CHAPTER 11 : MONOPOLY

11.1 Nature and Sources

(A) Features of Monopoly: Monopoly is another traditional form of market. It is an extreme form, opposed to a competitive market structure. As against this, a competitive market is one with a large number of firms or producers. Monopoly is a case where there is only a single seller in the market. This, however, is a theoretical concept. In reality, a market with a few producers assumes the form of a monopoly. The second important feature of a monopoly market is the absence of substitutes for the goods produced and sold by the monopolists. Buyers have no other option except to purchase goods from the monopolist at whatever price he charges. This results in a situation in which the monopolist has complete control over market conditions. He can decide his own price and earn profits without any fear of competition from his rivals. Yet a monopolist has certain constraints arising out of demand and technical conditions.

(B) Limits to the Monopoly Power: Though a monopolist has complete freedom in determining his own price, there are some limits to his power. These are listed below:

i) The demand curve of a monopolist slopes downwards.

This is shown as demand curve DD of the monopolist in Figure 38. On such a curve, a monopolist cannot choose both Price and Output to be sold. He has to determine one of these quantities. If he chooses higher price P₁ he has to be satisfied with smaller sales of quantity Q₁. If he prefers larger output Q₂ he will have to charge lower price P₂.

ii) The second constraint on monopoly power arises out of the income and willingness of consumers. If the monopolist attempts to charge a price as high as P_n his sales fall to zero. So even though a monopolist has complete freedom to charge any high price this freedom is restricted by the consumer’s ability to purchase goods.

iii) Finally, monopoly power also depends upon elasticity of the demand curve. If the demand curve is rigid or less elastic the monopolist has a greater degree of control. As the demand curve becomes more flexible or flatter the monopolist’s control starts declining.

This can be explained with the help of Figure 39. In the figure there are two demand curves. DD₁ is rigid or less flexible showing greater monopoly control. DD₂ is flatter or more flexible and depicts a lower degree of monopoly control. On rigid demand curve DD₁ if the monopolist increases the price from P to P₁ the fall in the quantity sold is as small as QQ₁ . On the flatter demand curve DD₂ with the same rise in price, a fall in the quantity sold is as large as NN₁ . In case of a flexible demand curve there is a danger that even at a higher price, the total revenue of a monopolist may be smaller. This has been further explained in the table below: