The term monopoly is derived from the Greek word monopolin which means exclusive sale. Thus, pure monopoly is market structure in which a single firm is the sole producer of a product for which there are no close substitutes. Since the monopoly is the only seller in the market, it has neither rivals nor direct competitors. For example, you get your electricity supply from one agency, that is. State Electricity Board; you travel by railway train owned and run by government of India. All these are examples of monopoly. Furthermore no other seller can enter the market. In monopoly, there is no distinction between firm and industry. The firm is the industry since it is the only producer in the market. The monopolist is the price maker. He determines the price and this price will determine how much he is able to sell. Its demand curve slopes downward to the right.For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market.
— According to Koutsoyiannls, "Monopoly is a market situation in which there is a single seller, there are no close substitutes for commodity it produces, there are barriers to entry."
— In the words of Baumol, "A pure monopoly is defined as the firm that is also an industry. It is the only supplier of some particular commodity for which there exists no close substitute."
Types of monopoly
1) Pure monopoly and imperfect monopoly
Pure monopoly there will be a single seller of a product for which there are no close substitutes. It will have absolute monopoly power. We will simply note that because the pure monopolist does not have to worry about competitors in reducing price, it can raise its price without fear that customers will not move to other producers of the same product or similar products In the case of imperfect monopoly there are close substitutes. It has no absolute monopoly power. Imperfect monopolist has to worry about is losing customers to producers of distantly related products.
2) Technical monopoly
Technological monopolies occur when the good or service the company provides is has legal protection in the form of a patent or copyright. For example, if a company develops and patents a drug to cure brain cancer, that company has a legal monopoly over that drug.
Generally big forms have technological monopoly. Example Bajaj Motors Company has the technological monopoly in the DTS-i bike engine technology. And it has taken patent rights for this technology. No other motor company has the right to use DTS-i technology in the manufacturing of engines.
3) Simple monopoly
In the case of simple monopoly, price is charged uniformly to all customers without any discrimination.
4) Discriminating monopoly
Sole producer who charges different prices: a sole producer who divides the buyers' market and charges different prices to different customers
5) Private monopoly public or social monopoly
When an individual or private person controls a firm it is called private monopoly. When production is solely and operated by state or government it is called public or social monopoly. Eg: municipal water supply and power supply by APTRANSCO.
Why monopoly arise
A firm is a monopoly if it is the sole seller of its product and if its product does not have close substitutes. The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller in its market because other firms cannot enter the market and compete with it. Barriers to entry, in turn, have three main sources:
Monopoly resources: A key resource required for production is owned by a single firm.
Government regulation: The government gives a single firm the exclusive right to produce some good or service.
The production process: A single firm can produce output at a lower cost than can a larger number of producers.
Causes of monopoly
Government may grant license to any one person or firm only to operate in the case of public utilities. There are many reasons behind this. Where existence of many firms may misuse the resources and control by many firms over public utilities leads to clashes. Example Gas production, Oil extraction and power generation.
Producer may have scarce raw material, patent rights, and secret methods of production. In this case producer becomes monopoly. Example Sony corporation is the monopoly in the Walkman technology in mobile phones.
Special knowledge so it can produce the same product cheaper
Special knowledge so it can produce a new or better product that others can't imitate
Disadvantages of monopoly market
May restrict the supply of goods which cause the market fluctuation and lead to raise price.
Consumer choice is restricted in the case of price, quality and quantity. Because these all controlled by the monopoly firm only.
Less scope in the reduction of price.
Charges high prices when compare to all markets.
Advantages of monopoly market
Generally monopoly firm is rich. It can therefore spend sufficiently on Research & Development for product innovation and finding of new technological process and it can introduce new techniques.
Enables saving in expenditure on advertisement, publicity as this is only the firm in the market and has no competitors.
As the monopoly firm is financially sound, workers can go for higher pay.
Large firm has the capability to bear the high cost which involved in the innovation process.