Industrial Economics, Business Monopoly

1. Dr. Sunita Sukhija
Assistant Professor in Commerce
Govt. National College, Sirsa(HRY)

2. Introduction The word monopoly has been derived from the combination
of two words i.e., ‘Mono’ and ‘Poly’. Mono refers to a single
and poly to control.In this way, monopoly refers to a market
situation in which there is only one seller of a commodity.
 Definition: A market structure characterized by a single
seller, selling a unique product in the market. In a monopoly
market, the seller faces no competition, as he is the sole
seller of goods with no close substitute.
Description: In a monopoly market, factors like government
license, ownership of resources, copyright and patent and
high starting cost make an entity a single seller of goods. All
these factors restrict the entry of other sellers in the market.
Monopolies also possess some information that is not known
to other sellers.

3. Industrial Monopoly
 A monopoly is an economic market structure where a
specific person or enterprise is the only supplier of a
particular good.
 Monopolies are firms who dominate the market.
Either a pure monopoly with 100% market share or a
firm with monopoly power (more than 25%) A
monopoly tends to set higher prices than a competitive
market leading to lower consumer surplus. However,
on the other hand, monopolies can benefit from
economies of scale leading to lower average costs,
which can, in theory, be passed on to consumers.

4. Characteristics of a Monopoly
 Profit maximizer: a monopoly maximizes profits. Due to the lack of
competition a firm can charge a set price above what would be charged
in a competitive market, thereby maximizing its revenue.
 Price maker: the monopoly decides the price of the good or product
being sold. The price is set by determining the quantity in order to
demand the price desired by the firm (maximizes revenue).
 High barriers to entry: other sellers are unable to enter the market of
the monopoly.
 Single seller: in a monopoly one seller produces all of the output for a
good or service. The entire market is served by a single firm. For
practical purposes the firm is the same as the industry.
 Price discrimination: in a monopoly the firm can change the price
and quantity of the good or service. In an elastic market the firm will
sell a high quantity of the good if the price is less. If the price is high,
the firm will sell a reduced quantity in an elastic market.

5. Sources of Monopoly Power
 Economies of scale
 Capital requirements
 Technological superiority
 No substitute goods
 Control of natural resources
 Network externalities
 Legal barriers
 Deliberate actions

6. Pros and Cons of Monopoly

7. Disadvantages of monopolies
 Higher prices than in competitive markets – Monopolies face inelastic
demand and so can increase prices – giving consumers no alternative. For
example, in the 1980s, Microsoft had a monopoly on PC software and charged a
high price for Microsoft Office.
 A decline in consumer surplus. Consumers pay higher prices and fewer
consumers can afford to buy. This also leads to allocative inefficiency because the
price is greater than marginal cost.
 Monopolies have fewer incentives to be efficient. With no competition, a
monopoly can make profit without much effort, therefore it can encourage x-
inefficiency (organisational slack)
 Possible diseconomies of scale. A big firm may become inefficient because it is
harder to coordinate and communicate in a big firm.
 Monopolies often have monopsony power in paying a lower price to suppliers.
For example, farmers have complained about the monopsony power of large
supermarkets – which means they receive a very low price for products. A
monopoly may also have the power to pay lower wages to its workers.
 Monopolies can gain political power and the ability to shape society in an
undemocratic and unaccountable way – especially with big IT giants who have
such an influence on society and people’s choices. There is a growing concern
over the influence of Facebook, Google and Twitter because they influence the
diffusion of information in society.

8. Why governments may tolerate
monopolies
 It is difficult to break up monopolies. The government
passed a lawsuit against Microsoft, suggesting it
should be split up into three smaller companies but it
was never implemented.
 Governments can implement regulation of
Monopolies In theory, regulation can enable the best
of both worlds – economies of scale, plus fair prices.
However, there is concern about whether regulators do
a good job – or whether there is regulatory capture
with firms gaining generous price controls.