Introduction

The word monopoly has been derived from the combination of two words
i.e., ‘Mono’ and ‘Poly’. Mono refers to a single and poly to control. In this
way, monopoly refers to a market situation in which there is only one seller
of a commodity. Here are no close substitutes for the commodity it
produces and there are barriers to entry. The single producer may be in the
form of individual owner or a single partnership or a joint stock company.
In other words, under monopoly there is no difference between firm and
industry.

Definition: A market structure characterized by a single seller, selling a

unique product in the market. In a monopoly market, the seller faces no
competition, as he is the sole seller of goods with no close substitute.
EXPLAINATION:: In a monopoly market, factors like government license,
ownership of resources, copyright and patent and high starting cost make
an entity a single seller of goods. All these factors restrict the entry of other
sellers in the market. Monopolies also possess some information that is not
known to other sellers.
Characteristics associated with a monopoly market make the single seller
the market controller as well as the price maker. He enjoys the power of
setting the price for his goods.

EXAMPLES of monopoly:
Advantages &Disadvantages of monopoly:
BARRIES TO ENTRY:

Legal restriction
Governments sometimes restrict competition in certain industries.
Important legal restrictions include patents, entry restrictions, and foreign-
trade tariffs and quotas. A patmt is granted to an inventor to allow
temporary exclusive use (or monopoly) of the product or process that
is patented. For example, pharmaceutical companies are often granted
valuable patents on new drugs in which they have invested hundreds of
millions of the few forms of government-granted monopolies that are
generally approved of by economists. Governments grant patent
monopolies to encourage inventive activity. Without the prospect of
monopoly patent protection, a company or a sole inventor might be
unwilling to devote time and resources to research and development. The
temporarily high monopoly price and the resulting inefficiency is the price
society pays for the invention. Governments also impose entry restrictions
on many industries.
Typically, utilities, such as telephone, electricity distribution, and water, are
given franchise monopolies to serve an area. In these cases, the firm gets
an exclusive right to provide a service, and in ‘return the firm agrees to limit
its profits and provide universal service in its region even when some
customers might be unprofitable.
ECONOMICS OF SCALE
Economies of scale occur when increasing output leads to lower long-run average
costs.

Diagram of economies of scale

Increasing output from Q1 to Q2, we see a decrease in long-run average costs from P1
to P2.

Economies of scale are important because they mean that as firms increase in size,
they can become more efficient. For certain industries, with significant economies of
scale, it is important to be a large firm; otherwise, they will be inefficient

Examples of economies of scale

1. Specialization and division of labour

In large scale operations workers can do more specific tasks. With little
training they can become very proficient in their task, this enables greater
efficiency. A good example is an assembly line with many different jobs .
 2. Technical

Some production processes require high fixed costs e.g. building a large factory. If a car
factory was then only used on a small scale, it would be very inefficient to run. By using
the factory to full capacity, average costs will be lower.

3. Bulk buying
If you buy a large quantity, then the average costs will be lower. This is because of
lower transport costs and less packaging. This is why supermarkets get lower prices
from suppliers than local corner shops.

Ownership or Control of Essential Resources:

 A monopolist can use private property as an obstacle to potential rivals.
o eg. a firm that owns or controls a resource essential to the production process can
prohibit the entry of rival firms.
 For example, the International Nickel Company of Canda (now known as Inco) used to
control 90 percent fo the world's known nickel reserves. A new firm trying to enter the
nickel market at that time would have an extremely hard time since the monopoly had
all the resources.

Pricing and Other Strategic Barriers to Entry:

 The monopolist may "create an entry barrier" by:

o slashing prices to drive consumers towards their firm and away from other
firms (Although this results in short term losses, in the long run, the
monopoplist can maintain market power and aim for economic profits
again).
o stepping up advertising.
o taking other strategic actions to make it difficult for entrants to succeed.

Barriers to Entry:

 Patent: exclusive right of an inventor to use, or to allow another

to use, her or his invention.
o protect the inventor from rivals who would use the invention w/o
having shared in effort and expense in developing it.
o provides the inventor with a monopoly position for the life of
patent.
o profit from one patent can finance the research required to
develop new patentable products.
 eg. In the pharmaceutical industry, patents of prescription drugs
have produced large monopoly profits that help finance the
discovery of new patentable medicine (therefore, monopoly power
achieved through patents can be self-sustaining).
 Licensing : Government using its authority to limit entry into
industry.
o Limited number of licenses given to radio/television stations,
taxicab drivers, etc.; in this way, the market is controled so that
new firms beyond a certain number cannot enter the industry to
drive down prices and profits.
o Sometimes the government also "licenses" itself to provide some
product and thereby create a public monopoly.
 eg. lotteries, state-owned liquor retail outlets.