- There is only one firm selling the product.
- The firm has no rivals or direct competitors.
- Substitutes may exist. However, close substitutes are non existent.
- Difficult entry for other firms.
- The monopolist is the price maker and tries to take the best of whatever demand and cost conditions exist without the fear of new firms entering to compete.
- Monopoly is not a permanent situation. Due to reasons like emergence of close substitutes, entry of new firms, etc. a firm which is a monopoly now may not be a monopoly in the future.
Price Determination under Monopoly
The price and output under monopoly are determined by taking into consideration certain assumptions which include that the monopoly firm does not set discrimination price. It aims at maximization of profits. The individual buyer is just a price taker and the monopolist firm operates in the condition of no restrictions in terms of price.
- The monopolist firm controls both the price and the supply of the commodity but one at a time.
- The firm’s demand curve is same as the demand curve of the industry.
a) Price Determination in the Short Run
The monopolist tries to maximize the profits by increasing the output to a level where additional revenue exceeds additional cost. A monopolist could either earn profit or incur losses in the short run.
The firm can incur profit by keeping the price more than its cost and meeting the demand by supplying specified units of the commodity.
However the firm can incur losses as well, due to its misjudgment in fixing the price or determining demand. Also the danger of entry of competitors may lead to setting of prices below the cost which may end up in a loss.
The monopolist in the short run can either fix the price or the quantity. He cannot fix both at the same time. The firm has to develop a strategy which leads to maximisation of profits or minimisation of losses. The firm has to be alert about the potential entry of its competitors.
b) Price Determination In The Long Run
The profits in the short run would definitely attract other firms to enter the market. With the entry of new firms the market would change from a monopoly to a oligopoly or perfect competition.
If the firm has control over the scarce resources, it can bar the entry of new firms and enjoy its monopoly position. In the long run, it is not necessary for the firm to use its existing plant at an optimum capacity due to lack of competition.
It is, however, necessary that the firm does not make losses in the long run. The size of plant and the extent to which it can be utilized is dependent upon demand of the commodity.
A monopoly firm is in a better position to exploit the market and it can limit the entry of outside firms into the industry. There is concentration of economic power in the market wherever monopoly exists.