MONOPOLY

The word monopoly is derived from two Greek words-mono and ploy. The meaning of mono is single and poly means selling. Monopoly therefore prevails in the market when there is a single seller. In Economics the monopolist is defined as the sole producer of a product which has no close substitutes.

            According to Stigler a monopoly is firm producing a commodity for which there are no close substitutes.

            In the words of Donald Watson, “In the standard definition, a monopolist is the only producer of product that has no close substitutes”.

            According to Benham, the monopolist, controls the supply of some commodity for which there is no very close substitutes.

            According to Stonier and Hague, “The monopolist is the sole producer of a product which has no closely competing substitutes”

Features of Monopoly

            It is the situation of single control over the market. Commodity produced by the monopolist has no close substitutes. There is no possibility for any one single producer or joint stock organization or any organization or Government.

Types of Monopoly

            Monopolies are of several types, Generally they are classified in the following manner:

                                                             

Natural Monopoly

            When monopoly arises due natural factors like climate, we call it as natural monopoly. For example, gold mining in South Africa, Tea in India, Petrol in Arabia, Tobacco in Greece etc.

Social Monopoly

            These monopolies are created to satisfy some social wants. For example, all public utility concerns – Posts and Telegraphs. Railways, Electricity etc.

Legal Monopoly

            Some monopolies are legally granted and they are called legal monopoly. For example special brands, trade names, patents and copyrights are the examples of legal monopoly.

Voluntary Monopoly

            A voluntary monopoly is created when the firms producing the same product join together voluntarily to control the supply of the commodity with a view to earn more profits. The objective here is to avoid unnecessary competition. For example, All India Sugar Syndicate. This monopoly is classified into three classes, Viz. Trust, Cartel and Holding Company.

            Trust is a monopolistic combination of many firms. The best example of a trust in India is A.C.C. in Indian Cement Company.

            Cartel is also a monopolistic combination of the firms. The Indian Sugar Syndicate is the best example of Cartel in India.

            Holding Company is a modern method of bringing a number of firms under one control. It is primarily a financial institution. The Holding Company has become an important organization for large concerns in both Great Britain and the United States.

Price – Output Equilibrium under Monopoly

Short Period

a) Abnormal Profit:

            Considering that the monopolist faces an inelastic demand curve, the monopolist will prefer to keep the prices high and the volume of production low. A monopolist may, both in the short run and long run make either profits or losses. In other words as in the case of Perfect Competition, the long run situation may not be very different here. It will only be similar to the short run, because there are strong barriers to entry and exit.

            In the graph the monopolist reaches the equilibrium at that particular point, where MR = MC. This when extended to the X-axis, we get the equilibrium output and when extended to the AC curve and the AR curve respectively, we get the equilibrium price and the average cost for the equilibrium level of output. In the graph ORPRM is the Total Revenue. The Total cost is OCSM. The shaded portion CPRS indicates the abnormal profit.

Figure 10.1

 b) Loss:A monopolist may also make losses. This situation is also depicted in the graph. The cost curves lie high, well above the average revenue curve. Due to the highly inelastic nature of the demand curve, the firm reaches the equilibrium output level, even before the average cost reaches the minimum point. In other words, the firm achieves the equilibrium level of output, much before it reaches the economically efficient level of production (that level of production, when AC is minimum). Because the cost curves lie above the average revenue curve, the firm makes losses. In the graph OCSM is the Total Revenue. The total cost is OPRM. The shaded portion CPRS indicates loss.

                                                                           

Figure 10.2

           

In the graph OCSM is the Total Revenue the Total Cost is OPRM. The shaded portion CPRS indicates Loss.

Long Period :

            Long period earns abnormal profit

 

Fig 10.3

            In the graph the monopolist reaches the equilibrium at that particular point, where MR = MC. This when extended to the X-axis, we get the equilibrium output and when extended to the AC curve and the AR curve respectively, we get the equilibrium price and the average cost for the equilibrium level of output. In the graph OPRM is the Total Revenue. The Total cost is OCSM. The monopolist is a single seller or producer. So definitely gets abnormal profits. The shaded portion indicates abnormal profit.

Equilibrium of a Monopolist in the Short and Long Run

            Under monopoly, the distinction between firm and industry disappears. Thus, the firm’s equilibrium is also the industry’s equilibrium. Since there is no competition, the long run situation may not be very different than that of the short run. In perfect competition, we observed a situation where new firms enter or exit, depending upon whether a majority of the firms under perfect competition may profits or losses. Since, strong barriers to entry and exit, exist in the case of monopoly, entry of new firms or exit of the loss-making monopolist is prevented. Thus, there may be very little difference between the long run and the short run. In the long run also, firms may continue to make super normal profits or may make losses. Therefore, the long run equilibrium will be similar to that of the short run equilibrium situation. The only difference being that in the long run the firm may be facing a demand curve, which is slightly more elastic.

The Consequences of Monopoly

            Monopoly has been criticized and considered as against public interest from the days of Adam Smith. It is assumed that the powerful monopolist exploits the consumers whereas competition helps the consumers. Traditional economic theory has advocated competition as the best market situation compared to monopoly. In this section, we shall discuss the case for and against monopoly.

The Case for Monopoly

            The last Sir Henry Clay has pointed out certain merits of monopoly in his article – The campaign against Monopoly and Restorative Practices’ published in Lloyds Bank Review of 1952. He has pointed out some instances where in monopoly may be in the public interest.

1. Monopolies May produce more efficiency

            Monopolies because of their large organization can produce more efficiently and at a lower cost compared to competitive firms. This organization can get the technical and commercial advantage over the smaller firms of competition. Sir Henry Clay gives the example of the British Cement Industry, which is the monopoly firm and points out that its prices are lowest in the world. The British Electric Lamp Company is another example of monopoly organization producing more efficiently. This industry is working at lower costs of production.

2. Monopoly can withstand depression

            Monopoly because of its larger financial resources and strength can withstand the depression. This is not possible for the small competitive firms. If the depression is severe, they have to close down their business, for example, the British Cotton Industry survived the depression of 1929 – 32. The other monopoly concerns like steel, coal and shipbuilding could also withstand the depression because of their monopoly actions.

3. Cut-throat competition may ruin the business

            Clay has pointed out that under competition the price may be driven down to such a lower level which may not even cover the cost of production. Therefore, each firm tries to get larger share in the market. This may result in cut-throat competition and such competition may ruin the business. Such a situation does not arise under monopoly as there is absence of competition.

4. Reduce inequality of income

            Generally, it said that monopoly increases the inequality of income. The monopolist gets profit by exploiting the consumer. But there are certain circumstances in which monopoly reduces inequality of income. For example, the monopoly of laborers i.e. trade unions fighting for higher wages reduce the inequality of income and wealth.

The case against Monopoly

1. Lesser output

            Monopoly results in lesser output and higher price compared to perfect competition.

2. Monopoly prevents the best use of resources

            A monopoly firm produces at the point where marginal cost curve is equal to marginal revenue and not the average cost is at a minimum as under perfect competition, Monopoly prohibits the best use of resources.

3. Consumers are at a loss

            Under conditions of perfect competition the consumer buys the last unit for a price equal to the marginal cost of it. The consumer stands to gain under perfect competition. Under conditions of monopoly the price is greater than the marginal cost of production. Therefore, the consumer is the sufferer under monopoly.

Controls of Monopoly

            The monopolist cannot exercise an absolute control over prices and output. He cannot behave like an autocrat and at the most he can have control over prices and output. The monopoly power is limited by the following factors:

1. Potential Competition

            A monopolist is always worried about the potential rivals. When the monopolist changes a very high price and earns enormous profits, dynamic entrepreneurs will enter into the production of similar commodities and share the enormous gains which he is making. This possibility of competition limits the use of monopoly power.

2. Substitutes

            This acts a threat to monopoly power. The substitute may not be always satisfactory. If the monopolist charges a very high price, the consumers use the substitutes and this may put a limit to the monopoly power. For example if the State Electricity Board charges a very high price for the domestic consumers, they may check this by using gas or kerosene.

3. Consumer’s Association

            The abuses of monopoly can be controlled by forming the association of consumers. The consumers may resist the high price charged by the monopolist by boycotting the purchase of the commodity. The bargaining power of the consumers increases when they have a better organization. This is also considered as one of the powerful means of controlling the monopoly.

4. Anti-Monopoly Legislation

            The monopolies may be controlled by anti-monopoly legislation. The legislation may aim at

1.      Preventing monopoly firms from coming into existence.

2.      When they come into existence; get them dissolved and split them into a number of competing firms: and

3.      Prevent the unfair practices of the monopolist.

5. Publicity

            Pigou has suggested an interesting method to control monopoly. He contends that the monopoly firm will be afraid of the public if all their details are published very often. The details regarding the use of unfair practices, donations to political parties, their huge profits and bribing of legislators. When such details are given a wide publicity, the monopolist may follow more reasonable method.

6. Nationalization

            This solution is popular in counties like India. This may solve some of the problems of monopoly. Therefore, it is suggested in many countries to control monopolist.

Related Topics 

OBJECTIVES OF PROFIT MAXIMIZATION
MEANING AND SCOPE OF BUSINESS ECONOMICS
DEMAND ANALYSIS
ELASTICITY OF DEMAND
DEMAND FORECASTING
BUSINESS CYCLES – TYPES AND PHASES 
MARKET STRUCTURE
PERFECT COMPETITION
SOCIAL RESPONSIBILITY OF BUSINESS
MONOPOLISTIC COMPETITION
PRICE DISCRIMINATION
OLIGOPOLY AND DUOPOLY
ECONOMIC LIBERALIZATION
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