PURE MONOPOLY

BY ZUJAJA KHAWAR
 INTRODUCTION
Within a particular market or industry, a pure monopoly is defined as a
single supplier. In this circumstance, the firm effectively serves as the
industry. Because of the nature of the market, there are no close competitors
or substitutes. When one company has a market share of more than 90%, it
is considered a near-pure monopoly.

Monopoly power is the extent to which a firm can influence and even ‘set’
the market price or influence the quantity supplied to the market, and also
the extent to which conditions of business are influenced by a single firm.

Here, a monopolist is a price maker and faces a downward sloping demand

curve. Although maximising profits would occur at the output where MC =
MR, the firm can make super-normal profits over the whole range between
A and B – given that AR is above ATC over this range.
When faced with the threat of a potential entrant a monopolist could even
drop price below P1 to deter entry. Furthermore, the monopolist can reduce
price to just below the average cost of potential entrants, and limit entry – a
practice called ‘limit pricing’.In terms of monitoring and controlling
mergers, monopoly power can result from a merger between two or more
dominant firms leading to a ‘substantial lessening of competition’.
A complex monopoly is a situation where a number of firms act as though
they were a single firm – for example, by jointly raising prices at the same
time. A legal  monopoly is a firm that is granted monopoly status by a
government.
 

CHARACTERISTICS OF PURE MONOPOLY

Monopoly characteristics include profit maximizer, price maker, high
barriers to entry, single seller, and price discrimination.

The four key characteristics of monopoly are: (1) a single firm selling all

output in a market, (2) a unique product, (3) restrictions on entry into and
exit out of the industry, and more often than not (4) specialized information
about production techniques unavailable to other potential producers.

To achieve this so-called market power, a monopoly must have several

characteristics.

1. It must be a single seller in the market.

2. There must be no close substitutes for the product or there must be
some other economic barrier that prevents users from using
substitutes. For instance, there are several computer operating systems
available that consumers can use, but because many people have
already made significant investments in hardware and software that
require specific operating systems, they cannot easily switch — they
are locked into their choices.

3. There must be significant barriers to entry so that no competitors can

enter the market.
These 3 characteristics must all be present for a monopoly to exist;
otherwise, a monopoly would be reduced to an oligopoly, a monopolistic
competition, or even pure competition.

Another characteristic of monopolies is that they do not need to advertise

their product to increase market share. They generally use public relations
and advertising to increase awareness of their products and to maintain a
good relationship with their buyers.

Barriers to Entry

Barriers to entry are obstacles that prevent firms from entering a market. A
monopoly is created when the barriers are steep. When barriers are not so
steep, then an oligopoly results. When there are few or no barriers to entry,
then either monopolistic competition results, if the product can be
differentiated to some degree from close substitutes, or pure competition
results when there is no significant difference among the products sold by
many suppliers, which is the case for most commodities.

Barriers to entry can be either natural or artificial.

Natural Barriers to Entry

Natural barriers to entry arise from the nature of the enterprise, the quality of
its workforce, or its position in the industry, rather than from legal barriers.

Some natural barriers to entry include:

 Large startup costs,

 A wide technological superiority over competitors.

 Control of an essential resource required to produce the product.

However, the most common natural barrier to entry is when the production
of a product exhibits large economies of scale.

Economies of Scale

Economies of scale result when the average total cost (ATC) of a product

declines with increasing quantity produced. Because almost every firm has
fixed costs, the cost to supply most products will generally decline with
increasing quantity because these fixed costs can be apportioned to a greater
supply of the product, which reduces the average total cost of each product.
Eventually, average total cost of most products increases as the limits of the
fixed resources is approached. However, if ATC declines over the quantity
demanded by the market, then a single firm can dominate that market, since
other firms would not be able to achieve the same economies of scale when
the market is already dominated by a seller.

When average total cost declines over the entire market, then a natural
monopoly exists. The best examples of natural monopolies are software and
digital editions of media, such as movies, TV shows, music, magazines, and
books, because the cost of producing additional items decreases continually.

A pure monopoly has pricing power within the market. There is only one
supplier who has significant market power and determines the price of its
product. A pure monopoly faces little competition because of high barriers
to entry, such as high initial costs, or because the company has acquired
significant market influence through network effects, such as facebook , for
instance.

One of the best examples of a pure monopoly is the production of operating

systems by Microsoft. Because many computer users have standardized on
software products compatible with Microsoft's Windows operating system,
most of the market is effectively locked in, because the cost of using a
different operating system, both in terms of acquiring new software that will
be compatible with the new operating system and because the learning curve
for new software is steep, people are willing to pay Microsoft's high prices
for Windows.
 MAIN FEATURES OF PURE MONOPOLY:
. 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.

6.Nature of Demand and Revenue under Monopoly:

Under monopoly, it becomes essential to understand the nature of demand

curve facing a monopolist. In a monopoly situation, there is no difference
between firm and industry. Therefore, under monopoly, firm’s demand
curve constitutes the industry’s demand curve. Since the demand curve of
the consumer slopes downward from left to right, the monopolist faces a
downward sloping demand curve. It means, if the monopolist reduces the
price of the product, demand of that product will increase and vice- versa

ADVANTAGES AND DISADVANTAGES

Depending on the nature of its product, a monopolist may
advertise. Examples of pure monopolies and “near monopolies”: Public
utilities—gas, electric, water, cable TV, and local telephone service
companies—are pure monopolies.

A modern economy has many different types of industries. However, an

economic analysis of the different firms or industries within an economy is
simplified by first segregating them into different models based on the
amount of competition within the industry. There are 4 basic market models:
pure competition, monopolistic competition, oligopoly, and pure monopoly.
Because market competition among the last 3 categories is limited, these
market models imply imperfect competition.

INDUSTRIES BELONGING TO PURE MONOPOLY:

 Railways
Public services like the railways are provided by the government. Hence,
they are a monopolist in the sense that new partners or privately held
companies are not allowed to run railways. However, the price of the tickets
is reasonable so that public transport can be used by the majority of people.

Luxottica
Luxottica – A Company that owns all the major brands of sunglasses. The
Company has bought almost all the major eyewear brands however, they are
still named differently. This creates an illusion in the mind of the customer
that they have a variety of sunglasses to choose from although they are all
manufactured by one Company. Luxottica produces more than 80% of the
eyewear worldwide.

Microsoft
Microsoft – Microsoft is a Computer and software manufacturing Company.
It holds more than 75% market share and is the market leader and virtual
monopolist in the tech space.

WAPDA
WAPDA has monopoly of producing electricity.  WAPDA`s Power Wing is
responsible for the planning, construction and operation of power
generation, transmission and distribution facilities throughout the country,
except Karachi area which is served by KESC (Karachi Electricity Supply
Corporation.

 DeBeers diamond 
From its inception in 1888 until the start of the 21st century, De
Beers controlled 80% to 85% of rough diamond distribution and was
considered a monopoly. De Beers' most famous ad campaign marked the
entire diamond industry. In 1947, De Beers completely changed
the diamond world. Their slogan 'A diamond is forever,' was and is still
revolutionary and relevant.
CONCLUSION:

A corporation with a full monopoly is the lone vendor in a market where

there are no near substitutes. Firms benefit from monopoly power because:
They can charge higher prices and make more profit than in a competitive
market. The can benefit from economies of scale – by increasing size they
can experience lower average costs are important for industries with high
fixed costs and scope for specialization.

REFERENCES:

Shinde, S., 2020. Monopoly.

Olson, M. and McFarland, D., 1972. The Restoration of Pure Monopoly and
the Concept of the Industry. In Readings in Industrial Economics (pp. 236-
256). Palgrave Macmillan, London.

Papandreou, A.G., 1949. Market structure and monopoly power. The

American Economic Review, 39(5), pp.883-897.