Home > Micro concepts, Monopoly and market power > Characteristics of monopoly markets

Characteristics of monopoly markets

August 14, 2011

A monopoly market usually means you have one firm which has no rivals and supplies to the whole market.

A perfectly competitive market will have these four characteristics:

1. Sellers are price takers
2. Buyers are price takers
3. Sellers do not engage in strategic behaviour
4. Firms can enter and exit the market freely.

In a monopoly situation the second and third ones will still hold. Here are the characteristics of a monopoly market:

Sellers are price makers – as there is only one seller in the market, it can influence the market price by its own production decisions. If the market demand curve is downward sloping then the monopoly firm faces the same demand curve, the price falls as the amount of output sold rises. So the firm can increase the market price by selling less.

Buyers are price takers – each buyer is sufficiently small in relation to the overall market that they can’t influence the market price by the amount they consume.

Sellers do not engage in strategic behaviour – when a firm makes its own output decisions, it does not take into consideration the response of other firms – because there aren’t any.

No new firms can enter the market – the monopoly firm faces no threat of entry from potential rivals. When you have a market that has only one firm producing, but the firm is producing at a lower price than you would expect it to, this could suggest that it is fearful of rivals entering and so is trying to deter entry through keeping the price down. Sometimes you will have a situation where there appears to be only one firm in the market, but it is not really a monopoly – the threat of entry will erode its market power.

In order for these four characteristics to be present, you will usually need to have:

A large number of buyers but only one seller – so that the first two assumptions hold

Goods that are not substitutable – if a firm produces goods that consumers can easily switch away from in favour of alternative goods in a different market, then it doesn’t have monopoly power because it is effectively competing with the firms in that other market.

Buyers must have full information – buyers have to be aware of the price and the characteristics of the monopolist’s product in order to make decisions of whether to buy it at the asking price

Effective barriers to entry – these could be legal (requiring a licence to enter) or because of control of key inputs, you can easily have a monopoly railway company because if it controls the rail network, nobody is likely to build a new railway to compete.

%d bloggers like this: