Meaning, Conditions, Sources and Advantages
Monopoly is a market where there is only one producer of a good or service. There is also no dose substitute of the good or service.
Conditions of Monopoly
1. Single seller and large number of buyers.
2. There is no substitute in the market.
3. Entry ban.
4. Controlled supply.
5. Independent price policy.
6. There is no difference between firm and industry.
7. Price discrimination.
8. Abnormal profit.
9. There are no selling costs.
10. Different average and marginal revenue curve.
Sources of Monopoly Power
In a monopoly, specific sources generate the individual control of the market. Sources of power include:
1. Economies of scale
Decreasing unit costs for larger volumes of production. Decreasing costs coupled with large initial costs, If for example the industry is large enough to support one company of minimum efficient scale then other companies entering the industry will operate at a size that is less than MES, and so cannot produce at an average cost that is competitive with the dominant company. And if the long-term average cost of the dominant company is constantly decreasing clarification needed, then that company will continue to have the least cost method to provide a good or service
2. Capital requirements
Production processes that require large investments of capital, perhaps in the form of large research and development costs or substantial sunk costs, limit the number of companies in an industry: this is an example of economies of scale.
3. Technological superiority
A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants either do not have the expertise or are unable to meet the large fixed costs needed for the most efficient technology. Thus one large company can often produce goods cheaper than several small companies.
4. No substitute goods
A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for that good relatively inelastic, enabling monopolies to extract positive profits.
5. Control of natural resources
A prime source of monopoly power is the control of resources (such as raw materials) that are critical to the production of a final good.
6. Network Externalities
The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words, the more people who are using a product, the greater the probability that another individual will start to use the product. This reflects fads, fashion trends,social networks etc. It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft office suite and operating system in personal computers.
7. Legal barriers
Another source of monopoly is source of monopoly power is the existence of legal entry barriers including patents, copyrights, licenses, etc.
In many instances, a monopoly is created and enforced by a government through its intellectual property rights laws. For example, Microsoft has monopoly in Windows-based operating systems because no one else can copy and sell Windows. Similarly, many pharmaceutical companies have monopoly in specific drugs due to existence of patents.
Advantages of Monopoly
(1) A monopoly organization is usually a large sized concern. It can, therefore, secure all the internal and external economies associated with large-scale production. These economies result in a lower cost of production and this benefit ultimately is passed on to the consumers in the form of low-priced products.
(2) A large-sized monopoly concern has huge financial resources. Competing small sized firms do not possess such a financial strength. As such, a monopoly concern can withstand business upheavals and can steer clear through troubled economic conditions.
(3) Public utilities provide a strong case for monopoly. Services like water supply, supply of cooking gas, electric supply, postal and telecommunication services are examples of public utilities. Competition in these areas will involve unnecessary duplication and triplication of overhead costs and such other wastes of competition. Monopolies can serve to provide public utilities at low per unit charges.