Meaning of Monopoly Market
A monopoly market is a market structure that is characterized by the single seller who is called a monopolist, but there are many buyers. The seller sells a completely unique product with restrictions on the new entry of new firms in the market. He has the power to exercise control over the whole market and determines the supply as well as the price of goods or services. Therefore, a monopolistic market is a non-competitive market with no close substitutes for the monopolist’s products. This market is also termed as one of the extreme imperfect markets amongst monopsony, oligopoly, and monopolistic competition.
Monopoly is a rare market situation where there is a single company operating and offering goods or services to people. The monopolist sells less quantity as compared to what is sold in a perfectly competitive market but charges a higher price. He is known as ‘price-makers of the market who can alone raise or reduce the price of products without considering the competitor’s action. The demand curve for a monopoly market is downward sloping denoting that raising sales is the only option available to firm for increasing their profit level. And if firms want to raise their sales level, then that is possible only by bringing down the price of the product.
Characteristics of Monopoly Market
Sole Trader: A monopoly market is wholly captured by a single seller or firm which provides goods with no close substitutes at all. The whole market is regulated by individual sellers having complete influence over the supply of products. A trader or firm from an industry with a monopoly as the whole output of the product is only dependent upon them.
Price Maker: The monopolist is the price maker being the sole king of the industry. The price of the product is set by the seller himself as there is no other competitor operating in the market. Due to the absence of competition, there is no one to challenge the price determined by the seller and therefore become the final price of the product in the market.
Barrier to entry and exit: A monopoly market is characterized by a high barrier to entry/exit of new entrants. The barriers involved in a monopolistic market are government licenses, copyrights and patents, resource ownership, and large startup costs. Other companies find difficulty in entering the monopolistic market as whole production and supply of particular product comes under the control of a single supplier.
Unique product: The product or service offered by a firm in a monopolistic market is unique with no close substitutes. Monopoly traders possess a patent of that specific product under which no close substitute can be manufactured or sold by other firms in the market.
Price discrimination: There is a high possibility of price discrimination in a monopolistic market. A single trader can change the price of the product without any challenge from anyone. He may charge different prices from different customers that are charging higher prices from rich people and low prices from poor customers.
Downward sloping curve: Under the monopoly market, the demand curve is downward sloping. It signifies that a firm can generate higher profits by raising the sales level which is possible via bringing down the price of the product.
Profit maximizer: A company operating in a monopolistic market aims to maximize its profit. Due to the absence of competition in the market, a firm can set a higher price than what would have been charged in a competitive market. Therefore, the price decided by monopolistic will be referred to as market price.
Stability of production elements: One of the major reasons behind the command of monopolists over resources is the non-movable nature of all elements of production. There is no one who can copy the combination for production which removes all chances of deposing a monopolist.
Types of Monopoly Market
Natural Monopoly: Natural monopoly is one that gets established due to distinguish natural factors of a particular region. Like for example, in India, Karnataka has a monopoly on coffee production. This is because of the climate conditions of Karnataka that are best suited for coffee cultivation.
Legal Monopoly: Legal monopoly got is a monopoly which got established due to the acquirement of legal provisions such as patents, licenses, and copyright. Under such circumstances, the law prohibits any replication of design that is registered under the specific brand name.
Simple Monopoly: A single monopoly is a type of monopoly under which the same price is charged by the seller from all buyers of its product. This type of monopoly generally operates in a single market.
Social Monopoly: A monopoly is said to be social where government himself controls the entire production for public welfare.
Fiscal Monopoly: Fiscal monopoly is a monopoly with the government for the purpose of printing currency notes, minting coins, etc.
Chosen Monopoly: Chosen monopoly is established in order to prevent throat-cutting competition in the market. A group of monopolists come together and form a monopoly with the purpose of escalating their profit level. Organization of Petroleum Exporting Countries (OPEC) is one of the best-suited examples for this kind of monopoly existing in the market.
Discriminating Monopoly: Discriminating monopoly leads to discrimination among prices charged by traders from buyers of its product. A discriminating monopoly unlike the simple monopoly operates in more than one market. For example, the same lawyer charges distinct prices from its clients in order to provide the services.
Reasons Behind the Monopoly Emergence
Control over raw materials: The sole ownership or control over key raw materials required in a specific industry many times leads to the establishment of a monopoly. Therefore, under these situations, an individual firm may exercise control over the final price of a product. For example, a South Africa-based company named “DeBeers” occupies about 80 percent of the world’s diamond manufacturing.
Licensing by the government: License provided by the government gives exclusive right to firm for production of particular product or service. A firm before entering into the market needs to take legal permission from the government. It is the minimum level of standards that are needed by the company for entering into the market and those who do not possess licenses are denied from operating in the market.
Formation of the cartel: Many times the firms unite themselves into groups thereby coordinating their output as well as pricing policies in order to act like a monopoly. However, they retain their individual identities and agree to restrict the total output together with the aim of maximizing profit level. This formation of companies together is termed a Cartel.
Unavailability of substitute products: The absence of substitute products in the market is another major reason for the establishment of a monopoly. This low elasticity of demand provides privilege to the company of charging higher prices as compared to marginal costs.
Technological advancement: Many companies enjoy the privilege of having superior technology as well as innovation in the market. Other companies due to the lack of technological resources are unable to replicate the unique product offered by monopolistic traders.
Examples of Monopoly Market
Few examples of monopoly firms are as follows: –
- Microsoft: Microsoft company launched a distinguished user-friendly operating system in market at times when only few operating systems were available in market. It is due to this that Microsoft brand becomes a key holder of this resource in market.
There are other operating systems as well in the market such as Unix and Linux which are not as user-friendly as windows. This is the main reason why windows cover almost 90% of the market at present.
- Raw Diamond Company-De Beers: De Beers have ownership of most of the mines all around the globe. Majority of African mines are under their control since 19th century. It makes De beers, a sole raw diamond seller in the world since late 19th century to initials of 21st century.
Various business strategies are employed by the brand in order to retain its position as the largest owner of raw diamond sellers around the globe.
A monopoly is a market with the sole sellers with no close substitutes at all. The individual trader possesses full power to affect the market selling price of goods and services. Also, government licensing, copyright, patents, regulation over raw materials, and cartel formation are some major factors leading to monopoly.