chartered accountant
Monopoly is derived from two Greek terms: "mono," meaning one, and "Polein," meaning to sell. In economic terms, a monopoly signifies a market where a single company sells a product without any close substitutes. This results in a one-firm industry structure.
Monopolies exhibit several distinct characteristics:
The hallmark of a monopoly is the existence of one seller catering to many buyers. In such a market, the monopolistic firm constitutes all or most of the industry. Consequently, the firm’s demand curve aligns closely with the industry demand curve. Since there are numerous buyers, individual consumer demand cannot affect the price due to the monopolist's significant market power.
In a monopoly, the products offered by the monopolist have no immediate substitutes. This market environment persists only if the cross elasticity of demand for the goods is effectively zero. As a result, the monopolist has the latitude to set prices and can refuse to sell below the established price point.
Monopolies often yield substantial profits, which leads to formidable barriers that prevent new firms from entering the market. These barriers can stem from various factors, such as legal restrictions, technological advancements, or specific resource availability, making it difficult for new competitors to establish themselves. Often, a monopoly operates within a limited market scope, presenting an economic hurdle for potential new entrants.
In a monopoly, the firm exerts complete control over the supply of goods. Despite having numerous customers, individual demand from buyers constitutes a minor fraction of the overall demand. Thus, consumers must adhere to the price set by the monopolistic firm.
Monopolies can be classified into two main types:
This type occurs when a government grants exclusive rights to an individual or company to be the sole supplier of certain goods in the market. As a result of this privileges, the designated seller becomes the dominant actor, leading to a monopolistic environment.
A natural monopoly arises in markets where a single seller can provide goods at a lower cost due to high fixed costs and increasing sales. This phenomenon is often seen in emerging markets where early entrants leverage their cost advantages and grow rapidly, establishing a monopoly.
Understanding the characteristics and types of monopolies is crucial for navigating economic discussions and market dynamics. Monopolies can significantly influence pricing and availability, making them a fundamental aspect of economic theory and practice.