Monopoly Meaning In Economics: Monopoly Definition Features Types

Monopoly Meaning In Economics

Monopoly Meaning In EconomicsA monopoly market is where there is only a single seller. Since, there is single seller in the market, who runs the entire industry that is why it is called monopoly market.

Government license, ownership of resources, copyright, patent, and high starting cost are few of the reasons behind which gives rise to the monopoly market. So, these becomes the restrictions on the entry in industry for other sellers. Monopolies are the only firm in the industry, so a monopoly firm constitute an entire industry. In other words, a monopoly firm is equal to an industry. Monopoly Sellers has two biggest advantages which they enjoy are: being a price maker and profit maximization.

Monopoly Meaning In Economics
Monopoly Meaning In Economics

What Is Monopoly In Economics?

Monopoly meaning in economics can be illustrated as the form of market structure where there is single seller and multiple buyers, and seller has the control over the price and they enjoy maximum profits.

Definition Of Monopoly In Economics

Definition: A monopoly market have only one seller that sells a unique product in the market. In this form of market, firm has no competition, as there is the only one firm selling goods or services with no close substitute available.

Features of Monopoly Market

Monopoly market structure features state the points which describes the monopoly market. For better and detail understanding of monopoly meaning in economics, we will look at the characteristics of the monopoly market.

Features of Monopoly Market
Features of Monopoly Market

1.   Single Seller and Many Buyers

Usually, there’s one firm that produces/ sells the particular commodity or product or service in the Monopoly market. Monopolies are the only firm in the industry, so a monopoly firm constitute an entire industry. In other words, a monopoly firm is equal to an industry.

2.   Entry Barriers

Government license, ownership of resources, copyright, patent, and high starting cost are few of the reasons behind which gives rise to the monopoly market. which restricts any new entrants from entering the industries. It is another one of the primary feature of the monopoly market, which describes the key points of to define monopoly markets in economics.

3.   No Substitute

One of the reasons behind the monopoly of a firm is the no availability of close substitute products in the market. Since, there is single seller, which gives the power to enjoy the whole market share. Due, to the reason their is no competition available and consumer have only single option to buy product from.
No close substitute product also gives the power to the seller to be in the position of price maker. Therefore, price is fixed according to the seller’s desired price.

4.   Price Maker

A monopoly market is the industry’s price maker, due to single sellers and no availability of close substitutes, which gives power to the firm to determine the price. As a result, consumers do not have any other option for their purchase. Therefore, which gives the power to the firm to set price according to their desires. It is one of Monopoly’s primary features, as it becomes the cause and reasons for its profits and equilibrium, which gives a Monopoly meaning in economics more easily.

5.   Price Discrimination

In a monopoly market, consumer faces the price discrimination as change in price or quantity of the good or service. Moreover, monopoly firms has the power to charge different prices from different customers for the same quantity of product. Price discrimination is a very common and regular feature of monopoly market. Most of the monopoly firms opt for this practice.

6.   Profit Maximization

Monopoly firm has a advantages of being in the position of price maker and maximum profits. Since, a monopoly firm is the price maker of the industry. The price is fixed according to the desired price of the firm. Also, there is no availability of close substitute  product and competition. Monopoly firm earns the power to charge their price, which results in the maximization of profits for monopoly firms.

These are the six features of the monopoly market which describes the monopoly meaning in economics and monopoly characteristics.

Types Of Monopoly

Monopoly meaning in economics is  not elaborated in many different types of monopoly. Reason and working of each type of monopoly is different.  Here are five different types of monopoly markets:

Types of Monopoly
Types of Monopoly

1.   Simple Monopoly and Discriminating Monopoly

A monopoly firm which charges a uniform or similar price for its products and services from all the buyers is called simple monopoly. While, discriminating monopoly firms charges different prices for the same product or services and same quantity from different consumers.

A simple monopoly only works in one market and discriminating monopoly operates in more than one market.

2.   Pure Monopoly and Imperfect Monopoly

Monopoly firm which controls all the supply of products as well as related things. Plus, there is no availability of even remote substitute, this form of market structure is called pure monopoly.

Pure monopoly firm has an absolute monopoly power. It is a very rare monopoly.
Imperfect monopoly refers to the limited degree of monopoly power. In imperfect monopoly a firm produces a product, with presence of close substitutes in the market.

Monopoly power is more in the pure monopoly It is related to the availability of substitutes. In real world, there are many examples of imperfect Monopoly.

3.   Natural Monopoly

There can be natural causes in for the establishing a monopoly market, this type of monopoly is called natural monopoly. Mica in India, nickel production in Canada are good examples for natural monopoly.

This monopoly came naturally to these countries. Natural monopoly is the one example which comes naturally. Describes about monopoly meaning in economics differently.

4.   Legal Monopoly

Monopoly which emerged because of any legal provisions like copyrights, patents, trade marks etc are called legal monopoly. According to the laws in different countries competitors cannot imitate the design and cannot make the products which are registered under given brand names, patent, or trade-marks. These laws safeguard the interests of the people who have  taken the risk and innovate the product.

5.   Industrial Monopolies or Public Monopolies

For the nation’s general interest, when a government nationalizes specific industries in the public sector, whereby industrial or public monopolies are created.
For example, The Industrial Policy Resolution 1956, in India, restricts private industry involvement in some industries like arms and ammunition, atomic energy, railways, and air transport. That means these industries will have a public monopoly of the Central Government. And, the industrial monopolies can be created by statutory measures.

These five types of monopoly market, which illustrates the monopoly meaning in economics.

Equilibrium In Monopoly Firm

Equilibrium of monopoly market is categorized into short-run and long-run. Understanding the Monopoly meaning in economics understands the levels of equilibrium in short and long run and type of profit firms can earn.

Short-Run Equilibrium in Monopoly Firm

Short-run concept states a certain period in the future, where at least one input is fixed while other inputs are variable. Now, lets read about the monopoly meaning in economics by defining the short-run equilibrium of monopoly firm.

Similar to the perfect competition, monopoly firm also have  three possibilities for a firm’s equilibrium in monopoly. Which are:

  1. In Case of normal profits – average cost(AC) = average revenue(AR)
  2. In case of supernormal profits – average cost(AC) <average revenue(AR)
  3. In case of losses – average cost(AC) > average revenue(AR)

Normal Profits

Monopoly meaning in economics: A monopoly firm earns normal profits when the average cost of production is equal to the average revenue for the corresponding output.

Normal Profits In Monopoly
Normal Profits In Monopoly
  • Above figure shows the equilibrium point E, where MC curve cuts the MR curve.
  • At the point corresponding to E, AC curve touches AR curve .
  • Therefore, the firm earns normal profits.

Super-normal Profits

A firm earns super-normal profits occurs when AC is less than the AR for the corresponding output. Gives you the better understanding of Monopoly meaning in economics

Super normal Profits In Monopoly
Super normal Profits In Monopoly
  • In the above figure, price per unit = OP = QA.
  • Also, the cost per unit = OP’. It means, firm is earning huge profits and they have a small cost of production.
  • In super normal profit, per-unit profit is equals to the OP – OP’ = PP’

Losses

A firm earns losses when the average cost of production is higher than the average revenue for the corresponding output.

Losses In Monopoly
Losses In Monopoly
  • In above figure, for the same quantity the AC cost curve lies above AR curve.
  • AR = OP and the AC=OP’.
  • Because of this firm is facing average loss which is equals to PP,’ and total loss is shown as PP’BA.
  • Sometimes monopoly firms set lower prices and faces losses, so that new firms cannot enter the market.

Now, understand monopoly meaning in economics equilibrium in long-run.

Long Run Equilibrium Under Monopoly

Next topic in monopoly meaning in economics. Equilibrium point of monopoly firms in the long-run.

Monopoly industry has barriers on entrance of new-firms in market. These entry barriers into the industry is created by controlling the raw materials used in the industry. Firm might have the rights for the production of a specific good (patent), or the market of the goods is limited.

If case new firm tries to enter the industry, it lower down its prices goods to such an extent that firm starts to incur losses.

When there is no threat of the entry of new firms into the industry, the monopoly firm makes long-run adjustments in the plant’s scale. If the demand of the product is limited, the monopoly firms are able to afford the production at the sub-optimum scale.

In situation of large market size and expansion. A monopoly firm will optimize its production of scale i:e they will produce large amounts of goods at lowest cost possible. However, the monopoly would not be able to run the business if it makes losses in long-run. The long-run equilibrium of a monopoly firm is explained with the following diagram.

 Monopoly meaning in economics by Diagram/Curve       

Long Run Profit in Monopoly
Long Run Profit in Monopoly
  • In the long run, all the factors of production, including the plant’s size, are variable.
  • A monopoly firm will earn maximum profits, when long-run marginal cost (MC) is equal to marginal revenue (MR), and the LMC curve cuts the MR curve from below.

In above graph, monopoly firm’s equilibrium is at point E.

  • LMC intersects the MR curve. Results to the, QP as the equilibrium price, and OQ is the equilibrium output.
  • At the OQ level of output, the cost per unit is QH (LAC). And, HP represents the per unit super-normal profit. Therefore,total super-normal profit is  KPHN.

The LAC  is not minimum at OQ level of output. The firm will only able to reach optimum scale of production when the demand for the product increases.
By now, a monopoly meaning in economics is explained by its features, types and equilibrium points. Now, lets understand why advantages part of the monopoly meaning in economics.

Advantages Of Monopoly

Here are advantages of monopoly firms, for our better understanding on topic monopoly meaning in economics:

Advantages of Monopoly
Advantages of Monopoly

1.   Economies of scale

Cost of production starts to decrease with the increase in the level of production, which makes the price of the product also lower and affordable for consumers. industries like mineral water, steel production have high fixed cost. So, in this case it is beneficial to have low variable cost.

2.   Research and development

As, discussed earlier about the super-normal profits of monopoly firms. There is huge cost which is spent on research and development to keep the products cost effective. Therefore, it becomes the important part of many industries, for example aircraft manufacturing , pharmaceuticals, telecommunication. Developing drugs involves a high risk of failure, and monopoly profits give a firm more significant resources to take risks, proving futile.

3.   International competitiveness

A monopoly firm enjoys their power in their home country, but in some cases firms faces global competition. For, E.g., British Steel enjoys the  domestic monopoly, but at the global level steel industry has huge competition. Domestic monopoly becomes the competitive edge in global competition. As discussed earlier, Monopoly meaning in economics does not always mean it doesn’t have to face competition in other countries.

4.   Successful firms

A firm also attains the monopoly position in the market by being consistent and dynamic. Firms success can also creates the monopoly power. One of the best example is ‘Google’. It has created the monopoly by being the most dynamic algorithm for search engine.

5. Subsides loss-making services

Monopoly firms make another big use super-normal profits in subsidizing socially useful but loss-making services. For example metro in India charges higher prices during office hours due to this metro subsidize the prices during odd timing- at night or early morning.

6.   Avoid the duplication of services

Some firms gains monopoly power by being most hardworking firm in the industry.  For example, in case of a neighborhood grocery stores, there is one store which is more efficient and dynamic. Which results into the loss of other stores in the area. And, a monopoly of one store in a neighborhood

These are the advantages of the monopoly market to which illustrate the  monopoly meaning in economics and its benefits in the economy.

Disadvantages of Monopoly

A monopoly market also have some negative effects on the economy. The disadvantages part of monopoly meaning in economics, it follows:

Disadvantages of Monopoly
Disadvantages of Monopoly

1.   Higher prices

There is a presence of inelastic demand in case of monopoly which can create the increase in prices. Since, there is no close substitutes is available  in the market, it forces consumers to buy the product on higher price. For example, Microsoft increased their prices in 1980s.This is because of the monopoly in computer software.

2.   Decline in consumer surplus

Since, the monopoly firm is the solo seller and price-maker which results in the high price of products. And as we talked earlier, about monopoly meaning in economics, that seller earns a maximum profit, which becomes burden for consumers. As a result there are few consumers, which creates allocative inefficiency.

3.   Fewer incentives

In monopoly market there is no or very less competition, which gives the power to firm not to pursue the customers. Firms in this market does’t need to give incentives to make the sale. Therefore it encourages x-inefficiency (organizational slack)

4.   Possible Diseconomies of scale

When monopoly firms starts to grow, firms have difficulty in handling the internal operations. As a result firm starts going downhill and it becomes difficult to survive the business.

5.   Monopoly power

It refers to the paying of lower price to suppliers. such as, in case of farmers and supermarket’s, due to the supermarket’s monopoly farmers faces the price discrimination. Moreover, it has an impact on worker’s salaries and wages.

These are the disadvantages of monopoly to understanding what is monopoly meaning in economics, and problems related to it in the economy.

Examples of Monopoly Market 

Now its time to relate the monopoly meaning in economics by real world. Here are true monopoly examples of the world:

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1.   Indian Railway

Indian railways is a primary example of monopoly market in India which describes the government monopoly. Legally central government as  rail transportation ministry has the monopoly on rail transportation in India. It gives a in depth understanding of monopoly meaning in economics. Indian railways is the sole provider of rail transport in India. Indian Railways company is state-owned. This type of monopoly is not equal to private company. Rail networks are often considered to be a ‘natural monopoly.’ It is because only one provider can run a train on a given track at a given time, so naturally, there cannot be competition.

2.   Google

Google is the leading search engine in the world, followed by Microsoft and Yahoo. Market share of Microsoft and Yahoo is very small as compared to Google. But, Google makes a maximum profit from advertising, making them 60% of the global revenue from advertising, which gives you monopoly meaning in economics. Google earns from its advertisement setup, using search history and locations. It is impossible for smaller firms to compete with such big data.

3.   Facebook

Facebook is the good example of monopoly meaning in economics as the key player of social media industry. Mark Zuckerberg has not named all the apps, but there four apps under Facebook: Facebook app, Facebook Messenger, WhatsApp, and Instagram. Facebook and other social media apps of Facebook top social apps globally on iOS and android.

4.   Luxottica

Luxottica is the leading brand in eyewear, plus it owns the biggest brands in the industry. But, their is no change in the name of these brands, which makes the consumer believes they have different choices. This brand has the market share more of more than 80%

5.   Microsoft

Microsoft operating systems owns 90-95% of the microcomputer computer operating systems market across the globe. Its operating system become essential in home and business computers. Which gives them the monopoly in all domestic and commercial IT industry. Plus, the substitutes available to the operations system market are not the close ones in Microsoft’s case.

These are top 5 monopoly market real-world examples that clearly explain the monopoly meaning in economics.

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