Characteristics of Monopoly

Definition of Monopoly

• Monopoly: A market structure with only one seller.
• Unique Product: The product has no substitutes; crucial for maintaining monopoly status.
• Price Control: The monopolist is a price maker, having complete control over the price.

Market Dynamics

• Entry Barriers: New firms cannot enter the market easily. Entry is blocked.
• Demand:
  • Entire market demand is faced by the single seller.
  • Market demand curve is downward sloping.
  • Unlike pure competition, the demand curve is not perfectly elastic.

Pricing Control

• Downward Sloping Demand Curve: As quantity increases, price decreases, allowing the firm to control prices.
• Profit Maximization: Monopolist selects prices to maximize profit, not necessarily the highest price.
• Quantity Manipulation: Adjusts production quantity to influence price.

Entry Barriers

• Legal Barriers: Patents, copyrights, or government licenses restrict entry of other firms.
• Resource Control: Ownership of essential resources can prevent competitors from entering the market.
• Economies of Scale:
  • As output increases, unit cost decreases.
  • In some industries, producing at high quantities results in the lowest per unit cost, supporting a natural monopoly.
• Strategic Barriers:
  • Established firms use strategies to block new entrants.
  • Predatory Pricing: Existing firms may lower prices below costs to prevent new competitors from surviving.

Summary

Monopolies are characterized by a single seller, unique products, control over pricing, and significant barriers to entry. Various strategies and structural barriers are employed to maintain monopoly power and prevent competition.