Monopoly and its features, types and examples - CSEET
Monopoly and its features, types and examples – CSEET
What is Monopoly?
Monopoly definition / Monopoly meaning
The term monopoly comprises two words: Mono means one, and Polein means to sell. In economics, a monopoly refers to a firm that sells a product with no substitute within the market. Therefore, it is a single-firm industry.
Examples of Monopoly
In today’s time and age, Google is one of the most classic examples of a monopoly. Everyone is aware of Google – Be it your grandparents or be it a kid in your house. Google is the largest web searcher, and it controls more than 70% market share. To confirm this fact, you can look it up on Google!
The company provides numerous services, including maps (Google Maps), e-mail (Gmail), search engines (Google.com), online payment (Gpay), etc. The company’s competitors – Yahoo and Microsoft, are way behind in the game due to a lack of technological advancements. You can Google that too!
Features of Monopoly
The main features of oligopoly are as follows:
1. Single seller and several other buyers: The primary feature of a monopoly may be that it has a single seller and several buyers. In such a market, since the single firm makes up the entire or most of the industry, there is no difference or only a slight difference between the industry and seller. Therefore, the firm’s demand curve is the same or almost the same as the industry’s demand curve. Since there are several buyers, a private buyer cannot affect the price of a product in a monopoly market as the control of the seller on the market is too strong.
2. No close substitute: In a monopoly, the merchandise that the monopolist produces has no close substitute. Such a market can exist only when the cross-elasticity of the goods produced by the monopolist is equal to zero. Therefore, the monopolist can determine the worth of his own choice and refuse to sell below the demanded price.
3. Heavy barriers to the entry of new firms: Since the monopolist firm earns super-normal profits, new firms face many hurdles in entering the industry. There are many reasons for this, like legal barriers, technology, or a present substance that others cannot find. Sometimes, the monopolist works in a small market, making it economically challenging for brand spanking new firms to enter.
4. Price Maker: Under monopoly, the monopolist has complete control over the availability of the commodity. But thanks to a sizable amount of buyers, the demand of small buyers constitutes only a minute part of the entire demand. Therefore, buyers need to pay the price of the product as fixed by the monopolist.
Nature of Demand and Revenue under Monopoly
A firm’s demand curve is equivalent to the industry’s demand curve under monopoly. Since the demand curve of the buyer slopes downward from left to right, the monopolist faces a downward-sloping demand curve. It means, if the monopolist reduces the worth of the merchandise, the demand for that product will increase and vice-versa.
Costs under Monopoly
Under monopoly, the shape of cost curves is analogous to the one under perfect competition.
The fixed costs curve is parallel to the X-axis.
The average fixed cost (AFC) takes the shape of a rectangular hyperbola.
The average variable cost curve (AVC), average total cost curve (ATC) incremental cost or the marginal cost curve (MC) are of U-shape.
Under monopoly, the incremental cost curve isn’t the availability curve. Price is above incremental cost. A monopolist isn’t obliged to sell a given amount of a good or any commodity at a given price.
Monopoly Equilibrium and Laws of Costs
The determination of equilibrium price depends on the elasticity of demand and the effect of the Law of costs on monopoly price determination.
Nature of Elasticity of Demand
The monopolist will fix the high price of his product if the demand for that product is inelastic. Inelastic demand arises when consumers need to buy the commodity urgently, irrespective of the purchase price. On the contrary, if the quantity demanded is elastic, the monopolist will fix a lower purchase price to encourage customers to buy.
Effects of Laws of Costs
The monopolist also takes into consideration Laws of costs while determining costs. Output could also be produced under the Law of diminishing costs, increasing costs and constant costs.
Types of Monopolies
Monopolies are of two types –
Government-granted Monopolies – As the name suggests, in such markets, the government of a country or state grants privilege to a private individual or company to be the sole provider of a commodity in the market. Since that particular seller becomes the sole or dominant seller, the market turns into a monopoly.
Natural Monopolies – A natural monopoly is a market wherein sellers experience an increase in sales over the relevant range of output and relatively high fixed costs. Early sellers in a new or emerging market. Such sellers take advantage of the cost structure and expand rapidly.
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