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Monopoly

Monopoly refers to a market situation where there is only single seller of a commodity and
there are no close substitutes of that commodity. In such a situation, monopolist or the single
seller of the commodity has some kind of power or control over the supply of a commodity and
hence he is in a position to influence the price.

Since under monopoly, there is only one firm selling a commodity, this firm exercises some
control over the supply and price of the commodity.

However, this can be possible only when there are no close substitutes of that commodity.
Therefore, the two distinct features of monopoly are, a single seller producing and selling the
commodity and no close substitutes of that commodity.

Characteristics of Monopoly

1. Single Seller
The producer or seller of the commodity is a single person, firm or an individual and
that firm has complete control on the output of the commodity.
2. No Close Substitutes
All the units of a commodity are similar and there are no substitutes to that
commodity.
3. No Entry for New Firms
Monopoly situation in a market can continue only when other firms do not enter the
industry. If new firms enter the industry, there will not be complete control of a firm on
the supply. As such, whenever a firm enters the industry, monopoly situation comes to an
end. There/art, monopoly industry is essentially one-firm industry. This signifies that
under monopoly there is no difference between a firm and an industry.
4. Profit in the Long Run
A monopolist can earn abnormal profit even in the long run because he has no fear of a
competitive seller. In other words, if a monopolist gets abnormal profits in the long run,
he cannot be dislodged from this position. However, this is not possible under perfect
competition. If abnormal profits are available to a competitive firm, other firms will enter
the competition with the result abnormal profits will be eliminated.
5. Losses in the Short Period
Generally, a common man thinks that a monopoly firm cannot incur loss because it can
fix any price it wants. However, this understanding is not correct. A monopoly firm can
sustain losses equal to fixed cost in the short period. A monopolist means that there is
only a single person or a firm to sell the commodity.
Therefore, anybody who would like to buy that commodity will buy it from the
monopolist only. However, if a firm has monopoly of such a commodity which people
buy less or do not buy, it can incur losses or it may have to stop production even. For
example, if someone has the monopoly of yellow hair dye, it is natural that the firm has
the possibility of incurring losses because it is a product which people generally don't
buy.
6. Nature of Demand Curve
Under monopoly the demand for the commodity of the firm is less than being per-
fectly elastic and, therefore, it slopes downwards to the right. The main reason of the
demand curve sloping downwards to the right is the complete control of the monopolist
on the supply of the commodity. Due to control on the supply a monopolist makes
changes in the supply which brings about changes in the price and because of this
demand changes in the opposite direction. In other words, if a monopolist increases the
price of the commodity, the amount of quantity sold decreases. Therefore, demand curve
(AR) slopes downwards to the right. The nature of demand curve has been shown in the
diagram. DD is demand curve, which has a negative slope.
7. Price Discrimination
From the point of view of profit a monopolist can change different prices from
different consumers of his commodity. This policy is known as price discrimination. He
adopts the policy of price discrimination on various bases such as charging different
prices from different consumers or fixing different prices at different places etc.

8. Firm is a Price-Maker
A competitive firm is a price-taker whereas a monopoly firm is a price-maker. This is
because a competitive firm is small compared to market and therefore, it does not have
market power. This is not true in the case of a monopoly firm because it has market
power. Hence, it is a price maker
9. Average and Marginal Revenue Curves
Under monopoly, average revenue is greater than marginal revenue. Under monopoly,
if the firm wants to increase the sale it can do so only when it reduces its price. This
means AR would decline when sale increases. In that case MR would be less than AR. (ii)
AR slopes downwards to the right and is greater than MR.

Monopoly Real Life Examples

No U.S. markets are more monopolistic than utilities. Providers of water, natural gas,
telecommunications, and electricity are usually granted exclusive rights to service municipalities
through local governments. Mexican tycoon Carlos Slim built his fortune of a series of
monopolistic companies, most notably his telecommunications firm America Movil.

Reference

Upadhyaya, K. "The Important Characteristics Of A Monopoly Market".


Preservearticles.com. N.p., 2017. Web. 21 Apr. 2017.
"What Are Common Examples Of Monopolistic Markets?". Investopedia. N.p., 2017.
Web. 21 Apr. 2017.