Monopoly Markets and Huge Profits
Monopoly is a market condition in which only one seller exists for selling a particular commodity; it is a market structure in which the entire product of the particular industry is made by a single seller or a single firm, so there is no difference between the industry and a firm. Monopoly market situation arises due to the various barriers which prevent the entry of competitors into the markets. The barriers of entry may be natural, legal, sociological, economic and deliberate actions of the existed firm.
Barriers to entry
No substitute goods
Monopoly situation arises mainly due to the absence of close substitute products in the markets. Here, the absence of substitute products completely eliminate the competition and can create demand for the products. The increase in price does no show much variation in the demand for the product, here the product’s demand is relatively inelastic, and increase in demand of the product maximizes profits.
Economic barriers highly restrict the new entrants; this condition arises due to the scarce financial resources high capital requirements, economies of scale, and cost of production during initial stages.
Huge capital requirements
Huge capital is required to enter into the monopoly markets, so the new entrants need to invest larger amounts of capital to satisfy the economies of scale, research and development, fixed costs and other costs.
Economies of scale
Economies of scale are the major advantage to the monopoly firms, it acts as an entry barrier to the new entrants because, in order to get the benefits of economies of scales, new entrants need to invest huge capital to satisfy various costs such as fixed costs and working capital.
Scarce financial resources act as barriers to entry to the new entrants. In order to satisfy the various costs associated with the establishment of new ventures such as fixed costs, working capital, research, and development new entrants need huge capital. Unavailability of financial resources and interest rates highly demotivates the new entrants to compete with the monopoly firms.
Legal barriers control the new entrants to enter into the markets due to the matter of legal aspects such as patent rights, copyrights, special brands, and trade means, these barriers can stop the new entrants during the initial stages of their thought of entry.
Sometimes the Governments need to take some actions in order to benefit the society and takes the responsibility of producing products or services such as producing electricity and providing water facilities etc.
Technological advancement is the main reason for the existence of monopoly firms and a monopoly firm has a better chance of spending more on further research and development due to high profits. It acts as a barrier for the new entrants to compete with the existed firms.
Deliberate actions of the existed firms highly restrict the new entrants to occupy the markets, their strategies, approaches, and actions such as unique pricing strategies, economies of scale and practicing anti-competitive steps such as lobbying can eliminate the competition.
Types of monopoly
- Legal monopoly
- Voluntary monopoly
- Limited monopoly
- Government monopoly
- Private monopoly
- Single price monopoly
- Discriminating monopoly and
- Natural monopoly
Pricing under monopoly
The major advantage to the monopoly firms is the power of controlling prices and can fix prices in order to get maximum benefits. Monopoly firms can reduce or raise the prices of their own commodity with the increasing or decrease of the outputs. Due to the existence of a single firm in the industry or no distinction between the industry and firm, they can fix any price irrespective to the competitors. Monopoly firms can increase or decrease the supply of output to bring changes in the demand in order to get maximum profit for example decrease in the supply of output can increase demand for the product and in such a situation increase in prices does not show much difference in sales and helps in maximizing profits. On the other hand marketers can decide either price or the supply of output, if the demand for the product increases then the monopoly firms increases the supply; here market determines the price of the products to some extent, in such conditions economies of scale facilitates decrease in prices which do not bring much difference in the profits.
Monopoly markets have the following characteristics
Single seller or a single firm
In monopoly markets there exists only a single firm or a single seller to produce a particular product; they supply the entire output to fulfill the entire market demand. Due to the existence of single firm, there exists no difference between the firm and industry.
Monopoly firms decide the price of the product to get maximum profits. Depending on the product’s demand these marketers take supply decisions. If they decrease the supply of output demand increases and in such conditions market itself determines the higher price, so the monopolists can make prices.
Monopoly means the existence of single sellers or a single firm. This situation arises due to the various entry barriers such as legal, financial, technology, economies of scale, and Government. These barriers restrict the new entrants or competitors to enter into that industry.
Large number of buyers
The existence of single seller and a large number of buyers is the characteristic of monopoly markets. Here many buyers compete among themselves to buy the products and create market demand, it facilitates marketers to take pricing decisions.
Downward sloping of demand curve
The characteristic downward sloping of demand curve says that decrease in price maximizes the quantity demanded and sales.
Supply and price
In monopoly market situation marketers can fix either price or supply, they cannot fix both. For example, if the monopolist charges very high price then they cannot sell more quantity.
Monopolists can enjoy higher profits due to various reasons such as economies of scale, price maker, entry barriers, single seller, and product’s demand.
No close substitute
Products of monopoly firms do not have close substitute products. This characteristic facilitates the increase in demand and profits. For example increase in electricity, charges do not make people use kerosene lamps.