Market Structure :Monopoly-Characteristics and Types Muzamil Jan 15/11/2018 Semester;2nd

The term ‘market structure’ refers to the organisational features of an industry that influences the firms behaviour in its choice of price and output. Market structure is classified on the basis of organisational features of the industry, more specifically, on the basis of degree of competition among the firms. Organisational features include the number of firms, distinctiveness of their products, elasticity of demand and the degree of control over the price of the product

The market structure is generally classified as follows: i)Perfect Competition ii)Monopoly iii)Imperfect Competition We have explained Perfect Competition,its features , price and output determination in a perfectly competitive market in the previous semester.Here we will discuss Monopoly type of market, its characteristics and types.

Kinds of market structure Type of market No.of firms Nature of product Firms control over price Perfect Competition Very large Homogenous None Imperfect Competition a)Monopolistic Competition Many Real or perceived difference in product Some b)Oligopoly Few Homogenous or Differentiated product Monopoly Single No close Substitutes Full but regulated

Monopoly: The word Monopoly is derived from two Greek words ‘monos’ meaning single and ‘polus’ meaning seller. Monopoly refers to a market structure where there is a single seller selling a product which has no close substitutes.For e.g Railways in India. “Monopoly is a market situation in which there is a single seller.There are no close substitutes of the commodity it produces, there are barriers to entry”-Koutsoyiannis Monopoly is an extreme opposite of perfectly competitive market. In a perfectly competitive market, the number of sellers is so large that no single seller can influence the market price thus all firms are price takers. Whereas in a monopoly market there is a single seller who has an absolute power to determine price of its product and hence a monopolist is a price maker.

Features of Monopoly: 1. Single Seller: There is a single seller selling the product under Monopoly. As a result .the monopoly firm and industry is one and the same and monopolist has full control over the supply and price of the product. 2. No Close Substitutes: The Monopolist sells a product which has no close substitutes. For e.g ,there is no close substitute of electricity. 3. Restrictions on Entry and Exit: There are barriers to entry of new firms and exit of existing firms. These barriers may be due to legal restrictions like licensing or patent rights etc. As a result a monopolist can earn abnormal profits and losses in the long run.

4.Price Discrimination: A monopolist may charge different prices for his product from different groups of consumers at the same time known as Price Discrimination. 5.Price Maker: Under Monopoly, firm has an absolute control over supply of the product . As a result, firm is a price maker and fixes its own price. It can influence the market price by changing the supply of the product.

Sources and kinds of Monopoly The barriers to entry are the sources of Monopoly power. The emergence of monopoly is due to the factors which prevent the entry of other firms into the industry. The major sources of barriers to entry are: i)legal restrictions ii)Control over the supply of scarce and key rawe materials iii)Efficiency iv)Patent Rights

Legal Restrictions: Certain Monopolies are created by law in public interest. Most of the state monopolies in the public utility sector like postal, telegraph and telephone services, electricity, railways etc are public monopolies. Such monopolies are created by public law. It means that before a firm can enter an industry, it needs to take permission from the Government. Such monopolies are intended to reduce cost of production by the economies of scale. Such monopolies are also known as Franchise monopolies. Control over key raw materials: Some firms acquire monopoly power due to sole ownership or control of certain essential raw materials needed in particular industry e.g, bauxite, graphite, diamond etc. Such monopolies are often called raw material monopolies.

Efficiency: Another reason for the growth of monopolies is the economies of scale or efficiency. Monopolies born out of efficiency are known as natural monopolies. In such industries a large size firm finds it profitable to eliminate competition by cutting down its price for a short period. Once a monopoly is established, it becomes almost impossible for the new firms to enter the industry and survive. Patent Rights: Another source of monopoly is the patent rights of the firm for a product or for a production process. Patent rights are granted by the government to a firm to produce a commodity of specified quality or to use a specified technique of production. patent rights give a firm exclusive right to produce the specified commodity. Such monopolies are known as patent monopolies.

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