Meaning of Monopoly Market

The English word "monopoly" is derived from two words: "mono" and "poly." "Mono" means single, and "poly" means seller. Therefore, a monopoly market is a market structure with only one seller. However, in such a market, the number of buyers is high. 

According to economist Anna Koutsyiannis, "A monopoly is a market structure in which there is a single seller, there are no close substitutes for the commodity it produces, and there are barriers to entry for new firms."

Thus, a market structure in which there is only one producer or seller of a good, there are no close substitutes for that good, and entry of other firms is completely prohibited is called a monopoly market.

Characteristics of a Monopoly Market

The main characteristics of a monopoly market are presented below:

(a) Single Seller

In a monopoly market, there is only one producer or seller of a good or service produced or sold. Although there is only one producer or seller of the good, the number of consumers can be large.

(b) Lack of Close Substitutes

In such a market, there is a lack of alternative goods or close substitutes that can be used in place of the goods produced or sold by the monopoly firm.

(c) Prohibition of Entry for Other Firms

In such a market, the entry of other producers/firms into the industry is completely prohibited. In such a market, since there is only one producer/firm producing the good, the firm and the industry are considered to be the same.

(d) Profit Maximization as the Main Objective of the Firm

The main objective of a monopoly firm is to maximize profit. To achieve this, the firm adjusts its production level and price to ensure that the difference between total revenue and total cost is maximized. A monopoly firm can continue earning supernormal profits in the long run as there are barriers to entry, preventing other firms from entering the market and increasing competition.

Price Determination in a Monopoly Market (Price Determination under Monopoly Market)

In a monopoly market, since there is only one firm selling the goods, the firm and the industry are the same. In such a market, the demand curve of the firm slopes downward from left to right or has a negative slope. The demand curve of a monopoly firm and the average revenue curve are the same because the market price of the good (P) and the average revenue (AR) are the same.

Since the average revenue or demand curve of a firm in a monopoly market has a negative slope, it indicates that the price must be reduced to sell more units of the good. Since the average revenue curve of the firm has a negative slope, the marginal revenue curve also has a negative slope. However, it passes below the average revenue curve. The average cost and marginal cost curves of a monopoly firm are U-shaped. In such a market, the firm is a price maker, not a price taker.

To determine the price of a good in a monopoly market, the equilibrium of the firm must be found. Here, the price determination process or the equilibrium situation in the short run is explained with the help of the marginal revenue curve and the marginal cost curve of the monopoly firm. The main objective of a monopoly firm is to maximize profit. A monopoly firm buys factors of production at a fixed market price and sets its own price for the goods. The following two conditions must be met for the equilibrium of a monopoly firm:

Thus, the state where these two conditions are met is the equilibrium state of the firm. The equilibrium state shows how much quantity of goods a monopoly firm produces/sells at what price. A monopoly firm can achieve equilibrium in the short run with supernormal profits, normal profits, or losses. 

Here, only the supernormal profit situation is explained with the help of a diagram.

Figure 2.2: Price Determination in a Monopoly Market or Short-Run Equilibrium of a Firm with Supernormal Profits.

In the equilibrium state, the price of the good is determined to be OP (AR). This price is the equilibrium price of the monopoly firm. At this price, the firm sells a quantity of OQ of the good. This quantity is called the equilibrium quantity. Here, the firm earns supernormal profits in the equilibrium state because the equilibrium price of the firm is higher than the average cost at the equilibrium production level OQ. The supernormal profit is indicated by the shaded area PABC in the diagram.

In the equilibrium state, the price of the good can also be equal to the average cost. In such a situation, the firm only earns normal profits. Similarly, in the equilibrium state, the price of the good can be lower than the average cost of the firm. In such a situation, the firm suffers losses. The diagrams showing the normal profit and loss situations of the firm are not presented here. Thus, a monopoly firm can continue its production/sales in the short-run equilibrium state with supernormal profits, normal profits, or losses.