A monopoly describes the situation where a market has only one producer.
In theory, a monopoly has the following characteristics:
a single seller
no close substitutes
high barriers to entry
the monopolist is a price maker.
If left uncontrolled, a monopoly can set its own price in the marketplace, which can result in what economists refer to as 'super-normal profits'. For this reason, monopolies are usually subject to control by government or a government agency.
A natural monopoly is a market situation where a monopolist has overwhelming cost advantage. In theory this can come about where a monopoly has sole ownership of a resource or where past ownership of capital resources
A monopoly exists when there is only one firm in the industry
In an industry with only one monopoly firm rather than lots of small competitive firms (perfect competition), three socially harmful things occur:
The monopoly firm produces less output than firms in a competitive industry.
The monopoly firm sells its output at a higher price than if the industry was competitive.
The monopoly firm’s output is produced less efficiently and at a higher cost than the output produced by firms in a competitive industry
👉Disadvantage to consumers
Firms with monopoly power can set higher prices than in a competitive market. Monopolists are also able to use price discrimination. This is the practice of charging different prices to different customers for essentially the same product.
Abuse of monopoly power could also involve setting higher prices or limiting output and lead to less choice for consumers.
Disadvantage to other producers
A monopoly can also set artificial barriers to prevent other producers from entering the market. For example, it can limit production and access to technical developments. There may also be an unfair treatment of competitors.
The firm may give preferential treatment to certain parties, placing others at a disadvantage. This does not benefit other producers.
We do not distinguish between short-run and long-run profit maximisation in monopoly.
This is because a monopoly is protected by barriers to entry, which prevent new firms from entering the market to share in the abnormal profit made by the monopolist. Entry barriers enable the monopolist to preserve abnormal profits in the long run as well as in the short run.
By contrast, in perfect competition abnormal profits are temporary, being restricted to the short run.
The profit-maximising monopoly’s optimal output level, Q, is determined by where the MR and MC curves cross. The abnormal profit that the monopoly makes is shown by the shaded rectangle. Since there are barriers to the entry of new firms, these abnormal profits will not be competed away in the long run.