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In short, natural monopolies exist because it is able to provide a product or service at a lowerĬost than a competitive market would offer. Therefore, other firms do not want to enter the market because there is no profit to be made. If two companies were to build and offer separate lines, the costs would be higher than what they would be under a monopoly. To build new sewers or power lines would be costly, inefficient, and impractical. This is because the cost to build another track would be over and above what a competitor would make back in profit. This derives from the fact that its creation originates from variables that are not man-made.įor instance, railways are a prime example of a natural monopoly. One type of monopoly is the natural monopoly, which is called ‘natural’ because there is no direct government involvement. So let us look at the 3 types of monopoly below: 1. All three have unique characteristics and causes. There are three types of monopoly: Natural, Un-natural, and State.

Monopolies can lead to higher prices, reduced output, and decreased consumer welfare.A monopoly is a market structure in which a single firm is the sole seller of a product or service, without any close substitutes.What is a monopoly and what are its three main features?Īnswer: A monopoly refers to a firm which has a product without any substitute in the market. Therefore, he has no control over the prices of the inputs that he uses. He is not the sole buyer of the inputs but only one of the many in the market.

Talking about the cost of production, a monopolist faces similar conditions that a single firm faces in a competitive market. Unfortunately, there is no theoretical basis for determining the direction and extent of this shift. In the long-run, the demand curve can shift in its slope as well as location. Therefore, he faces a negatively sloped demand curve for his product. In fact, the monopolist faces demand conditions similar to the industry as a whole. Hence, the demand conditions for his product are different than those in a competitive market. If a monopolist wants to increase his sales, then he must reduce the price of his product to induce: This is because of the decrease in price. Take a look at the table below: Quantity SoldĪs you can see in the figure above, both the revenue curves (Average Revenue and Marginal Revenue) are sloping downwards. Also, when the price changes, the average revenue, and marginal revenue changes too. Therefore, a monopolist can increase or decrease the price. Revenue curves under a MonopolyĪ monopolistic firm is a price-maker, not a price-taker. Sometimes, the monopolist works in a small market making it economically challenging for new firms to enter. There are many reasons for this like legal barriers, technology, or a naturally occurring substance which others cannot find. Strong barriers to the entry of new firmsĮven if the monopolist firm is earning super-normal profits, new firms face many hurdles in trying to enter the industry. Therefore, the monopolist can determine the price of his own choice and refuse to sell below the determined price. Remember, a monopoly can only exist when the cross-elasticity of the product that the monopolist produces is zero. If a close substitute exists, then the monopoly cannot exist. In a monopoly, the product that the monopolist produces has no close substitute. Since there are several buyers, an individual buyer cannot affect the price in a monopoly market. Therefore, the firm’s demand curve is the industry’s demand curve. This is because there is only one producer and/or seller. Also, in a monopoly, there is no difference between the firm and the industry. The primary feature of a monopoly is a single seller and several buyers. Equilibrium under Monopolistic CompetitionĪfter monopoly definition, let’s take a look at the features of a monopoly: Single seller and several buyers.Equilibrium under Perfect Competiton – II.Equilibrium under Perfect Competiton – I.Pure monopoly suggests a no substitute situation.‘ Browse more Topics under Analysis Of Market

The monopolist’s demand is the market demand. Braff – ‘ Under pure monopoly, there is a single seller in the market. Therefore, for all practical purposes, it is a single-firm industry. In economics, a monopoly refers to a firm which has a product without any substitute in the market. The term monopoly means a single seller ( mono = single and poly = seller).