Monopoly, in economics, implies presence of a single supplier or producer of a product. ‘Mono’ means single and ‘Poly’ means supplier. Thus, monopoly, is a market structure characterized by a single supplier of a commodity which doesn’t have close substitutes.
Since there is a single producer and there is lack of competition, the supplier would decide the price at which it would like to offer the good or service. The consumer in this case becomes the price taker and the supplier, the price setter or the price maker. This price decision would be based on the seller’s motives to maximize profits. This means that depending upon its cost and revenue structure, it would set the price in such a way that its costs are minimized and profits maximized.
Depending on the market that the seller is serving, it would also be able to practice price discrimination. That is, charging a different price depending on the customers it is serving. (An example of price discrimination, though not belonging to the monopoly market, would be of a doctor, who might be charging a different consultation fee across different clinics)
Why are Barriers to Entry High in Monopolies?
In such a market, entry barriers are high for a new producer. Why is this the case? This could be because of various reasons
- Access to Resources – Seller is the owner of a key resource that is essential for the production of the good or service
- Legal Barriers – Seller has a patent for production of a particular product
- High start-up costs – large producers at times might have a cost advantage, where in they can afford to invest heavily and operate at a minimum scale required to be viable. Over time, as the production increases, they are able to reap benefits of economies of scale. This also leads to a Natural Monopoly, where in the large firm, due to its sheer size, can offer the said product at a cheaper price than any new small entrant
- Government Monopoly – the government is the sole supplier in the sector
- Innovation capabilities and first mover advantage – A seller might enjoy a monopoly, albeit for a limited time, if they can be the first to bring to the market a product that is based on cutting-edge technology. Over time though, such firms might lose their monopoly, as other firms catch-up.
Examples of Monopoly
- Railways in India. Indian Railway Catering and Tourism Corporation (IRCTC), is the only organization that operates railways in India, providing, ticketing, tourism and catering services. This is an example of a Government Monopoly.
- Google Search Engine is again a monopoly, accounting for nearly 96% of search queries. Though there are other search engines, but their market share is miniscule.
- Xerox Corporation, which was the manufacturer of paper copying machine, is another example of monopoly. There presence was so significant, that the term Xerox had become synonymous to paper copying. An example of both legal barriers and first mover advantage.