Characteristics of Monopoly

Definition

• Monopoly: A market structure with only one seller.
• Product is unique with no substitutes.
• The firm has complete control over price (price maker).

Market Entry

• Entry of New Firms: Blocked, meaning no new firms can enter the market.

Demand Curve

• Market Demand: Entire demand faced by the firm is from the market.
• Downward Sloping Demand: Implies that as quantity increases, price must decrease.
• Unlike pure competition where demand is perfectly elastic (horizontal line), monopoly demand is not.

Price Control

• Monopolist chooses price to maximize profit, not necessarily the highest price.
• Manipulates quantity produced to set desired price.

Barriers to Entry

1. Legal Barriers

   • Patents or copyrights can prevent other firms from entering.
   • Government licenses may limit production rights to one firm.

2. Ownership or Control of Resources

   • If one firm controls essential resources, it blocks others from entering.

3. Economies of Scale

   • Increased output leads to decreased production costs per unit.
   • In industries where minimal cost is achieved at high production, one firm can dominate, creating a natural monopoly.

4. Strategic Barriers

   • Existing firms may use strategies (pricing, marketing) to prevent market entry.
   • Predatory Pricing: Existing firm lowers prices, potentially below production costs, to deter new entrants.