He will produce that level of output, which maximises profits and charge only that price at which heis in a position to dispose of his entire output. If buyers refuse to buy at a very high price, he has to keep a lower price. This is because, he cannot disregard demand situation in the market. Though a monopolist is a price-maker, he has limited power to charge a high price for his product in the market.

Since a monopolist has complete control over the market supply in the absence of a close or remote substitute for his product, he can fix the price as well as quantity of output to be sold in the market.

There are legal, technological, economic or natural obstacles, which may block the entry of new firms.

A pure monopolist has no immediate rivals due to certain barriers to entry in the field.

That means it cannot sell more output unless the price is lowered.

A monopoly firm itself being the industry faces a downward-sloping demand curve for its product.

Thus, in a competitive industry, there is single ruling price, while in a monopoly there may be price differentials. He can vary the price from buyer to buyer.

He is in a position to fix the price for the product as he likes. In fact, his price fixing power is absolute. A monopolist is a price-maker and not a price-taker.Monopoly is a complete negation of competition.They have either to buy the product or go without it. Therefore, the buyers have no alternative or choice. There are no closely competitive substitutes for the product.Thus, under monopoly firm and industry are identical. The monopolist is the single producer in the market.The characteristic features of a monopolistic firm are: Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.“Monopoly is a market situation in which the firm is independent of price changes in the product of each and every other firm.” Prof. Glossary of Industrial Organisation Economics and Competition Law, compiled by R. Different jurisdictions approach 'monopoly' in different ways depending upon market share criteria. The latter are natural monopolies which are often characterized by steeply declining long-run average and marginal costs and the size of the market is such that there is room for only one firm to exploit available economies of scale.įor purposes of competition law and policy, monopoly may sometimes be defined as a firm with less than 100 per cent market share. However, some monopolies are created and sustained through strategic behaviour or economies of scale. Barriers which sustain monopolies are often associated with legal protection created through patents and monopoly franchises. Monopolies can only continue to exist if there are barriers to entry. Market power may arise not only when there is a monopoly, but also when there is oligopoly, monopolistic competition, or a dominant firm.

The latter is a term which refers to all situations in which firms face downward sloping demand curves and can profitably raise price above the competitive level. Monopoly should be distinguished from market power. Moreover, resources may be wasted in attempts to achieve a monopoly position However, a counter argument advanced is that a degree of monopoly power is necessary to earn higher profits in order to create incentives for innovation. It is sometimes argued that monopolists, being largely immune from competitive pressures, will not have the appropriate incentives to minimize costs or undertake technological change. The preceding arguments are purely static in nature and constitute only part of the possible harm resulting from monopoly.

In addition, income will be transferred from consumers to the monopoly firm. This suggests that consumers will face a higher price, leading to a deadweight welfare loss. is a price setter rather than a price taker.Ĭomparison of monopoly and perfectly competitive outcomes reveals that the monopolist will set a higher price, produce a lower output and earn above normal profits (sometimes referred to as monopoly rents). Thus, the monopolist has significant power over the price it charges, i.e. By definition, the demand curve facing the monopolist is the industry demand curve which is downward sloping. In conventional economic analysis, the monopoly case is taken as the polar opposite of perfect competition. Monopoly is a situation where there is a single seller in the market.

Monopoly meaning