Characteristics of Monopoly Markets

Monopoly exists when an individual producer has the ability to set market prices. Monopoly firms are price makers as opposed to price takers. Their control over price typically requires

• A single seller. A single firm produces all industry output. The monopoly is the industry.

• Unique product. Monopoly output is perceived by customers to be distinctive and preferable to its imperfect substitutes.

• Blockaded entry and exit. Firms are heavily restricted from entering or leaving the industry.

• Imperfect dissemination of information. Cost, price, and product quality information is withheld from uninformed buyers.

As in the case of perfect competition, these basic conditions are too restrictive for monopoly to be commonplace in actual markets. Few goods are produced by single producers, and fewer still are free from competition of close substitutes. Even public utilities are imperfect monopolies in most of their markets. Electric companies approach a perfect monopoly in the residential lighting market but face strong competition from gas and oil suppliers in the heating market. In all industrial and commercial power markets, electric utilities face competition from gas- and oil-powered private generators. Even though perfect monopoly rarely exists, it is still worthy of careful examination. Many of the economic relations found under monopoly can be used to estimate optimal firm behavior in the less precise, but more prevalent, partly competitive and partly monopolistic market structures that dominate the real world.

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