Hello everyone, this video introduces you to the characteristics of monopoly. First thing, monopoly by itself means there is only one seller in the market. That means the product they are producing has to be a unique product.
The product should not have any substitutes. If there are substitutes, monopoly is not going to work. When there is no substitute single seller, that means firm has complete control on the price.
In other words, we call monopoly as a price maker. Looking from the entry of new firms, new firms cannot enter into this market. We call it as entry of new firms is blocked. Another thing about single seller here is when you have single seller, entire demand faced by the single seller has to be coming from the market. Since the market demand is downward sloping, the demand faced by this firm is also downward sloping.
This is different from pure competition. Unlike pure competition, demand and monopoly faced by the firm is not perfectly elastic. In pure competition, it's perfectly a horizontal line.
Next thing, how they get control on the price. When you have downward sloping demand curve, that means as the quantity increases, price has to decrease. So that way, firm can... control the price. We call them as price maker.
So it is not correct to say that monopolist can choose highest price possible. That's not how it works. In fact monopolist will choose the price that maximizes his profit not necessarily highest price. To come up with a desired price monopolist manipulates the quantity produced. That means if you want a particular price you need to produce a related price.
quantity not to produce too much. Next characteristic is entry of new firms. As we said entry of new firms is blocked.
There are different ways firms are blocked from entering into this market. We want to look at all possibilities. First possibility is legal barrier to entry.
That means there could be a patent or copyright by the firm that stops other firms from producing these goods. R. Sometimes government give license to only one firm.
That means other firms cannot do or cannot produce this particular good. Second type of entry barrier is ownership or control of essential resources. If single firm controls major resources used in the production, that eliminates other producers from producing this one. That means without having access to that essential resource, you won't be able to produce.
Third type of entry barrier is talking about economies of scale. Basically means the amount of output produced increases, unit cost of production decreases. That means more you produce per unit cost is decreasing. In some industries, unit cost produced minimized at a very high quantity. When this extreme thing happens, single firm producing all the quantity in the results is not going to be the same as the average.
in the industry results in lowest per unit cost as compared to more firms producing. Okay, so if this barrier forces industries to have only one firm, then we can call that type of monopoly to be a natural monopoly. Now, let's come to the fourth type of entry barrier.
Fourth type of barrier is strategic barriers. That means firms choose certain strategies such that other firms cannot enter. So that could be sometimes firm may engage in different pricing strategies or marketing strategies that essentially eliminate or reduces the possibility of new firms from entering.
One of that possibility, we call it as predatory pricing. That means if a new firm wants to enter, the existing firm may actually slash the prices to really, really low, sometimes even lower than the cost of production, not able to survive in the industry that way they will be able to continue to have the monopoly