Monopoly

• 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