Different Types of Monopolies

A monopoly is a market situation where there is only one seller of products.

Therefore, both the industry and firm in this market is one. Hence, there are
barriers for a new producer to enter the market. Further, imperfect information
is a prominent feature in this market.
The general characteristics of all the monopoly types are as follows.

 Monopoly is one of the market structures among other markets like

perfect competition, monopolistic competition and oligopoly. Monopoly
differs from these structures especially due to its outstanding and
absolute market power.
 In monopoly, both producer and Apart from that, monopoly producer
does not real information to another party. This product has no close
substitutes either. This characteristic creates different monopoly
structures like pure monopoly and imperfect monopoly.
 There is only one seller in this market and its products are
homogeneous.
 Unlike in competitive market where there is a separate industry and
many firms, monopoly has only one firm which is the price-maker and
not price taker.
 Since there are many buyers and one seller, no one can influence the
price. Hence, a monopolist treats all consumers in an equal way and
charges a uniform price for the product.
Let’s explore these monopoly structures separately as follows.

Different types of monopolies

1. Simple Monopoly
This is one of the monopoly markets structures. Here, a simple monopoly firm
charges a uniform price for its products when selling to all its buyers. A simple
monopoly operates in a single market with a single price, unlike a discriminating
monopoly that operates in more than one market.

Examples: water supply, railway services

2. Discriminating Monopoly
Price differentiation is a special power that a monopoly enjoys. It bases its
objective on profit maximization. Monopoly can either choose to price
differentiation and quantity differentiation.

In either way, a monopoly gets to maximize its profit. Why a simple monopoly
differs from a discriminating monopoly is that the discriminatory monopoly firm
charges different prices for the same product to different buyers.

Therefore, a discriminatory monopoly, as the name suggests, discriminate its

buyers in different markets with different prices.

3. Different Types of Monopolies: Pure Monopoly

This particular type of monopoly differs from all the other monopoly types
because the substitutes available for the product in pure monopoly is zero.

This means that pure monopolies do not even have a remote substitute.
Therefore, the power centred around a pure monopoly is immense. No matter
how unfair the pure monopoly price is, the buyers will have to stick to that
price.

However, pure monopoly is a rare phenomenon. Instead, there are imperfect

monopolies all around the world. The imperfect monopoly has a limited degree
of monopoly power to exercise.

Example: A special kind of medicine that is produced only by one and

only producer

4. Imperfect Monopoly
Imperfect monopoly is a single firm that produces a commodity having no close
substitutes. The degree of Monopoly power is less than the perfect monopoly or
the pure monopoly.

In imperfect monopolies, it is easier for buyers to shift to a close substitute than

in pure monopoly. This market is commonly existent in the real world.
5. Different Types of Monopolies: Natural Monopoly
This monopoly market has something to do with natural benefits. It can occur
due to reasons like specialisation or availability of natural resource etc.

Therefore, natural monopoly is a case that arises due to natural causes. It also
has common monopoly characteristics such as producing a unique good, price
and quantity differentiation and entry barriers etc. Natural monopoly offers the
industry with a
special benefit of producing the product at a lower cost. This particular instance
supports them to win a larger part of the market.

Example: Canada has a natural monopoly nickel production while India

has got Monopoly in mica production at present.

6. Legal Monopoly
This particular situation arises when anybody receives or acquires monopoly
power due to legal provisions in the country. In general, patents, trademarks
and copyrights safeguards products from an unauthorised use of a third party.

Such provisions are assured by law and vest special powers on the hands of the
producer or the person who owns the so-called patents, trademarks or
copyright.

Once copyright protection or trademark protection is available, the law forbids

the potential competitors to imitate the form and design of products registered
under the given brand names, or trademarks.

The purpose of granting such patents and copyrights is to safeguard the

interests of innovators who have done much research and undertaken risks of
innovating particular products.

Example: Company A has obtained a patent to produce particular

electric equipment, therefore it has power against other companies to
defend its product from other companies.

7. Industrial Monopolies or Public Monopolies

Industrial or public monopolies arise as a result of government action.
Governments may nationalize some industries in public sectors in the general
interest of the nation.

Example: In 1956 The Indian Industrial Policy Resolution for example,

emphatically lays down that certain sectors like atomic energy, arms and
ammunition, railways and air transport will be
the exclusive monopoly of the Central Government.

Therefore, it is clear that industrial monopolies arise as a result of statutory

measures.

Barriers to Entry: How a Monopoly Maintains its

Power
Several factors and strategies allow a monopoly to maintain the power
that it holds in an industry. These essentially pose as barriers of entry to
potential entrants. Some of these are:

Economies Of Scale
When it is said that the production of a certain commodity has become
efficient, it means that the firm does not have to spend large amounts on
the cost of production. After existing in the market for a considerable
period of time, output can be generated at a larger scale with fewer input
cost. This is known as economies of scale.

Due to this phenomenon, the output generated by a monopolist is large,

with lesser input cost. In case a new firm tries to enter, the cost of
production would be higher than that of the monopolist and the output
generated would be lower than the monopolist. It is, hence, evident that
the new entrant would be at a disadvantage in terms of production
costs. Hence, the monopolist gains a cost advantage.
This inevitable disadvantage deters potential entrants and so,
economies of scale poses as a barrier to entry.

Strategic Pricing
Strategic Pricing allows a monopolist to charge any price for their
offerings. The price may be set to be extremely low – predatory pricing –
in order to prevent any firm from entering the market. This is often done
by a monopolist to demonstrate power and pressurise potential and
existing rivals.

Sometimes, a monopolist often sets the price of its product or service

just above the average cost of production of the product/service. This
move ensures no competition. This is because if a competitor too
decides to charge the same price for the commodity, the competitor will
face losses as the cost of production for the monopolist is far lower than
the competitor’s cost of production.

Ownership Of Essential And Scarce Resources

Monopolies that first enter a market have access to resources that it
may choose to keep for itself. Due to this, these scarce but essential
resources are made unavailable to the potential entrants.

This is often the case with natural monopolies.

High Sunk costs

Sunk costs are those which cannot be retrieved in the case a firm shuts
down. These are costs that are essential for the firm, like advertising
costs, but cannot be recovered.
With the existence of a large monopoly, the risk of a potential entrant
going out of businesses always looms. Hence, these potential entrants
hesitate when it comes to taking a risk that could cost them too much.
This consequently poses as a barrier to entry.

Contracts
Monopolies maintain their power by creating contracts with suppliers
and retailers.

Consumer Brand Loyalty

Consumers often develop trust and loyalty with firms that offer them
quality products and services. A sense of familiarity that generates
consequently deters them from going elsewhere to satisfy their demand.
This does not allow other entrants a chance. Hence, they find it difficult
to capture market share for the product and service that they offer.

A great example of a company using this technique to develop a

monopoly is Google.

Advantages Of Monopoly
Monopolies are advantageous to economies in some ways. Some of
these reasons are listed below:

 No price wars – Price wars often discompose markets. In the

absence of price wars, consumers enjoy a certain degree of
certainty with regards to the prices they pay for a commodity.
Hence, this becomes an advantage that monopolies bring to
consumers in a market.
 Large economies of scale – A monopoly has the power to
produce large quantities of output at low input costs. Thus,
 they can and provide them to the masses at lower costs. But
this advantage would benefit consumers only if the monopoly
is ethical.
 More research and development- A monopoly tends to feel
confident about its market share. This encourages them to
go ahead and invest more in research and development.
Research and development leads to the generation of new
goods and services as well as enhanced manufacturing
efficiencies which eventually benefits consumers.

Disadvantages Of Monopoly
The disadvantages of a monopoly in an economy often outweigh its
advantages. Below listed are the disadvantages of a monopoly:

 Affects the quality of products and services offered – Due to

a lack of competition, monopolists often do not realise the
need to upgrade. They tend to not engage in innovating, and
so, many monopolies go out of trend for the same. A good
example of this could be Blackberry, a cellphone brand that
captivated the global market in the early 2000s but has now
been compelled to discontinue making its own smartphones
in 2016. Monopolies also offer inferior products and services
in an attempt to save on the cost of production. Since there
are no close substitutes, consumers have no option but to
buy these inferior products.
 Higher prices – A monopoly is essentially a price maker.
Monopolies have the power to determine the price of their
commodity without having to analyse competitor prices since
there are virtually o competitors. This allows them to indulge
in charging excessive prices for their commodities.
 Price discrimination – This selling strategy is employed by
monopolies wherein they charge different prices for the same
product in different markets. They charge a price based on
what they think the consumer would agree to. For example, a
product that is being sold at a relatively affluent area would
be priced more than the same product that is being sold at a
poor.