The Market structure of Monopoly is characterized by a single seller, selling the unique product with the restriction for a new firm to enter the market. In simpler terms, monopoly is a form of market where there is a single seller selling a particular commodity for which there are no close substitutes.
In the 21 century a firm is said to have monopoly power if it has more than 25% of the market share. For example, Tesco @30% market share or Google 90% of search engine traffic.
Few examples of existing Monopoly market are:
- Microsoft owning windows operating system brand.
- De-beers owing diamond
- Producers may have patents over designs, or copyright over ideas, characters, images, sounds or names, giving them exclusive rights to sell a good or service, such as a song writer having a monopoly over their own material.
- Google as a search engine
- YKK-the Japanese zipper behemoth, makes roughly half of all the zippers on earth.
Sometimes even a Monopoly Market may exist naturally because of its natural advantages like strategic location and/or abundant mineral resources. For example, as in the case of Gulf countries which have a monopoly in crude oil exploration because of its abundant naturally occurring oil resources.
Major characteristics of monopoly are its- entry and exit barrier, as a result of which- seller is the Price-maker while the buyer is a Price-taker.
The firm will choose its production output (q) and price (p) in order to maximise revenue (π) at minimal cost(C). The optimal condition, where we’ll have marginal cost (MC) equals marginal revenue (MR), is given by:
The extent to which a firm can take advantage of its monopolistic condition will highly depend on the elasticity (E) of its demand curve. If it is more rigid (steeper), it will only have to reduce its production in order to achieve a higher price. However the more flexible (flatter) the demand curve is, the less market power the firm has to increase prices.
A monopolist seeking to maximize profits will never be on the inelastic part of the demand curve, E < 1, which is why elasticity will always be such as ∞ ≥ E ≥ 1.
If we compare a Monopoly to a perfectly competitive scenario, we will see that in case of a monopoly the price of a product will always be greater that the Marginal cost and quantity will be lower. However, in case perfect competition price and quantity will be fixed where, MC=MR. Thus resulting in higher profits for the seller.
It’s important to note that the total gain for the seller does not sum up for the total loss of consumer- rather there will be a dead-weight loss occurring due to the loss of efficiency and social welfare occurring due to reduced quantity and higher prices.
Advantages of Monopoly
- Since Monopolies have super natural profits they can boost investment into R&D. Innovation is more likely with large enterprises and this innovation can lead to lower costs than in competitive markets. Also, a firm needs to be in a dominant position to bear the risks associated with innovation.
- A monopolist is a single seller in the market it leads to economies of scale resulting from big scale production, which lowers the cost of production per unit for the seller.
- Monopolists enjoy the benefit of barriers to entry and can enjoy super natural profits.
Disadvantages of Monopoly
- Restriction on the quantity of output in the market.
- Since Monopolist is a single seller- therefore it could lead to higher prices leading to the exploitation of the consumer.
- Presence of Price discrimination- where they would charge different prices from different consumers, maximizing its own profit.
- The lack of competition may cause the monopoly firm to produce inferior goods and services.