Understanding Monopoly Market Structure

Monopoly and How the Existence of a Single Dominant Supplier for a Commodity Affects the Marketplace, and Consumer Demand Theory

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1. Understanding Monopoly Market Structure

1. Introduction

A monopoly market is an economic term used to describe a situation in given market whereby there exist just one seller or provider of a particular product or service and with completely zero substitutes. This is different from a perfectly competitive market whereby players in a market experience a perfectly elastic demand and supply curve. This implies that in a perfectly competitive market structure in the sense the marginal revenue and price are equal. In the case of monopolistic market structure players (firms) experiences an inelastic demand and supply curve. This is because of the fact that the seller is alone and basically is the market itself. The difference in demand curves explains the difference between monopoly and other market structures and in particular perfectly competitive market structure. Normally market demand curves that are evident in a monopoly market structure have negative slopes and this implies that the marginal revenue will be below that curve (Amacher, R., & Pate, J, 2013).  

One major feature of a monopoly market is that there is zero competition as there are no other players offering similar services and therefore the existing business or rather company is the sole provider of that specific service or product in a specific area. Monopoly market structure is completely unique and different from the other 3 market structures; oligopoly, perfect competition, and monopolistic competition. Since the provider of this service or product is one there is no marketing and advertising required to penetrate into a given market, increase revenue and profits, gain and retain customers, and to attract customers into the business. Monopolies generally are free to determine their own prices. However, these prices should be reasonable for the buyers in the industry. They should be reasonable since they are not competing with any other business offering similar services.

1. Types of monopoly

Perfect Monopoly

This is also known as absolute monopoly. In this form of monopoly there exists only one seller with no close substitute for its products and services. There is zero competition in this kind of monopoly. In a real or rather true economy this kind of monopoly does not practically exist (Haider, 2010).

Imperfect Monopoly

This type of monopoly is also referred to as limited or relative or simple monopoly. It refers to a form of monopoly where there is a sole seller of goods and services with completely zero substitute. This form of monopoly is different from a perfect monopoly in that there could be remote substitutes resulting in fears of competition so certain levels. A good example would be the mobile industry where it may face competition from fixed landline phone service providers (Haider, 2010).  

Private Monopoly

This type of monopoly exists when production is controlled, owned and managed by a specific individual or privately owned firm or organization. A good example of such form of monopoly would be Tata, Bajaj, and Reliance all found in India (Haider, 2010).

Public Monopoly

This type of monopoly refers to a monopoly that is created when production is managed, controlled and owned by government or any public entity. The reason why governments creates such type of monopoly is that they use them to offer its citizens welfare services to improve their lives. This type of monopoly is at times known as Welfare monopoly. A good example for this form of monopoly is Railways and defense among many others.  This type of monopolies only exist to offer services that can only be offered well by government than private entities (Akrani, 2010).

Simple Monopoly

This type of monopoly refers to a situation whereby a monopoly charges single or rather uniform prices to all of its customers. This form of monopoly exists only where a firm operates in single market limited to a certain region (Akrani, 2010).

Discriminating Monopoly

This form of monopoly occurs when a monopoly applies discriminative prices for the same product on similar customers. This type of monopoly exists in scenario whereby a monopoly is not limited to a certain market or specific region (Akrani, 2010).

Legal Monopoly

This form of monopoly exists on the basis of patents, trademarks, copy rights and statutory regulations of government. A good example of such monopoly is the music industry.  It is created whereby a certain individual or firm has a legal right to offer certain product or service (Akrani, 2010).

Natural Monopoly

Natural monopoly happens due to certain firm or individual obtaining natural advantage such as accessibility to natural resources or strategic location.  For instance the Gulf nations tend to possess monopoly in exploitation of crude oil since they have plenty of oil resources available to them (Akrani, 2010).

 Technological Monopoly

Technological monopoly is created due to a firm enjoying economies of large scale in new production techniques, capital goods, and production. A good example of such monopoly is automobile industry, engineering industry and software industry among many other (Akrani, 2010).

Joint Monopoly

This type of monopoly is created when two or more business come together through cartels, amalgamation or syndicates to form a monopoly. For instance if burger producing firm and pizza producing firm are two competitors in a market and they merge together there is reduced competition. This means that they can enjoy monopoly power in the in the food industry or market. This kind of monopoly does not exist in a real economic situation as the mergers may not result in single seller being created. However it results in reduced competition and increased market power (Akrani, 2010).

1. Characteristics of a Monopoly Market Structure

                  Lack of Substitutes

In a monopoly market there is only one sole producer of goods and services without a close substitute. The product or service that is offered by a monopoly is usually unique and different from any other. For instance Apple was considered a monopoly when it started developing iPad as it was viewed as having a monopoly in the tablet industry (Agarwal, 2017)

Barriers to Entry

There exists a large number of barriers to entry in a monopoly market which are either set up by the monopolist itself or by government. The reason why there exists a large number of barriers is to prevent other players from entering the market which would take away the complete control of a business on supply and market in general. Therefore it can be interpreted to mean that in a monopoly there is no clear distinction between industry and firm. In the absence of barriers a monopoly market would not exist. Economies of scale always creates natural barriers creating space for just one cost-efficient firm in a given market or industry (Agarwal, 2017).