Monopoly is a market situation in which an individual or firm controls the total output or supply of a good or service which has no close substitutes. A monopolist is the only producer or seller of a particular commodity in the market. In real life, pure monopolists do not exist since there are hardly any goods or services that do not have substitutes.
What are the Features of Monopolistic Markets
1. There is only one seller or a combination of firms under one management, but there are many buyers. The single seller has no rivals.
2. The monopolist has the ability to control either price or output. He cannot control both at the same time. He can raise price if demand for his commodity is inelastic. On the other hand, he could earn higher prices by curtailing his output.
3. Entry is restricted or barred in monopolistic markets. Other firms o/ producers are not allowed to enter the trade when they wish.
4. There is no perfect substitute for the products of the monopolist. His product is not identical with the products of other producers.
5. There is an imperfect knowledge of market transactions. There is no free flow of information in the market and so the buyers are not aware of the ruling market price for the commodity.
6. The cost structure of the monopolist is unique. He does not have an identical cost structure with any other seller or producer.
7. The monopolist usually has transport costs. There is no free mobility of factors of production q and costs are incurred in transporting the and services to be sold.
8. There is price discrimination. He can sell different prices to different consumers in diferent markets.
9. The producer/seller makes abnormal profits in both the short-run and long-run.
10. In monopolistic market price is greater than arginal cost.
Types or causes of Monopoly (Bases of Monopoly)
1. Natural monopoly: Nature does not distribute its resources evenly over the earth. As a result, some areas have natural resources which are not found in other areas. This makes the areas where such resources are found monopolists in the supply of certain commodities. For example, Nigeria is a monopolist as far as the production of coal and crude petroleum in West Africa is concerned.
2. Social or government monopoly: This deals with the establishment of public corporations or other government enterprises. The government may set up a corporation to provide a particular kind of goods or services in the interest of the public, P.H.C.N., Water Boards, Broadcasting Corporations. There are several reasons why the government may set up such government monopolies.
3. Legal monopoly: Monopoly may be created by law. Examples are 'patent right' and 'copyright' which the government grants to an individual or a firm in order to protect him or it and give an incentive to inventions. The individual producer or firm is granted the sole right to produce something or to use a particular production technique. For example, if an individual invents a machine, the govemment may give him a patent right for a number of years to prevent any other person from manufacturing such a machine within the period in question put up a copyright is similar, but is given for literary or musical works.
4. Voluntary Monopoly: this type of monopoly is formed when firms willingly merge or combine. There are several reasons why friends may decide to merge. It may be to secure economies of large-scale production, to wipe out competition, to secure more capital, et.c
There are two types of combination on measures:
a. Vertical combination
b. Horizontal combination
Vertical combination occurs when all the firms at different stages of the production process, beginning from the obtaining of raw material and ending with the manufacture of the finished product, are brought under one management. For example, N.T.C, now controls a large supply of tobacco and the processing, manufacturing and distribution of cigarettes
Horizontal combination occurs when several of the same kind, production, are brought together at the in an agreement or come under one management. Firms at the stage of spinning in the textile industry can fuse together. The major types of combination could be grouped into trust and cartel.