Management Notes

Reference Notes for Management

Which of the following is not a characteristic of a monopoly?

Which of the following is not a characteristic of a monopoly?

Options

A) the seller has market power
B) one seller
C) free entry and exit
D) a product without close substitutes

Answer Explanation

Answer Explanation

The correct answer for the given question is C) free entry and exit

Monopoly

Monopoly is defined as the market structure where there is a single producer /seller that has the control over the entire market. The products sold by the single seller has no close substitutes which indicates that they have a direct demand , supply and prices of a product. The monopolist (single seller) aims in maximizing his/her profit .Monopolies can be established by a government, form naturally, or form by integration. In many jurisdictions, competition laws restrict monopolies due to government concerns over potential adverse effects. Holding a dominant position or a monopoly in a market is often not illegal in itself, however certain categories of behavior can be considered abusive and therefore incur legal sanctions when business is dominant.

A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyrights, and trademarks are sometimes used as examples of government-granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly, for example with a state-owned company.

There are two theories that explains how price is determined in monopoly. The two theories are :

  • Trial Theory of Prof. Marshall¬†
  • Modern Theory or theory of Mrs. John Robinson.

Features of Monopoly

Some of the Features of Monopoly are as follows:

  • Single Producer or Seller in the market.
  • No close substitute product in the market.
  • Independent price policy is adopted by Monopolist in the market.
  • Buyers of Commodity are large in number.

An important characteristic of a monopoly is that there is only one seller and several buyers. Furthermore, in a monopoly, there is no difference between the firm and the industry. That is because only one trader and one producer exist. Accordingly, the demand curve for the firm is also the demand curve for the industry. A monopoly market has several buyers, so an individual cannot affect the price.When a monopolist produces a product, there is no close substitute for it. If there is a close substitute, then the monopoly cannot exist. Monopolies are only possible when a monopolist produces zero cross-elasticity.

Therefore, the monopolist can decide the price of his choice and refuse to sell below it. New firms entering the industry face many obstacles, even if the monopolist firm is earning supernormal profits. A number of reasons contribute to this, such as legal barriers, technological advancements, or naturally occurring substances that others cannot obtain. Sometimes, the monopolist works in a small market making it economically challenging for new firms to enter.

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