Monopoly: Feature, Pricing under Monopoly

The word monopoly has been derived from the combination of two words i.e., ‘Mono’ and ‘Poly’. Mono refers to a single and poly to control.

In this way, monopoly refers to a market situation in which there is only one seller of a commodity.

“Pure monopoly is represented by a market situation in which there is a single seller of a product for which there are no substitutes; this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy.” Bilas

“Monopoly is a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry”. -Koutsoyiannis

“Under pure monopoly there is a single seller in the market. The monopolist demand is market demand. The monopolist is a price-maker. Pure monopoly suggests no substitute situation”. -A. J. Braff

“A pure monopoly exists when there is only one producer in the market. There are no dire competitions.” -Ferguson

“Pure or absolute monopoly exists when a single firm is the sole producer for a product for which there are no close substitutes.” -McConnel

Features of Monopoly

We may state the features of monopoly as:

1. One Seller and Large Number of Buyers

The monopolist’s firm is the only firm; it is an industry. But the number of buyers is assumed to be large.

2. No Close Substitutes

There shall not be any close substitutes for the product sold by the monopolist. The cross elasticity of demand between the product of the monopolist and others must be negligible or zero.

3. Difficulty of Entry of New Firms

There are either natural or artificial restrictions on the entry of firms into the industry, even when the firm is making abnormal profits.

4. Monopoly is also an Industry

Under monopoly there is only one firm which constitutes the industry. Difference between firm and industry comes to an end.

5. Price Maker

Under monopoly, monopolist has full control over the supply of the commodity. But due to large number of buyers, demand of any one buyer constitutes an infinitely small part of the total demand. Therefore, buyers have to pay the price fixed by the monopolist.

Price Determination under Monopoly Market

A monopolist is the sole seller of a commodity. The aim of a monopolist is to get maximum profits. Of course, everyone who enters business aims at getting maximum profit. But there is no scope for getting abnormal profit under competition for there are several number of sellers. But the monopolist is the sole seller of a commodity. So he will take advantage of the situation and try to get maximum profits. For, all those who want the good should buy it only from him. They have no other way. So in determining the price of a commodity, he will be guided by only one motive, that is, to maximize his profits.

We know in a market, price is determined by the interaction of supply and demand. Under monopoly too, the price of a good is determined by the interaction of supply and demand, but in a different way. Under perfect competition, there will be several number of sellers. But under monopoly, the monopolist is the sole seller of a commodity. So he can control the supply of his good. But he cannot control demand for there are several number of buyers as in the case of competition.

The aim of a monopolist is to maximize his profits. For that, he can do one of the following two things. He can fix the price for his good and leave the market to decide what output will be required. Or he can fix the output and leave the price to be determined by the interaction of supply and demand. In other words, he can fix the price or the output; he cannot do both. The amounts he can sell at any given price depend upon the conditions of demand for his good.

Just because the monopolist is the sole seller of the commodity, we should not think he can fix whatever price he likes. Of course, he can do it but he will not make profits. Benham has put it will in the following lines: “The fortunate monopolist can fix what price he chooses, but if he cannot sell enough, he doesn’t gain; he loses.” The monopolist, therefore, has to study the conditions of supply and demand. He must carefully estimate the demand for his goods. He has to see first whether his commodity has got elastic demand or inelastic demand. If the demand for the commodity is elastic, the monopolist cannot fix a very high price because a rise in price may result in a fall of demand. So he cannot sell much and he may not get large profits. In such a case, the monopolist will fix a low price. If the good in question has inelastic demand, the monopolist may fix a high price. It is so because even if the price is high, there will not be a fall in demand. Then the monopolist will get maximum profits by fixing a high price.

The monopolist should also study the conditions of supply. He must estimate the cost of production for different quantities of his goods. If his firm is producing under the conditions of the Law of Diminishing costs, cost of production per unit will fall as output increases. Then the monopolist will try to fix a low price and sell more units. Thereby he will try to get maximum profits. On the other hand, if his firm is working under conditions of increasing costs, cost of production per unit will rise as output increases. Under such circumstances, the monopolist will generally restrict his output and sell his goods at a high price. Thereby he will try to get maximum profits. Suppose his firm is working under conditions of constant costs, the price he fixes will depend largely on the conditions of demand for his goods.

The monopolist will get maximum profit at the output at which his marginal cost and marginal revenue are equal to one another.

In the earlier stages of production, marginal cost may be much less than the marginal revenue and the monopolist may make huge profits. But after a certain stage is reached the marginal cost will rise and it may tend to be higher than the marginal revenue. The monopolist will stop producing additional units at that point. So price is fixed by the monopolist at that point where his marginal costs and marginal revenue are equal to one another. There is one more thing we should note. Under perfect competition too, marginal revenue = marginal cost = price. In other words, marginal revenue is equal to price. Under monopoly, it is true that marginal cost is equal to marginal revenue. But marginal revenue is not equal to price. Marginal revenue is always less than price. This is so because in order to expand his sales, the monopolist must reduce his price. This will result in a fall in his marginal revenue. So marginal revenue is less than price. Since marginal cost is equal to marginal revenue, marginal cost is also less than price. In other words, price is higher than marginal cost. We may summarize it as follows:

Under monopoly, marginal cost = marginal revenue; but marginal revenue is less than price, therefore marginal cost is less than price. In other words, price is greater than marginal cost.