What Is a Monopoly?

The monopolist does not discriminate among customers and charges them all alike for the same product. Some characteristics of a monopoly market are as follows. Oligopoly – Has a few dominant firms monopolizing the market, often in collaboration with one another. Businesses relying on apps to fund their content may no longer be able to reach their consumers.

meaning of monopoly in economics

Therefore, the difference between OW2 and OW1 cannot be considered as exploitation. However, if product differentiation is excessive and commodities are imposed on the consumers by the monopolistic sellers, then the argument of monopolistic exploitation may be acceptable. Because monopolist can manipulate output and price so it is often alleged that a monopolist “will charge the highest price he can get”.

Restriction of entry

There are no substitutes or close substitutes for the good or service sold by the monopolist. It is widely believed that the costs to society arising from the existence of monopolies and monopoly power are greater than the benefits and that monopolies should be regulated. The area of deadweight loss for a monopolist can also be shown in a more simple form, comparing perfect competition with monopoly. The National Football League survived antitrust lawsuit in the 1960s but was convicted of being an illegal monopoly in the 1980s. Steel in 1901 by combining Andrew Carnegie’s Carnegie Steel Company with Gary’s Federal Steel Company and William Henry “Judge” Moore’s National Steel Company. Steel was the largest steel producer and largest corporation in the world.

meaning of monopoly in economics

The important questions on Monopoly Market, along with solutions are important study materials that have been made according to the latest syllabus . Monopolies possess information that is unknown to others in the market. Brand loyalty – Customers are loyal to a particular company, thus increasing its power.

Monopoly Meaning

This is a case whereby a single firm producing a commodity charges a uniform price for its commodity to all buyers. In this time frame, there was no other telecommunications company that had the license to compete with AT&T. This is because the government believed that the market could only support a single producer.

  • • It may follow policies that maximize profits rather than those that serve the best interest of the society and environment.
  • Imperfect Monopoly – The monopolist controls the entire market supply for its product as there is no close substitute, but there is a remote substitute for the product available in the market.
  • The enactment of the two laws was for the purpose of protecting consumers and preventing monopolies.
  • The demand is inelastic when it does not change much with a change in the price of the product.

The reason being that a company in a monopoly set up is completely free from fear of going out of business. When you’re the only seller, there is no one else to steal your business which allows these enterprises to be inefficient. In the case of a monopoly, however, there are no substitutes for goods produced rendering the business in monopoly the sole source of the commodity.

This company has little or no competitors and its competitors do not have real substitutes for the goods and services that this dominant business provides. Without competition, monopolies can set prices and keep pricing consistent and reliable for consumers. Monopolies enjoy economies of scale, often able to produce mass quantities at lower costs per unit. Standing alone as a monopoly allows a company to securely invest in innovation without fear of competition. As with collusive conduct, market shares are determined with reference to the particular market in which the company and product in question is sold.

The third column shows the total revenue the monopolist can earn by selling varying quantities of wooden tables. The fifth column shows the monopolist’s features of liberalisation marginal revenue. It is the additional revenue earned by the monopolist when it increases the quantity sold in the market by one unit.

High barriers to entry

Most importantly all the content on Vedantu is provided for free and it can be easily downloaded into PDF from both the website and mobile application of Vedantu. Iii) Government or Legal Monopoly, where the business is owned either by the government or by a legal firm. Iii) There is no discrimination among buyers and customers.

Here he produces OM units of the commodity and gets PM as the price. His monopoly profit is represented by the shaded area PQRS. No other alternative will give him this much of profit and hence this is the best position for him provided he produces goods under the Law of Increasing Costs. Under monopoly, it becomes essential to understand the nature of demand curve facing a monopolist.

While a perfectly competitive firm is a “price taker,” a monopolist is a “price maker.” Similar to a monopoly is a monopsony, which is a market with many sellers but only one buyer. Sometimes, a monopolist often sets the price of its product or service just above the average cost of production https://1investing.in/ of the product/service. These regional monopolies, monopolies that serve a certain geographic region, are acceptable because of their unique services and their connection to the public good. A monopoly is a highly profitable company due to little or no competition in the market.

Characteristics of monopoly

Since there is only one seller of a particular commodity with many buyers, this single seller enjoys the entire demand. With this, a monopolist can maximize profits while he reduces his cost of production. If one occurs naturally, such as a competitor going out of business, or lack of competition, it is not illegal until such time as the monopoly holder abuses the power.

Irrespective of the market curve, in a competitive market with thousands of firms, the residual demand curve of an individual seller is mostly flat. At the same time, a monopolist would have to accept a lower price if it desires to sell a significantly high number of products. The cross elasticity of demand is a concept in economics where one measures the responsiveness of quantity demanded of one product when the price of another product is changed. Another name for this is the cross-price elasticity of demand. This is determined by calculating the change in the percentage of the quantity demanded of a product divided by the change in the price of another product.

  • The monopoly is allowed and heavily regulated by government municipalities and rates and rate increases are controlled.
  • At the same time, a monopolist would have to accept a lower price if it desires to sell a significantly high number of products.
  • Government-created monopolies often have good intentions for the consumers.
  • Steel in 1901 by combining Andrew Carnegie’s Carnegie Steel Company with Gary’s Federal Steel Company and William Henry “Judge” Moore’s National Steel Company.

A monopoly faces a lack of competition, and therefore, it may have less incentive to work at product innovation and develop better products. There is a huge cost which is spent on research and development to keep the cost of the product effective. Therefore, it becomes an important part of many industries, for example, aircraft manufacturing, pharmaceuticals, telecommunication. Developing medicines have a huge risk, but monopoly profits give sufficient support to take the risk. By now, a monopoly meaning in economics is explained by its equilibrium. Now, understand the advantages part of the monopoly meaning in economics.

If there is a high restriction of entry into a particular occupation or business, monopolies may arise. There are times that trade unions may restrict entry They can do this by insisting on long periods of apprenticeship and training or certificate acquisition. This is common with the medical and legal professions which require a high standard of training. There s no perfect knowledge with regard to the market transactions. The flow of information in the market is not free, buyers are not aware of the commodity’s ruling price in the market.

Features of a Monopoly Market

The absence of competition in a monopolistic market can amount to the production of inferior goods/low quality. They usually do this to save their costs of production just to generate more profits at the expense of the consumers. In a situation whereby, the market for the production of a particular commodity is small, monopolies can emerge. Here, the entry of many firms will lead to the wastage of resources. If a firm first enters into the industry or market, it will continually enjoy monopolistic advantages as it would be uneconomical for other firms to join. Price fixing is an agreement among competitors to raise, lower, maintain, or stabilize prices or price levels.

A monopolist can cut down prices and sell below the average cost just to force competitors out of business. Under monopolistic conditions, consumers tend to lose some of their freedom of choice. Unlike a perfect market where the consumer is sovereign and their demand determines the quantity, a monopolist is likely to produce few goods which tend to restrict the range of consumer choice.

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