Monopoly is characterised by a single seller who acts as a price setter/Price makers .

Monopolists are called price setters/ Price makers because they select their own price and
supply the entire quantity demanded. The word monopoly come from a Greek word
‘monos polein’, which means alone to sell. For the monopolist to have an effective control
over the market, the monopolized product should not have any close substitutes. Monopoly
does not imply that there is a single producer, because monopolists need not produce their
own output. There would be many producers who supply their product to monopolists. The
essence of monopoly is that there is a single seller who sets the price. As an example, we
can cite OPEC (Oil and Petroleum Exporting Countries) which consists of the major
producers that collectively set the price of oil. A monopolist might not set a single price for
all customers and may practice price discrimination, i.e., may charge different prices to
different customers

Key Features of Monopoly

• Single Seller
• Price Maker
• Barriers to Entry
• Control Over Supply
• Lack of Competition

Single Seller
In a monopoly, only one entity sells a particular product or service, making it the exclusive
provider. This unique position allows the monopolist to influence market conditions,
including pricing and availability, without direct competition, shaping the market according
to its business strategies and objectives.
Price Maker
A monopolist acts as a price maker, possessing the authority to set prices for its products or
services due to the lack of competition. This power enables the monopolist to adjust prices
to maximize profits, potentially leading to higher prices than competitive markets, affecting
consumer choice and market efficiency. n some cases, a monopolist might charge different
prices for the same product depending on the situation, which is called price
discrimination. For example, a hospital might charge different rates to patients with
different health insurance plans.

Barriers to Entry
Monopolies are protected by high barriers to entry, which can be legal (patents, exclusive
rights), technological (advanced technology), or economic (high startup costs). These
barriers prevent new entrants from competing in the market, securing the monopolist's
position and allowing it to operate without the threat of new competition.
Control Over Supply
A monopolist has complete control over its product or service supply. By manipulating the
quantity available to consumers, the monopolist can directly influence market prices and
demand, using supply adjustments as a tool to further its market dominance and profit
objectives.
Lack of Competition
The absence of competition is a hallmark of monopoly, where the single seller faces no
direct competition. This lack of competition can lead to less innovation, lower quality, and
higher prices, as the monopolist has no incentive to improve its offerings or reduce prices
to attract consumers, contrasting sharply with competitive market dynamics.

The main causes that lead to monopoly are: i) Ownership of strategic raw materials or
exclusive knowledge of techniques of production. ii) Patent right on a product or on the
process of production. iii) Government licensing or the imposition of foreign trade barrier
to restrict foreign competitors. iv) The size of the market may be such that it cannot support
more than one seller. v) The producer may exhibit increasing returns to scale (as it happens
in transport, electricity and communication), as a result, cost of production declines when
a firm operates on a large scale and this might throw out other producers who are unable
to complete with the low cost firm. vi) Practice of limit pricing may prevent new entries in
a market and can create monopoly. Such a pricing policy may be combined with other
policies such as heavy advertising or continuous product differentiation,

which render entry unattractive.

Types of Monopoly
Monopolies vary based on their origin of dominance, including technological innovation,
government designation, geographic exclusivity, or substantial infrastructure
requirements, each shaping the market's competitive landscape. It can be segregated based on
the below types:
• Natural Monopoly
The size of the market may not allow the existence of more than as ingle large plant. In
these conditions it is said that the market creates a 'natural'monopoly, and it is usually the
case that the government undertakes the production of the commodity or of the service so
as to avoid exploitation of the consumers . Also, A natural monopoly occurs when a single
firm can supply a product or service to an entire market at a lower cost than two or more
firms could. It is often due to high fixed or infrastructure costs. These are common in
industries where the infrastructure investment is massive and not duplicable efficiently.

Example: Indian Railways is a classic example of a natural monopoly in India. The

extensive network and the massive infrastructure required make it impractical for multiple
entities to operate parallel railway systems.

• Geographic Monopoly
Geographic Monopoly
This type of monopoly exists when a company is the sole provider of a product or service
in a particular geographic location, often due to the impracticality of competition entering
the market.

Example: In certain remote areas of India, a single petrol pump operated by Indian Oil
Corporation Limited (IOCL) might serve as the only fuel source for miles, creating a
geographic monopoly.
3. Technological Monopoly
A technological monopoly arises when a company has exclusive ownership of a technology,
patent, or methodology, giving it a competitive advantage that is difficult for others to
replicate.
Example: Bharat Biotech's Covaxin, an indigenous COVID-19 vaccine, is an example of a
company holding a technological monopoly in India for a vaccine developed and
manufactured within the country.
4. Governmental Monopoly
Government monopolies are created when the government either owns or controls the
major supplier of a product or service, often for reasons of national security, to protect
consumers, or to control natural resources.
Example: India's Defence Research and Development Organisation (DRDO) operates as
a government monopoly in developing defense technologies and weapons systems, which
is critical for national security.
DEMAND AND REVENUE FUNCTIONS OF A MONOPOLIST
Since there is a single firm in the industry, the firm’s demand curve is identical to the
industry demand curve. Therefore, the demand curve of a monopolist in downward
sloping. For the sake of simplicity in our analysis, we assume that the demand curve of a
monopolist is a downward straight line.

Let the demand curve be given by

X = a – bP ; a and b are positive
X: quantity demanded,
P: price
The demand equation, ceteris paribus, is

The clause ceteris paribus implies that all the other factors (such as income, tastes,
other prices) which affect demand are assumed constant. Changes in these factors will
shift the demand curve. The clause ceteris paribus implies that all the other factors (such as
income, tastes,other prices) which affect demand are assumed constant. Changes in these
factors will shift the demand curve.

2. The slope of the demand curve is

The price elasticity of demand is

(a) At point D the elasticity approaches infinity

 COSTS
In the traditional theory of monopoly the shapes of the cost curves are the same as in
the theory of pure competition. The AVC, MC and ATC are U-shaped, while the AFC
is a rectangular hyperbola. However, the particular shape of the cost curves does not
make any difference to the determination of the equilibrium of the firm, provided that
the slope of the MC is greater than the slope of the MR curve (see below).
One point should be stressed here. The MC curve is not the supply curve of the
monopolist, as is the case in pure competition. In monopoly there is no unique relationship
between price and the quantity supplied

EQUILIBRIUM OF THE MONOPOLIST

A monopolist is always guided by profit motives and therefore to reach the equilibrium, it maximises
her profit.

Short-run Equilibrium In the short run, the monopolist cannot adjust it’s plant size but it maximises
its short-run profit by equating MR and MC. The second order condition required for equilibrium is
that MC cuts MR from below.

Mathematical Derivation of the Short-run Equilibrium Let the demand function in X=g(p) and the
inverse demand function is P= f1(X) The cost function of the monopolist is given by C = f2 (X). If

In the following figure, both the conditions MR= MC and MC cuts MR from below are met but the
monopolist does not make any profit due to the cost structure
Here SARC (short-run average cost) > P* (equilibrium price) of the monopolist. The monopolist makes
a loss of the amount given by the area abcd

In pure competition the firm is a price-taker, so that its only decision is output determination. The
monopolist is faced by two decisions: setting his price and his output. However, given the downward-
sloping demand curve, the two decisions are interdependent. The monopolist will either set his price
and sell the amount that the market will take at it, or he will produce the output defined by the
intersection of MCand M R, which will be sold at the corresponding price, P. The monopolist cannot
decide independently both the quantity and the price at which he wants to sell it. The crucial
condition for the maximisation of the monopolist's profit is the equality of his MC and the MR,
provided that the MC cuts the MR from below

Figure where the cost structure allows the firms to make profit

Figure 8.4
In the figure 8.4 above the firm is able to make profit because Pm, the monoplypric eis greater then
the SATC. SATC position is marked at B which is lesser than the PM

Long-run Equilibrium

In the long-run, the monopolist is endowed with the time to expand her plant or to use her existing
plant at any level which maximises her profit. Unlike perfect competition, it is not necessary for the
monopolist to reach a optimal scale (i.e., to build up her plant until she reaches the minimum point
of long run average cost curve). But we can say for sure that a monopolist will most probably continue
to earn supernormal profits even in the long-run (given that entry is barred) and she will not stay in
business if she makes losses in the long-run. However, the size of the plant and degree of its utilisation
crucially depend upon the market demand conditions. In the following three figures, we depict three
situations. In the first Figure 8.5, we show that the market size does not permit the monopolist to
expand to the minimum point of LAC. In this case not only her plant is of suboptimal size but also is
underutilised

The optimum use of the existing plant is at ‘a’ and the minimum point of long-run average cost is
given by ‘b’. Since the firm utilises the capacity ‘c’, there is excess capacity

Figure 8.5

In the 2nd figure (Figure 8.6) we show that the monopolist, in order to maximise profit,
must build a plant size greater than the optimal size (to the right of minimum point of
LAC) and will over utilise it. This happens when the market size is unduly large. Thus, the
plant that maximises the monopolist’s profit leads to higher costs for two reasons: first,
because it is larger than the optimal size and second, because it is over utilised. This is often
the case with public utility companies operating at national level.
Figure 8.6
Finally, in the 3rd figure (Figure 8.7) we show the case in which the market size is just large
enough to permit the monopolist to build the optimal plant and to use it at full capacity.

Figure 8.7
Thus, there is no certainty that in the long-run the monopolist will reach Monopoly optimal
plant size as in the case of perfect competition. Whether a monopolist stays in business in
the long-run will depend on the long run average cost curve. She will exit in the long run
unless all costs can be covered.
Long run equilibrium for the monopolist requires that LRMC = SRMC = MR