Monopoly: Definition, Types, Features, Causes, Pros & Cons

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What is a Monopoly?

Monopoly Definition: A monopolist is a single seller or producer of a product which has no close substitutes.

Monopoly may be defined as a market situation where there is only one producer or supplier of a particular commodity that has no substitute and who has the power to influence the price of the commodity to his own favour. The commodity sold by a monopolist is usually differentiated.

Main Features of a Monopoly

  • As a single seller or producer of a product, he faces no competition and can vary his supply to change the price as he likes.
  • The monopolist cannot determine both the quantity and price he wishes to sell. He can only control whichever of the two he wishes and leaves the consumers to control the other.
  • The monopolist is known to make abnormal profits and exploit consumers.
  • Entry into the market is highly restricted.
  • There is no close substitute for the goods and services.

Types of Monopolies

  • State monopolies: These are those that emerge as a result of government legislations that give firms the exclusive privilege to be the sole producers or suppliers of certain goods and services.
  • Natural monopolies: These are firms, which given the nature of their output (which requires large scale investments) have turned out to be natural monopolies either on account of their efficiency or uniqueness in the design of their products or sourcing of raw materials.

Causes of Monopoly

  • Single ownership of a factor of production i.e. sole ownership of a large deposit of raw materials or possession of a unique or rare skill by a surgeon or a dentist in a community.
  • Conferment by law of import licences for scarce materials and patent rights given only to certain firms or legally recognized professional organizations e.g. Nigeria Bottling PLC, the only producer of Coca-Cola in Nigeria.
  • Pioneering establishment of a project that involves high initial cost or investment which will make entry difficult to potential competitors e.g. Iron and Steel Industry.
  • Superior operational efficiency in production and marketing which enables a company to take over other firms in the industry, e.g. Nigerian Breweries Company PLC.
  • Acquisition of copy rights that makes the producer the only supplier of his products within a given period e.g. books published by University Press PLC.

Price and Output Determination Under Monopoly

Being the sole supplier or producer of a product, a monopolist can either have full control over the price he charges for his product or the quantity he wishes to sell. He can control either the price or the quantity but not both.

Price and Output Determination Under Monopoly
Price and Output Determination Under Monopoly

In the image above, the marginal revenue curve (MR) and the average revenue curve (AR) of a monopoly firm are shown to be different from what they look like under perfect competition.

The AR curve is shown to be different from the MR curve because in order for a monopolist to be able to sell extra units of his product, he has to lower his price which means a fall in his marginal revenue and vice versa.

That is why at all times the marginal revenue curve and the demand curve are not the same, as shown in the image. The equilibrium level of output is determined at point B where marginal cost and marginal revenue are the same.

The monopolist will however charge a price (M) making an excess profit represented by rectangle (PMTE). This means that marginal revenue is no longer equal to price as is obtained under perfect competition.

Advantages of a Monopoly

  • State monopolies can provide goods and services at relatively subsidized prices to enhance citizen’s welfare.
  • It can eliminate excess capacity and allow the reaping of economies of scale which may lower the cost of production and eventually benefit the consumers.
  • A monopolist has an incentive to engage in research and development since it has larger resources and an established market.
  • The existence of monopoly fimts reduces the need for excessive advertising and violent price-war.
  • Trade unions, professional associations by virtue of their monopolistic positions are able to maintain high standards of living and enhance the remuneration of members.

Disadvantages of a Monopoly

Under-utilization of societal resources. In order for a monopolist to charge the monopoly price, he may supply fewer products into the market thereby under-utilizing labour and other productive resources.

Monopolists sometimes reduce the welfare of the consumers by charging them exploitative prices.

Lack of competition may lead to inefficiencies e.g. poor services and lack of enterprise.

A feeling of complacency on the part of a monopoly can lead to degeneration in technical progress, research and innovation.

Control of Monopoly

The following points are some of the measures that can be used to curtail or eliminate the power of monopoly:

  • Taxing the excess profit.
  • Nationalizing or privatizing the industry.
  • Legislation to regulate or fix prices of monopoly products and prices of factors of production.
  • Reduction or elimination of import duties, tariffs and other quantitative restrictions on trade.