to produce some good.
Patents, Copyrights and Government Licensing.
- Costs of production make a single producer more efficient than a large number of the producers.