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ROLL NO: 169



A situation in which a single company owns all or nearly all of the market for a given
type of product or service. This would happen in the case that there is a barrier to entry
into the industry that allows the single company to operate without competition (for
example, vast economies of scale, barriers to entry, or governmental regulation). In such
an industry structure, the producer will often produce a volume that is less than the
amount which would maximize social welfare.

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.

These four characteristics mean that a monopoly has extensive (boarding on complete)
market control. Monopoly controls the selling side of the market. If anyone seeks to
acquire the production sold by the monopoly, then they must buy from the monopoly.
This means that the demand curve facing the monopoly is the market demand curve.
They are one and the same.

The characteristics of monopoly are in direct contrast to those of perfect competition. A

perfectly competitive industry has a large number of relatively small firms, each
producing identical products. Firms can freely move into and out of the industry and
share the same information about prices and production techniques.

A monopolized industry, however, tends to fall far short of each perfectly competitive
characteristic. There is one firm, not a lot of small firms. There is only one firm in the
market because there are no close substitutes, let alone identical products produced by
other firms. A monopoly often owes its monopoly status to the fact that other potential
producers are prevented from entering the market. No freedom of entry here. Neither is
there perfect information. A monopoly firm often has specialized information, such as
patents or copyrights, that are not available to other potential producers.

(1) Single Supplier

The essence of a monopoly is a market controlled by a single seller. The "mono" part of
monopoly means single. This "mono" term is also the source of such words as monarch--
a single ruler; monochrome--a single color; monk--a solitary religious figure; monocle--
an eyeglass for one eye; and monolith--a single large stone. The "poly" part of monopoly
means to sell. So the word itself, monopoly, means a single seller.
The single seller, of course, is a direct contrast to perfect competition, which has a large
number of sellers. In fact, perfect competition could be renamed multipoly or manypoly,
to contrast it with monopoly. The most important aspect of being a single seller is that the
monopoly seller IS the market. The market demand for a good IS the demand for the
output produced by the monopoly. This makes monopoly a price maker, rather than a
price taker.
A hypothetical example that can be used to illustrate the features of a monopoly is Feet-
First Pharmaceutical. This firm owns the patent to Amblathan-Plus, the only cure for the
deadly (but hypothetical) foot ailment known as amblathanitis. As the only producer of
Amblathan-Plus, Feet-First Pharmaceutical is a monopoly with extensive market control.
The market demand for Amblathan-Plus is THE demand for Amblathan-Plus sold by
Feet-First Pharmaceutical.

(2) Unique Product

To be the only seller of a product, however, a monopoly must have a unique product. Phil
the zucchini grower is the only producer of Phil's zucchinis. The problem for Phil,
however, is that gadzillions of other firms sell zucchinis that are indistinguishable from
those sold by Phil.
Amblathan-Plus, in contrast, is a unique product. There are no close substitutes. Feet-
First Pharmaceutical holds the exclusive patent on Amblathan-Plus. No other firm has the
legal authority to produced Amblathan-Plus. And even if they had the legal authority, the
secret formula for producing Amblathan-Plus is sealed away in an airtight vault deep
inside the fortified Feet-First Pharmaceutical headquarters.
Of course, other medications exist that might alleviate some of the symptoms of
amblathanitis. One ointment temporarily reduces the swelling. Another powder relieves
the redness. But nothing else exists to cure amblathanitis completely. A few highly
imperfect substitutes exists. But there are no close substitutes for Amblathan-Plus. Feet-
First Pharmaceutical has a monopoly because it is the ONLY seller of a UNIQUE

(3) Barriers to Entry and Exit

A monopoly is generally assured of being the ONLY firm in a market because of assorted
barriers to entry. Some of the key barriers to entry are: (1) government license or
franchise, (2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and
(5) decreasing average total cost.
Feet-First Pharmaceutical has a few these barriers working in its favor. It has, for
example, an exclusive patent on Amblathan-Plus. The government has decreed that Feet-
First Pharmaceutical, and only Feet-First Pharmaceutical, has the legal authority to
produce and sell Amblathan-Plus.
Moreover, the secret ingredient used to produce Amblathan-Plus is obtained from a rare,
genetically enhanced, eucalyptus tree grown only on a Brazilian plantation owned by
Feet-First Pharmaceutical. Even if another firm knew how to produce Amblathan and had
the legal authority to do so, they would lack access to this essential ingredient.
A monopoly might also face barriers to exiting a market. If government deems that the
product provided by the monopoly is essential for well-being of the public, then the
monopoly might be prevented from leaving the market. Feet-First Pharmaceutical, for
example, cannot simply cease the production of Amblathan-Plus. It is essential to the
health and welfare of the public.
This barrier to exit is most often applied to public utilities, such as electricity companies,
natural gas distribution companies, local telephone companies, and garbage collection
companies. These are often deemed essential services that cannot be discontinued without
permission from a government regulation authority.

(4) Specialized Information

Monopoly is commonly characterized by control of information or production technology
not available to others. This specialized information often comes in the form of legally-
established patents, copyrights, or trademarks. While these create legal barriers to entry
they also indicate that information is not perfectly shared by all. The AT&T telephone
monopoly of the late 1800s and early 1900s was largely due to the telephone patent.
Pharmaceutical companies, like the hypothetical Feet-First Pharmaceutical, regularly
monopolize the market for a specific drug by virtue of a patent.
In addition, a monopoly firm might know something or have a piece of information that
is not available to others. This "something" may or may not be patented or copyrighted. It
could be a secret recipe or formula. Perhaps it is a unique method of production.
One example of specialized information is the special, secret formula for producing
Amblathan-Plus that is sealed away in an airtight vault deep inside the fortified Feet-First
Pharmaceutical headquarters. No one else has this information.

Market in which no participant can influence prices. Characterized by a free flow of
information, no barriers to entry, and a large number of buyers and sellers.

These four characteristics mean that a given perfectly competitive firm is unable to exert
any control whatsoever over the market. The large number of small firms, all producing
identical products, means that a large (very, very large) number of perfect substitutes
exists for the output produced by any given firm.
This makes the demand curve for a perfectly competitive firm's output perfectly elastic.
Freedom of entry into and exit out of the industry means that capital and other resources
are perfectly mobile and that it is not possible to erect barriers to entry. Perfect
knowledge means that all firms operate on the same footing, that buyers know about all
possible perfect substitutes for a given good and that firms actually do produce identical

(1) Large Number of Small Firms

A perfectly competitive market or industry contains a large number of small firms, each
of which is relatively small compared to the overall size of the market. This ensures that
no single firm can exert market control over price or quantity. If one firm decides to
double its output or stop producing entirely, the market is unaffected. The price does not
change and there is no discernible change in the quantity exchanged.

How many firms are needed in a perfectly competitive industry, such that each is so small
it has absolute no market control? There is no actual number that answers this question.
This is due partly to the fact that perfect competition is an idealized market structure that
does not exist in the real world. It is also partly due to the notion that the number of firms
is not as important as the result... that no firm has market control.
Here are two extreme examples that will help illuminate this notion. Example 1 is Phil's
home grown zucchinis. Phil is one among gadzillions (a really large number) of people
who grow zucchinis in their backyard gardens. Phil has no control over the zucchini
market because the total zucchini market contains gadzillions of zucchini producers, each
producing only a handful of zucchinis. Should Phil decide to produce more zucchinis,
fewer zucchinis, or none at all, the zucchini market and especially the zucchini price are
unaffected. Zucchini buyers continue buying zucchinis from the remaining gadzillions of
zucchini producers as if nothing changed. As far as the market is concerned, nothing has
Example 2 is the innovative folks at Quadra DG Computer Works, which produces the
Quadra 400 Data RAM Cartridges (a memory storage cartridge used in the Quadra 400
Data RAM Computer Storage System). In this hypothetical economic world, Quadra DG
Computer Works is only one of threes companies that produce computer storage
products. Because it holds a market share of 33 percent, Quadra DG has a substantial
degree of market control. Should Quadra DG decide to produce more or fewer Quadra
400 Data RAM Cartridges, or stop producing them altogether, then the computer storage
market takes notice. The price and quantity exchanged are likely to change.

(2) Identical Goods

Each firm in a perfectly competitive market sells an identical product, which is also
commonly termed "homogeneous goods." The essential feature of this characteristic is
not so much that the goods themselves are exactly, perfectly the same, but that buyers are
unable to discern any difference. In particular, buyers cannot tell which firm produces a
given product. There are no brand names or distinguishing features that differentiate
products by firm.
This characteristic means that every perfectly competitive firm produces a good that is a
perfect substitute for the output of every other firm in the market. As such, no firm can
charge a different price than that received by other firms. If they should try to charge a
higher price, then buyers would immediately switch to other goods that are perfect
Once again, Phil the zucchini grower offers an example. Phil's zucchinis are no different
than Becky's zucchinis, which are no different than Dan's zucchinis, which are no
different than Alicia's zucchinis, which are no different than any of the other zucchinis
produced by any of the other gadzillions of zucchini growers. They look the same. They
taste the same. And most important, they satisfy the same zucchini need.
In contrast, the Quadra 400 Data RAM Cartridges used in the Quadra 400 Data RAM
Computer Storage System are unique. First of all, Quadra 400 Data RAM Cartridges only
work in the Quadra 400 Data RAM Computer Storage System. Second of all, Quadra 400
Data RAM Computer Storage System only uses Quadra 400 Data RAM Cartridges. Third
of all, the brand name of Quadra DG Computer Works is printed on each cartridge,
signifying whatever quality notion (good or bad) that buyers have for this product. To
most buyers, Quadra 400 Data RAM Cartridges are NOT identical to OmniRam
computer storage cartridges or MegaMem computer storage cartridges. Each works with
a different system, have different uses, and have different quality connotations.
(3) Perfect Resource Mobility
Perfectly competitive firms are free to enter and exit an industry. They are not restricted
by government rules and regulations, start-up cost, or other barriers to entry. While some
firms incur high start-up cost or need government permits to enter an industry, this is not
the case for perfectly competitive firms. Likewise, a perfectly competitive firm is not
prevented from leaving an industry as is the case for government-regulated public
Perfectly competitive firms can acquire whatever labor, capital, and other resources that
they need without delay and without restrictions. There is no racial, ethnic, or sexual
For example, if Phil wants to leave the zucchini industry and entry the kumquat industry,
he can do that without restriction. Likewise if Becky is a kumquat producer who wants to
entry the zucchini industry, she can do so without restraint. Phil and Becky are not faced
with up-front investment cost nor brand-name recognition that might prevent them from
entering a perfectly competitive industry. When they enter an industry they can instantly
compete on equal ground with existing firms.
By comparison, when Quadra DG Computer Works entered the market it needed to build
several expensive factories, spend millions of advertising dollars to achieve brand name
recognition, and obtain several government patents to produce its Quadra 400 Data RAM
Cartridges. Additionally, because Quadra 400 Data RAM Cartridges are used in top
secret military projects, Quadra DG Computer Works is not allowed to STOP producing
Quadra 400 Data RAM Cartridges without authorization from the Secretary of Defense
and an act of Congress.

(4) Perfect Knowledge

In perfect competition, buyers are completely aware of sellers' prices, such that one firm
cannot sell its good at a higher price than other firms. Each seller also has complete
information about the prices charged by other sellers so they do not inadvertently charge
less than the going market price. Perfect knowledge also extends to technology. All
perfectly competitive firms have access to the same production techniques. No firm can
produce its output faster, better, or cheaper because of special knowledge of information.
Phil, for example, has all of the information needed to grow zucchinis. This is the same
information possessed by Becky, Dan, Alicia, and the other gadzillions of zucchini
producers. Phil also knows that the going price of zucchinis is 50 cents. All of the
zucchini buyers know that the going price is fifty cents.
In contrast, Quadra DG Computer Works has several patents on the production of Quadra
400 Data RAM Cartridges that are not available to its competition (OmniRam and
MegaMem). Quadra DG also has a secret formula that it uses for production locked away
in the company safe.