These laws came into force to protect consumers and prevent companies from gaining total control of a market. In most advanced economies and many emerging economies, monopolies are forced to divest assets to satisfy anti-monopoly (anti-trust) laws. A monopoly is a market structure with just a single seller who sells a unique product, faces no competition, and determines its price. Even defense suppliers that export generally have just one client in each nation. The United States, UK, France, Israel and Russia have many defense companies but just one buyer in their home country – the government (the military). Not to be confused with a monopsony, which relates to a single buyer of a product or service with many sellers – for example, the only buyer of fighter jets is the country’s air force. The word monopoly may refer to the situation in which there is only one supplier of a product or a service, or the supplier itself. Some people also include a market with just two or three suppliers – but that is not a ‘pure monopoly’. Hence, it is a single-firm industry.A monopoly is a supplier of a product or service that has no competitors – it is the sole provider in a market. What is a monopoly and what are its three main features?Īnswer: A monopoly refers to a firm which has a product without any substitute in the market. Therefore, he has no control over the prices of the inputs that he uses. He is not the sole buyer of the inputs but only one of the many in the market. Talking about the cost of production, a monopolist faces similar conditions that a single firm faces in a competitive market. Unfortunately, there is no theoretical basis for determining the direction and extent of this shift. In the long-run, the demand curve can shift in its slope as well as location. Therefore, he faces a negatively sloped demand curve for his product. In fact, the monopolist faces demand conditions similar to the industry as a whole. Hence, the demand conditions for his product are different than those in a competitive market. If a monopolist wants to increase his sales, then he must reduce the price of his product to induce: This is because of the decrease in price. Take a look at the table below: Quantity SoldĪs you can see in the figure above, both the revenue curves (Average Revenue and Marginal Revenue) are sloping downwards. Also, when the price changes, the average revenue, and marginal revenue changes too. Therefore, a monopolist can increase or decrease the price. Revenue curves under a MonopolyĪ monopolistic firm is a price-maker, not a price-taker. Sometimes, the monopolist works in a small market making it economically challenging for new firms to enter. There are many reasons for this like legal barriers, technology, or a naturally occurring substance which others cannot find. Strong barriers to the entry of new firmsĮven if the monopolist firm is earning super-normal profits, new firms face many hurdles in trying to enter the industry. Therefore, the monopolist can determine the price of his own choice and refuse to sell below the determined price. Remember, a monopoly can only exist when the cross-elasticity of the product that the monopolist produces is zero. If a close substitute exists, then the monopoly cannot exist. In a monopoly, the product that the monopolist produces has no close substitute. Since there are several buyers, an individual buyer cannot affect the price in a monopoly market. Therefore, the firm’s demand curve is the industry’s demand curve. This is because there is only one producer and/or seller. Also, in a monopoly, there is no difference between the firm and the industry. The primary feature of a monopoly is a single seller and several buyers.
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