Monopoly : Characteristics and Causes

Monopoly

Monopoly is a market structure in which there is a single seller, there are no close substitutes for the commodity it produces and there are barriers to entry.

Characteristics of Monopoly

1.        Single Seller: There is only one seller; he can control either price or supply of his product. But he cannot control demand for the product, as there are many buyers.

2.        No close Substitutes: There are no close substitutes for the product. The buyers have no alternatives or choice. Either they have to buy the product or go without it.

3.        Price: The monopolist has control over the supply so as to increase the price. Sometimes he may adopt price discrimination. He may fix different prices for different sets of consumers. A monopolist can either fix the price or quantity of output; but he cannot do both, at the same time.

4.        No Entry: There is no freedom to other producers to enter the market as the monopolist is enjoying monopoly power. There are strong barriers for new firms to enter. There are legal, technological, economic and natural obstacles, which may block the entry of new producers.

5.        Firm and Industry: Under monopoly, there is no difference between a firm and an industry. As there is only one firm, that single firm constitutes the whole industry. .

Causes for Monopoly

1.        Natural: A monopoly may arise on account of some natural causes. Some minerals are available only in certain regions. For example, South Africa has the monopoly of diamonds; nickel in the world is mostly available in Canada and oil in Middle East. This is natural monopoly.

2.        Technical: Monopoly power may be enjoyed due to technical reasons. A firm may have control over raw materials, technical knowledge, special know-how, scientific secrets and formula that enable a monopolist to produce a commodity. e.g., Coco Cola.

3.        Legal: Monopoly power is achieved through patent rights, copyright and trade marks by the producers. This is called legal monopoly.

4.        Large Amount of Capital: The manufacture of some goods requires a large amount of capital or lumpiness of capital. All firms cannot enter the field because they cannot afford to invest such a large amount of capital. This may give rise to monopoly. For example, iron and steel industry, railways, etc.

5.        State: Government will have the sole right of producing and selling some goods. They are State monopolies. For example, we have public utilities like electricity and railways. These public utilities are undertaken by the State.

Price and Output Determination

A monopolist like a perfectly competitive firm tries to maximise his profits.

A monopoly firm faces a downward sloping demand curve, that is, its average revenue curve. The downward sloping demand curve implies that larger output can be sold only by reducing the price. Its marginal revenue curve will be below the average revenue curve.

The average cost curve is 'U' shaped. The monopolist will be in equilibrium when MC = MR and the MC curve cuts the MR curve from below.

In figure, AR is the Average Revenue Curve and MR is the Marginal revenue curve. AR curve is falling and MR curve lies below AR. The monopolist is in equilibrium at E where MR = MC. He produces OM units of output and fixes price at OP. At OM output, the average revenue is MS and average cost MT. Therefore the profit per unit is MS-MT = TS. Total profit is average profit (TS) multiplied by output (OM), which is equal to HTSP. The monopolist is in equilibrium at point E and produces OM output at which he is earning maximum profit. The monopoly price is higher than the marginal revenue and marginal cost.

Advantages

1.        Monopoly firms have large-scale production possibilities and also can enjoy both internal and external economies. This will result in the reduction of costs of production. Output can be sold at low prices. This is beneficial to the consumers.

2.        Monopoly firms have vast financial resources which could be used for research and development. This will enable the firms to innovate quickly.

3.        There are a number of weak firms in an industry. These firms can combine together in the form of monopoly to meet competition. In such a case, market can be expanded.

Although there are some advantages, there is a danger that monopoly power might be misused for exploiting the consumers.

Disadvantages

1.        A monopolist always charges a high price, which is higher than the competitive price. Thus a monopolist exploits the consumers.

2.        A monopolist is interested in getting maximum profit. He may restrict the output and raise prices. Thus, he creates artificial scarcity for his product.

3.        A monopolist often charges different prices for the same product from different consumers. He extracts maximum price according to the ability to pay of different consumers.

4.        A monopolist uses large-scale production and huge resources to promote his own selfish interest. He may adopt wrong practices to establish absolute monopoly power.

5.        In a country dominated by monopolies, wealth is concentrated in the hands of a few. It will lead to inequality of incomes. This is against the principle of the socialistic pattern of society.

Methods of Controlling Monopoly

1.        Legislative Method: Government can control monopolies by legal actions. Anti-monopoly legislation has been enacted to check the growth of monopoly. In India, the Monopolies and Restrictive Trade Practices Act was passed in 1969. The objective of this Act is to prevent the unwanted growth of private monopolies and concentration of economic power in the hands of a small number of individuals and families.

2.        Controlling Price and Output: This method can be applied in the case of natural monopolies. Government would fix either price or output or both.

Taxation: Taxation is another method by which the monopolistic power can be prevented or restricted. Government can impose a lump-sum tax on a monopoly firm, irrespective of its level of output. Consequently, its total profit will fall.

1.        Nationalisation: Nationalising big companies is one of the solutions. Government may take over such monopolistic companies, which are exploiting the consumers.

2.        Consumer's Association: The growth of monopoly power can also be controlled by encouraging the formation of consumers associations to improve the bargaining power of consumers.