A monopoly is a market structure where a single seller controls the entire supply of a unique product with no close substitutes, enabling price-setting power and barriers to entry that prevent competitor entry.
## Core concept
Monopoly is one extreme of market structure (the other being perfect competition). Key characteristics: - One seller producing the entire market output - No close substitutes for the product - High barriers to entry preventing new competitors (patents, licences, natural monopoly, huge capital requirements, control of raw materials) - Price maker, not price taker — the firm sets price and moves along the demand curve - Abnormal profits in long run (unlike perfect competition where they erode) - Restricted output — the firm produces less than competitive level, charging higher price
Sources of monopoly power: - Natural monopoly (e.g. electricity distribution — high fixed costs) - Legal/patent protection (e.g. pharmaceutical patents under Patent Act 1970) - Licencing (e.g. TRAI-licensed telecom operator) - Control of essential raw materials or resources - Economies of scale (one firm can meet entire demand most efficiently)
## Formula / rule
Revenue and profit under monopoly: - Demand curve: P = f(Q) — monopolist faces downward-sloping industry demand - Total Revenue (TR) = P × Q - Marginal Revenue (MR) < Price (P) — because price must be cut to sell extra unit - Profit maximisation: MR = MC (same rule as all firms) - Abnormal profit = (P – AC) × Q where P is price at MR = MC output
Price elasticity matters: monopolist will never produce on inelastic portion of demand curve (where MR < 0).
## Comparison with perfect competition
| Aspect | Monopoly | Perfect Competition | |--------|----------|-------------------| | Number of firms | One | Many | | Product | Unique | Homogeneous | | Price control | Price maker | Price taker | | Long-run profit | Abnormal profit possible | Normal profit only | | Barriers to entry | High | None | | Allocative efficiency | No (P > MC) | Yes (P = MC) |
## Common exam applications
1. Profit maximisation problem A monopolist faces demand P = 100 – 2Q and MC = 20. Find profit-maximising output and price. - TR = PQ = (100 – 2Q)Q = 100Q – 2Q² - MR = dTR/dQ = 100 – 4Q - Set MR = MC: 100 – 4Q = 20 → Q = 20 - Price: P = 100 – 2(20) = ₹60 - *Answer: Output 20 units at ₹60 per unit*
2. Deadweight loss — monopoly produces less than competitive output, creating welfare loss (area between demand and MC curve).
3. Price discrimination — monopolist may charge different prices to different customer groups (Section 4 Competition Act 2002 scrutinises predatory pricing).
## Common mistakes
- Confusing MR with price: In monopoly, MR ≠ P. MR lies below demand curve.
- Assuming monopoly always earns profit: In short run, monopoly may incur loss if AC > P at MR = MC output. Long run: monopolist exits if profit remains negative.
- Forgetting barriers to entry: Without barriers, even one firm cannot sustain monopoly; rivals enter. Always cite the barrier.
- Comparing only profit levels: Don't just say "monopoly profit > competition profit." Emphasise allocative inefficiency (P > MC).
- Ignoring regulatory aspects: In India, monopolies are regulated under Competition Act 2002 (abuse of dominance, Section 4) and sector regulators (TRAI, CERC, etc.).