Monopoly occurs when one company provides the entire production of goods and services in particular country or industry (e.g. postal services, gas pipelines). It may take the form of associations of producers (cartel, trust, group). These associations offer an economic advantage over its competitors, by achieving higher profits, thanks to the favourable price setting. The premise of the existence of the monopoly could be owning a patent, copyright or exclusive right to sell a given product in a given market.
Monopoly product or service is the only of its kind (unique), which means that it has no close substitute. At the same time there are many buyers, none of which are particularly important, so their behaviour could not affect the formation of prices. Monopolistic company control prices.
Under conditions of monopoly producer (service provider) actively influence the price and quantity of offered goods (services offered). In a monopoly, production is at the optimum economic volume, supply does not depend on price. The supply is determined in relation to the size of the existing demand.. In the case of a pure monopoly, product has no substitutes, which means that elasticity of demand is equal to zero.
Assumptions of full monopoly
- on the market there are many buyers and one seller (monopoly of supply), or one buyer and many sellers (monopoly of demand),
- products are homogeneous or differentiated. (there are no close substitutes),
- there is perfect information about the market. (supply monopolist knows the demand for products manufactured, while demand monopolist knows the supply of goods, for which there is demand),
- there are barriers to entry in the market captured by monopoly,
- monopoly sets the price.
The causes of monopoly
- monopolist holds patents and copyrights to the product,
- monopolist is the sole and exclusive owner of strategic resource, not having close substitutes,
- monopolist has exclusive sales of the product in particular area,
- monopolist has a sufficiently large capital
- administrative and legal barriers - state policy protecting domestic producer from the influx of foreign products on the market.
Nature of monopoly
Monopoly may be either:
- forced - occurs when one of the producers of the goods or services reaches a dominant position in the market and other manufacturers go bankrupt
- state - occurs when the law of the country allows to provide a service or produce a specific range of goods by only one entity (e.g. lottery, postal services, etc.).
- natural - due to the nature of the service provided or the goods manufactured, when competition of many companies for technical reasons is difficult or impossible (e.g. railways, natural gas supply, electricity supply, telecommunications).