Read this article to learn about the features and reasons for the emergence of monopoly in India!
In the preceding section, we analysed the behaviour of a perfectly competitive market structure with very large number of small firms. Monopoly is strictly opposite to perfect competition. ‘Monopoly’ is derived from two Greek words: ‘Monos’ means single and ‘polus’ means a seller.
Monopoly refers to a market situation where there is a single seller selling a product which has no close substitutes. For example, Railways in India.
Features of Monopoly:
The various features of Monopoly are:
1. Single Seller:
Under monopoly, there is a single seller selling the product. As a result, the monopoly firm and industry is one and the same thing and monopolist has full control over the supply and price of the product. However, there are large numbers of buyers of monopoly product and no single buyer can influence the market price.
2. No Close Substitutes:
The product produced by a monopolist has no close substitutes. So, the monopoly firm has no fear of competition from new or existing products. For example, there is no close substitute of electricity services provided by NDPL. However, the product may have distant substitutes like inverter and generator.
3. Restrictions on Entry and Exit:
There exist strong barriers to entry of new firms and exit of existing firms. As a result, a monopoly firm can earn abnormal profits and losses in the long run. These barriers may be due to legal restrictions like licensing or patent rights or due to restrictions created by firms in the form of cartel.
4. Price Discrimination:
A monopolist may charge different prices for his product from different sets of consumers at the same time. It is known as ‘Price Discrimination’.
5. Price Maker:
In case of monopoly, firm and industry are one and the same thing. So, firm has complete control over the industry output. As a result, monopolist is a price-maker and fixes its own price. It can influence the market price by changing the supply of the product.
Reasons for Emergence of Monopoly:
A firm enjoys monopoly when it is the sole seller of its product and the product has no close substitutes. The fundamental cause of monopoly is the barrier to entry.
The various reasons for emergence of Monopoly are:
1. Government licensing:
It means that before a firm can enter an industry, it needs to take permission from the government. Licensing is used to ensure minimum standards of competency. By not granting licenses to new firms, government aims to assure that only one firm operates in the market.
2. Patent Rights:
Certain big private companies are engaged in research and development activities. At times, they come up with new products or new technologies. As a reward for their risk and investment in research, government grants them patent right. The period for which patent rights are granted is known as patent life.
For Your reference:
‘Xerox 914′ was the first marketable automatic and plain-paper copier. So, it was granted 15-year exclusive patent rights to xerography (a dry photocopying technique).
Under cartel, some firms retain their individual identities but coordinate their output and pricing policies in order to act as a monopoly. The firms agree among themselves to restrict their total output to the level that maximizes their joint profits. The most famous example of Cartel is ‘Organisation of Petroleum Exporting Countries (OPEC)’ formed in 1960, that led to virtual monopoly in the world market for oil.
For further reference of ‘OPEC’, please refer Power Booster Section.
4. Control on raw materials:
Monopoly also arises due to sole ownership or control of certain essential raw materials needed in a particular industry. For example, DeBeers Company of South Africa controls about 80 per cent of the world’s production of diamonds. Although, the share is not 100 per cent, still it is large enough to exert substantial influence over the market.
Demand Curve under Monopoly:
A monopoly firm is like an industry as the single seller constitutes the entire market for the product, which has no close substitutes. So, a monopolist has full freedom and power to fix price for the product. However, demand of the product is not in the control of monopoly firm. In order to increase the output to be sold, monopolist will have to reduce the price. Therefore, monopoly firm faces a downward sloping demand curve.
In Fig. 10.3, output is measured along the X-axis and price and revenue along the Y-axis. At price OP, a seller can sell OQ quantity. Demand rises to OQ1 if the price is reduced to OP1. So, demand curve under monopoly is negatively sloped as more quantity can be sold only at a lower price.
It is often said that demand curve facing a monopoly firm is a constraint for the monopolist as he can sell more only by reducing the prices.
MR < AR under Monopoly:
A monopoly firm faces a downward sloping demand curve as more output can be sold only by reducing the price. As a result, revenue generated from every additional unit (known as MR) is less than price (AR) of the product. Due to this reason, MR is less than AR.