• 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
  • 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.
    Natural Monopolies

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