Monopoly, derived form the Greek words ‘monos’ or alone and ‘polein’ or sell, can be defined as "the exclusive control or possession of supply or trade in a commodity or service". The term is extensively used in economics, referring to controlled power over the market, by an individual or company. Let’s brush up a bit more on this.
Monopoly symbolizes domination over a product to the extent that the enterprise or individual dictates the terms of access and the markets for availability. The term is specific to a seller’s market. A similar situation in the buyer’s market is referred to as monopsony. It first appeared as an economics-related term in ‘Politics’ by Aristotle.
A natural monopoly is defined in economics as an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a “natural” reason for this industry being a monopoly. It is an extreme imperfect form of market. In ancient times, common salt was responsible for natural monopolies, till the time people learned about winning sea-salt. Regions facing scarcity of transport facilities and storage were most prone to notorious acceleration of commodity prices and uneven distribution of daily-use products and services. The characteristics of monopoly are solitary to the condition generated by intent.
Salient Features of Monopoly
Under monopoly, there is a single producer of a particular commodity or service in the market accruing to a rather large number of buyers. The mono manufacturer may be an individual, a group of partners or a joint stock company or state, being the only source of supply for the goods or services with no close substitute. In this market structure, the firm is the industry and, thus, the market is referred to as ‘pure monopoly’, but, it is more of a theoretical concept. At times, close substitutes are produced by few manufactures holding a substantial market share and this imperfect form of extreme market is termed as monopolistic competition.
Free entry of new organizations in this market arrangement is prohibited, that is, other sellers cannot enter the market of monopoly. Few of the primary barriers, constricting the entry of new sellers are:
- Government license or franchise
- Resource ownership
- Patents and copyrights
- High start-up cost
- Decreasing average total cost
A monopoly firm manufactures a commodity that has no close substitute and is a homogeneous product. With the absence of availability of a substitute, the buyer is bound to purchase what is available at the tagged price. For instance: there is no substitute for railways as the ‘bulk carrier’. Thus, to be the sole seller, in the monopolistic setup, a unique product must be produced.
Full Control Over Price
In a monopoly market, restricted entry constricts competition and the monopolist exhibits full control over the market conditions. The absence of competition spares the monopolizing company from price pressure and grants him the opportunity to charge the product as per his advantage, targeting profit maximizing via predetermined quantity choice. Thus, a monopolist is a ‘price maker’ and not a ‘price taker’, wherein he decides the price and the buyers have to accept it. Nevertheless, to evade the entry from new market participants, the company needs to regulate the set product or service price within the paradigms of the Monopoly Theorem.
Price discrimination can be defined as the ‘practice by a seller of charging different prices from different buyers for the same good or service’. A monopolist has the leverage to carry out price discrimination as he is the market and acts as per his suitability.
Increased Scope for Mergers
Scope for vertical and/or horizontal mergers increase in lieu of control exhibited by a single entity under a monopoly. The mergers efficiently absorb competition and maintain the supply chain management.
With regards to the demand of the product or service offered by the monopolizing company or individual, the price elasticity to absolute value ratio is dictated by price increase and market demand. It is not uncommon to see surplus and/or a loss categorized as ‘deadweight’ within a monopoly. The latter refers to gain that evades both, the consumer and the monopolist.
Lack of Innovation
On account of solitary market domination, monopolies exhibit an inclination towards losing efficiency over a period of time; new designing and marketing dexterity takes a back seat.
Lack of Competition
When the market is designed to serve a monopoly, the lack of business competition or the absence of viable goods and products shrinks the scope for ‘perfect competition’.
Being the sole merchant of a eccentric good with no close imitation, a monopoly has no opposition. The demand for turnout induced by a monopoly is the market demand, adhering extensive market control. The incompetence resulting from market dominance also makes monopoly a key type of market failure.