Monopoly

In a perfectly competitive market, there are many firms, none of which is large in size. In contrast, in a monopolistic market there is only one firm, which is large in size. This one firm provides all of the market's supply. Hence, in a monopolistic market, there is no difference between the firm's supply and market supply.

Conditions for Monopoly

These conditions characterize a monopolistic market structure. First, as mentioned above, there is only one firm operating in the market. Second, there are high barriers to entry. These barriers are so high that they prevent any other firm from entering the market. Third, there are no close substitutes for the good the monopoly firm produces. Because there are no close substitutes, the monopoly does not face any competition.

Barriers to entry. A barrier to entry is anything that prevents firms from entering a market. Many types of barriers to entry give rise to a monopolistic market structure. Some of the most common barriers to entry are:

1. Patents: If a firm holds a patent on a production process, it can legally exclude other firms from using that process for a number of years.

Profit Maximization in a Monopolistic Market

The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Indeed, the condition that marginal revenue equals marginal cost is used to determine the profit maximizing level of output of every firm, regardless of the market structure in which the firm is operating. However, in order to determine the profit maximizing level of output, the monopolist will need to supplement its information about market demand and prices with data on its costs of production for different levels of output. The monopolist's market supply will not be independent of market demand.

Monopoly in the Long-run

In the discussion of a perfectly competitive market structure, a distinction was made between short-run and long-run market behavior. In the long-run, all input factors are assumed to be variable, making it possible for the firms to enter and exit the market. The consequence of this entry and exit of firms was that each firm's economic profits were reduced to zero in the long-run.

The distinction between the short-run and the long-run is not as important in the case of a monopolistic market structure. The existence of high barriers to entry prevents firms from entering the market even in the long-run. Therefore, it is possible for the monopolist to avoid competition and continue making positive economic profits in the long-run.

Costs of Monopoly

A monopolist produces less output and sells it at a higher price than a perfectly competitive firm. The monopolist's behavior is costly to the consumers who demand the monopolist's output. The cost to the consumer of a monopolistic market structure is the reduction in consumer surplus that results from monopoly output and price decisions.

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