Monopoly refers to a market situation where there is only single seller of a commodity and there are no close substitutes of that commodity. In such a situation, monopolist or the single seller of the commodity has some kind of power or control over the supply of a commodity and hence he is in a position to influence the price.
Since under monopoly, there is only one firm selling a commodity, this firm exercises some control over the supply and price of the commodity.
However, this can be possible only when there are no close substitutes of that commodity. Therefore, the two distinct features of monopoly are – a single seller producing and selling the commodity and no close substitutes of that commodity.
Characteristics of Monopoly:
1. Single seller:
The producer or seller of the commodity is a single person, firm or an individual and that firm has complete control on the output of the commodity.
2. No Close Substitutes:
All the units of a commodity are similar and there are no substitutes to that commodity.
3. No Entry for New Firms:
Monopoly situation in a market can continue only when other firms do not enter the industry. If new firms enter the industry, there will not be complete control of a firm on the supply. As such, whenever a firm enters the industry, monopoly situation comes to an end. There/art, monopoly industry is essentially one-firm industry. This signifies that under monopoly there is no difference between a firm and an industry.
4. Profit in the Long Run:
A monopolist can earn abnormal profit even in the long run because he has no fear of a competitive seller. In other words, if a monopolist gets abnormal profits in the long run, he cannot be dislodged from this position. However, this is not possible under perfect competition. If abnormal profits are available to a competitive firm, other firms will enter the competition with the result abnormal profits will be eliminated.
5. Losses in the Short Period:
Generally, a common man thinks that a monopoly firm cannot incur loss because it can fix any price it wants. However, this understanding is not correct. A monopoly firm can sustain losses equal to fixed cost in the short period. A monopolist means that there is only a single person or a firm to sell the commodity.
Therefore, anybody who would like to buy that commodity will buy it from the monopolist only. However, if a firm has monopoly of such a commodity which people buy less or do not buy, it can incur losses or it may have to stop production even. For example, if someone has the monopoly of yellow hair dye, it is natural that the firm has the possibility of incurring losses because it is a product which people generally don't buy.
6. Nature of Demand Curve:
Under monopoly the demand for the commodity of the firm is less than being perfectly elastic and, therefore, it slopes downwards to the right. The main reason of the demand curve sloping downwards to the right is the complete control of the monopolist on the supply of the commodity. Due to control on the supply a monopolist makes changes in the supply which brings about changes in the price and because of this demand changes in the opposite direction. In other words, if a monopolist increases the price of the commodity, the amount of quantity sold decreases. Therefore, demand curve (AR) slopes downwards to the right. The nature of demand curve has been shown in the diagram. DD is demand curve, which has a negative slope.
From the point of view of profit a monopolist can change different prices from different consumers of his commodity. This policy is known as price discrimination. He adopts the policy of price discrimination on various bases such as charging different prices from different consumers or fixing different prices at different places etc.
8. Firm is a Price-Maker:
A competitive firm is a price-taker whereas a monopoly firm is a price-maker. This is because a competitive firm is small compared to market and therefore, it does not have market power. This is not true in the case of a monopoly firm because it has market power. Hence, it is a price maker
9. Average and Marginal Revenue Curves:
Under monopoly, average revenue is greater than marginal revenue. Under monopoly, if the firm wants to increase the sale it can do so only when it reduces its price. This means AR would decline when sale increases. In that case MR would be less than AR. (ii) AR slopes downwards to the right and is greater than MR.