Question

Provide an example of a monopoly and explain how the firm maintain its monopoly power and keep competition out.

Answer 1

Monopoly is a form of market in which there exist only a single seller who sold goods which does not have close substitutes. There is barrier in the entry of new firms. Under monopoly, the firm is a price maker because it can fix the price for its product. It has free control over the supply of the product. A monopolist firm faces a market demand curve which is negatively sloped. It means that the firm will have to reduce the price to increase its sale. Demand curve of a firm under monopoly is less elastic because the product has no close substitutes. Railways in India are a monopoly industry of the Government of India. Since, there is only one producer of a product in the market, the distinction between firm and industry disappears.

Characteristics that creates barriers to entry for monopolies and help firm to maintain its monopoly power:

1. Government Licensing/ Government Control: The government may grant license for the production of a particular commodity only to one producer. Accordingly, monopoly comes into existence. Also, the government may decide to control the production of certain goods or services exclusively through its departmental undertakings, like Railways in India.

2. Patent Rights: New products may secure patent rights. It amounts to monopoly rights regarding the shape, design or other characteristics of the product. Likewise, patent rights may be secured on new technology. It prohibits the use of patented technology by others. Accordingly, monopoly market structure emerges.

3. Cartels: It refers to collective decision making by a group of firms with a view to avoiding competition and securing monopoly control of the market. Competing firms may reach a board agreement on the pricing and output policy so that competition is avoided and a sort of joint monopoly structure of the market emerges.

4. Natural Occurrence: Monopoly may exist as a natural phenomenon. The only spring of water in an island, for example may be under the control of one person who exercises full control over price of water, without any competition.