A
pure monopoly exists when there
is one and only supplier. In this case the firm will be the
industry. Natural
monopoly occurs when there is only one firm in the industry producing at
minimum efficient scale. This situation arises when there is only source
of supply or economies scale are significant and permit one firm to supply the
entire market at lower price than any other number of firms.
The
characteristics or features of
monopoly are as follows.
(1)
Being the only supplier of a good or service monopoly faces no competition from other firms.
(2)
Since there is no competition, the monopolist is able to earn very high profits
known as abnormal profits.
(3)
Monopolist produces all of a particular product for a market. So it can
raise the price of its product by supplying less of it, and hence they are price makers.
(4)
Although the new firms are attracted by the abnormal profit in the market,
monopolists prevent the entry of new firms by creating barriers to entry.
(5)
Monopolist firm may hide the price it charges to one group of consumers from
another group which it charged a different. So in monopoly there will be imperfect information.
(6)
Usually monopolist will produce different varieties of their products in order
to make others difficult to copy them. These types of
products are called non-homogenous
products.
There
are many advantages of monopoly.
Monopolist will be able to avail
economies of scale of large scale production. They also may have natural monopolies.
Monopolist can spent on research and development for new products or production techniques without
the risk of new entrants. They can afford to sell goods at lower price than a firm in a
competitive market {but normally they don’t sell]. These firms are large
in size so that they can compete in the
global markets.
There
are many disadvantages of monopoly.
Monopolists do not worry about losing their customers to other firms so
they inefficiently run and
provide a poor service to their
customers. They normally produce low output so as to keep a very high price. The
monopoly firm will decide what goods and service to produce for
customers and at what prices, this is known as producer’s sovereignty. Monopolists exploit consumers by charging
well above average cost.
If
the monopolist seek to maximize sales
revenue they produce where MR = 0, at this the total revenue is at its
peak. This is to ensure the increase in salaries and make other firm more
difficult to take over the company.
When
the firm seeks normal profit they produce where average cost equals average
revenue. State owned monopoly may produce at maximum profit output where
marginal cost is equal to average cost, at this output the firm achieve productive efficiency or producing
at optimum output.
When
the firms produce socially
efficient output (socially optimum output) it will be at Price (average
revenue) is equal to marginal cost.
When
the firm set Predatory price,
(price with an objective of driving the competitor out of the market) they
set the price above the normal profit level but below the maximum profit
level.
Sometimes
monopolists engage in price
discrimination (charging different prices in different market for
reasons other than costs).
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