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
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 Pn his sales fall to zero. So
even though a monopolist has complete freedom to charge any high price
this freedom is restricted by the consumerís 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 monopolistís 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: