MONOPOLY
Nature of Monopoly
A firm is a monopoly if it is the sole seller of its product and it its product does not have close substitutes. Literally monopoly means one seller. ‘Mono’ means one and ‘poly’ means seller. Monopoly is said to exist when one firm is the sole producer or seller of a product which has no close substitutes. Thus monopoly is negation of competition. The following are important features of monopoly.
1. There is a single producer or seller of the product. Entire supply of the product comes from this single seller. There is no distinction between a firm and an industry in a monopoly. The firm and industry are identical in monopoly.
2. There is no close substitute for the product. If there are some other firms which are producing close substitutes for the product in question there will be competition between them. In the presence of competition a firm cannot be said to have monopoly. Monopoly implies absence of all competition.
3. There is no freedom of entry. The monopolist erects strong barriers to prevent the entry of new firms. The barriers which prevent the firms to enter the industry may be economic or institutional or artificial in nature. In the case of monopoly, the barriers are so strong that prevent entry of all firms except the one which is already in the field. In fact, the fundamental cause of monopoly is barriers to entry. A monopolist remains the only seller in its market because other firms cannot enter the market and compete with it. Barriers to entry, in turn, have three sources;
a) A key resource is owned by a single firm
b) The government gives a single firm the exclusive right to produce some good
c) The costs of production make a single producer more efficient than a large number of producers.
4. The monopolist is a price maker. But in order to sell more a monopolist had to reduce the price. He cannot sell more units at the existing price.
5. The monopolist aims at maximisation of his profit
Source and Types of Monopoly
The most important reason the economists generally find the source of monopoly is barriers to entry. Barriers to entry are legal or technical conditions that make it impossible or prohibitively costly for a new firm to enter a given market. The following five types of entry barriers have historically been associated with the presence of monopoly.
1) Monopoly Resources or Control of inputs
The simplest way for a monopoly to arise is for a single firm to own a key resource. Some firms acquire monopoly power from their overtime control over certain scarce inputs or raw materials that are essential for the production of certain other goods, e.g. bauxite, graphite, diamonds etc. such monopolies are often called raw material monopolies. The monopolies of this kind may also emerge because of monopoly over certain specific technical knowledge or technique of production. Not surprisingly the monopolist has much greater market power than any single firm in a competitive market. In the case of necessaries like water, the monopolist could command quite a high price, even if the marginal cost is low.
2) Natural Monopoly
An industry is natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. The technology of production for a product may be such that one large producer can supply the entire market at a lower per-unit cost than can several firms sharing the same market. In other words, the long run average cost curve for a single firm slopes downwards over the entire range of market output. A natural monopoly arises when there are economies of scale over the certain range of output. The following figure shows the average cost curve of a firm with economies of scale.
When a firm’s average cost curve continually declines, the firm has what is called natural monopoly. In this case, when production is divided among more firms, each firm produces less, and average cost rises. As a result, a single firm can produce any given amount at the smallest cost. Consequently to have more than one firm operating in such a market would be wasteful since production costs are lowest if one firm supplies the entire output. In this situation the industry is natural monopoly.
3) Government Created Monopolies
In many cases, monopolies arise because the government has given one person or firm the exclusive right to sell some good or service. Patent and copy right laws are one example of how government creates a monopoly to serve public interest. Thus, another source of monopoly power is the patent rights of the firm for a product or the production process. The exclusive right to use the productive technique or to produce a certain product granted by the government is called patents. Patents are granted to the inventor for a technique or product, and they amount to the legal right to a temporary monopoly. Such monopolies are called patent monopolies. The laws governing patents and copy rights have both benefits and costs. The benefits of patents and copy rights are the increased incentive for creative activity. These benefits are offset, to some extent, by the costs of monopoly pricing.
4) Legal Restrictions
Some monopolies are created by law in public interests. Most of the state monopolies in the public utility sector, including postal, telegraph, generation and distribution of electricity, railways etc are public monopolies. The state may create monopolies in the private sector through license or patents. Such monopolies are called franchise monopolies. That is government grants a monopoly power because doing so is in the public interest.
5) Entry Lags
The time needed to enter the market can act temporarily to shield an existing producer from competition. Thus, the first firm to market some product will usually enjoy some monopoly position. If the product turns out to profitable, entry is likely to occur as rapidly as technological conditions permit.
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