ANKIT MITTAL GSMS BATCH 2010-2012
What is Monopoly?
The term monopoly means an absolute power of a firm to produce and sell a product that has no close substitute. In other words, a monopolized market is one in which there is only one seller of a product having no close substitute. The cross elasticity of demand for a monopoly product is either zero or negative. In other words, a monopolized industry is a single – firm industry.
Characteristics of Monopoly:
1. There is only single seller in the market. This means that the demand curve faced by the monopolist is the downward – sloping demand curve for the market 2. For a firm to continue as a monopoly in the long – run, there must be factors that prevent the entry of other firms. 3. The product of the monopolist must be highly differentiated from other goods. There must be no close substitutes.
Market structure characteristics of Monopoly:
Number and size distribution of sellers Number and size distribution of buyers Product differentiation Conditions of entry and exit Single seller Unspecified No close substitutes Entry prohibited or difficult
Causes and kinds of monopoly:
The emergence and survival of a monopoly firm is attributed to the factors which prevent the entry of other firms into the industry and eliminate the existing ones. The main barriers to entry are: 1. Legal restrictions: Some monopolies are created by law in the public interest. Most of the erstwhile monopolies in the public utility sector of India, e.g., postal, telegraph and telegram services, generation and distribution of electricity, Indian Railways, Indian Airlines and State Roadways, etc., were public monopolies. Entry to these industries was prevented by law. Now most of these industries are being gradually opened to the private sector. Also, the state may create monopolies in the private sector also, through license or patent, provided they show the potential of and opportunity for reducing cost of production to the minimum by enlarging size and investing in technological innovations. Such monopolies are known as franchise monopolies. 2. Control over key raw materials: Some firms acquire monopoly power because of their traditional control over certain scarce and key raw materials which are essential for the production of certain goods, e.g., bauxite, graphite, diamond, etc. For instance, Aluminium Company of America had monopolized the aluminium industry before World War – II because it had acquired control over almost all resources of bauxite supply. Such monopolies are often called ‘raw material monopolies’. Such monopolies also emerge because of monopoly over certain specific knowledge of technique of production 3. Efficiency in production: Efficiency in production, especially under imperfect market conditions, may be the result of long experience, innovative ability, financial strength, availability of market finance at lower cost, low marketing cost, managerial efficiency, etc.
Efficiency in production reduces cost of production. As a result, a firm’s gains higher the competitive strength and can eliminate rival firms and gain the status of a monopoly. 4. Economies of scale: The economies of scale are a primary and technical reason for the emergence and existence of monopolies in an unregulated market. If a firm’s long – run minimum cost of production or its most efficient scale of production almost coincides with the size of the market, then the large – size firm finds it profitable in the long – run to eliminate competition through price cutting in the short – run. Once its monopoly is established, it becomes almost impossible for the new firms to enter the industry and survive. Such monopolies are known as natural monopolies. A natural may emerge out of technical conditions or efficiency or may be created by law on efficiency grounds.
Measures of Monopoly Power:
Like perfect competition, pure...