5.3.
Monopoly market
5.3.1. Definition and characteristics
Pure monopoly exists when a single firm is the only
producer of a product for which there are no close
substitutes.
The main characteristics of this market structure include:
1. Single seller:
A pure or absolute monopoly is a one firm industry.
A single firm is the only producer of the product;
2. No close substitutes:
The monopolist’s product is unique in that there are no
good or close substitutes.
For the buyer, there are no reasonable alternatives.
3. Price maker:
The individual firm exercises a considerable control over
price because it controls the total quantity supplied.
With the usual downward sloping demand curve for its
product, the monopolist can change product price,
by changing the quantity of the product supplied.
4. Blocked entry:
A pure monopolist has no immediate competitors
because there is no entry of other firms into the
monopoly firm’s market.
There are barriers which prevent entry of potential firms
into the industry.
These barriers may be economic, technological, legal,
etc.
Under conditions of pure monopoly, entry is totally
blocked.
5.3.2. Sources of monopoly
The emergence and survival of monopoly is attributed,
to the factors which prevent the entry of other firms
into the industry.
The barriers to entry are therefore the sources of
monopoly power.
The major sources of barriers to entry are:
i) Legal restriction:
Some monopolies are created by law in public interest.
Such monopoly may be created in both public and private
sectors.
Most of the state monopolies in the public utility sector
are public monopolies.
eg, postal service, telephone services, radio & TV
services, generation and distribution of electricity, rail
ways, airlines etc. …
ii) Control over key raw materials:
Some firms acquire monopoly power,
from their traditional control over certain scarce and key
raw materials that are essential to produce certain other
goods.
Such monopolies are often called raw material
monopolies.
For example, Aluminum Company of America had
monopolized the aluminum industry
because it acquired control over almost all sources of
iii) Efficiency:
a primary and technical reason for growth of monopolies is
economies of scale.
The most efficient plant produces at minimum cost,
eliminates its competitors and acquire monopoly power,
by reducing its price for a short period.
Such monopolies created through efficiency are known
as
Natural monopolies.
iv) Patent rights:
Patent rights are granted by the government to a firm
to produce commodity of specified quality and
character,
or to use specified rights to produce the specified
commodity,
or to use the specified technique of production.
Such monopolies are called patent monopolies.
5.4. Monopolistically competitive market
This market model can be defined as the market
organization in which,
there are relatively many firms selling differentiated
products.
It is the blend of competition and monopoly.
The competitive element arises from the existence of
large number of firms and no barrier to entry or exit.
The monopoly element results from differentiated
products, i.e., similar but not identical products.
A seller of a differentiated product has limited monopoly
power over customers who prefer the firm’s product to
others’.
The monopoly is limited because the differences among
the products are small.
The products are close substitutes for one another..
This market is characterized by:
(i) Differentiated product:
the product produced and supplied by many sellers in this
market is similar but not identical in the eyes of the
buyers
There is a variety of the same product. The difference
could be in style, brand name, in quality, or others.
Hence, the differentiation of the product could be,
real (e g. quality),
or fancied, (e.g., difference in packing). .
(ii) Many sellers and buyers:
there are many sellers and buyers of the product;
but their number is not as large as that of the perfectly
competitive market
(iii) Easy entry and exit:
like the PCM, there is no barrier on new firms that are
willing and able to produce and supply the product in the
market.
On the other hand, if any firm believes that it is not worth
(iv) Existence of non-price competition:
Economic rivals take the form of non-price competition in
terms of product quality, brand name, advertisement,
service to customers, etc.
A firm spends money in advertisement to reach the
consumers,
about the relatively unique character of its product,
and thereby get new buyers and develop brand loyalty.
Many retail trade activities such as clothing, shoes, soap,
etc are in this type of market structure.
5.5. Oligopoly market
This is a market structure characterized by:
• Few dominant firms:
There are few firms although the exact number of firms is
undefined.
Each firm produces a significant portion of the total
output.
• Interdependence:
Since few firms hold a significant share of the industry’s
output, each firm is affected by the price and output
• Entry barrier:
there are considerable obstacles that hinder a new firm
from producing and supplying the product.
The barriers may include economies of scale, legal,
control of strategic inputs, etc
• Products may be homogenous or differentiated.
If the product is homogeneous, we have a pure
oligopoly.
If the product is differentiated, it will be a differentiated
oligopoly.
Therefore, the distinguishing characteristic of oligopoly
is the interdependence among firms in the industry.
• Lack of uniformity in the size of firms:
Firms differ considerably in size. Some may be small,
others very large. Such a situation is asymmetrical.
•Non-price competition:
firms try to avoid price competition due to the fear of
price wars.
Firms depend on non-price methods like advertising,
after sales services, warranties, etc.
This ensures that firms can influence demand and build
brand recognition.
A special type of oligopoly in which there are only two
firms in the market is known as duopoly.
