Monopoly is a market structure in which one firm makes up the entire market.

What is a monopoly?

Monopoly is a market structure in which one firm makes up the entire market. Monopoly and competition are at the two extremes. Monopoly refers to a market where there is a single seller for a product and there is no close substitute of the commodity that is offered by the sole supplier to the buyers. The firm constitutes the entire industry. There are barriers to entry fro the firms into the market. Monopoly, therefore, indicates a case where:

  • There is only a single seller of a product or service in the market.

  • The goods produced by a sole seller has not close substitute.

  • The entry of new firms into the industry is effectively barred by legal or natural barriers.

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    The firm being the sole supplier of a product constitutes industry. Firm and industry thus have single identity, or we can say monopoly is a single firm identity.

  • The single seller affects no other seller by its own action in the market. The other sellers too cannot affect the price and output of the monopolist.

  • The demand curve facing the monopolist is negatively sloped. The monopolist being the only seller of the commodity in the market can increase the total sale by lowering the price and if he raises the price, he would not loss all his sale. The demand curve facing a monopolist is less than perfectly elastic, i.e., it slopes downward from left to right.

For the monopoly to exist, it is not necessary that the size of a firm should be large. Even a small firm may have a monopoly. For instance, a local water company or a local electricity company supplying water and electricity in the city possesses all the characteristics of a monopoly, Spencer has defined monopolist market in the following words, “A monopolist market can be defined as one in which there is no perfect substitute for the product of an individual seller so that there is a separate demand curve for the product of each seller in the market.

Pure monopoly in its actual form does not exist in the real world. It is near monopolies which are very common. For example, railways face competition from road transport, electricity companies from oil and gas, telephone company from postal service.