Pure Monopoly

Updated on April 16, 2024
Article byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Pure Monopoly?

Pure monopoly refers to a type of economic market. It is a situation in which a single corporation controls the whole supply of goods or services. In a pure monopoly, only one company exists, and it determines all terms, conditions, rules, and pricing. It develops when a single company dominates a product’s market.

What Is Pure Monopoly

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A pure monopoly implies a company whose product is the only one on the market, implying it has no substitutes. Therefore, the industry is practically dominated by a single company. Consequently, these businesses can maximize profits by calculating the optimal price and quantity. A pure monopoly is a framework in which a single provider manufactures and sells a commodity or service.

Key Takeaways

  • Monopoly is derived from two Greek words: mónos, meaning “single,” and plein, meaning “to sell.”
  • In a pure monopoly, there is only one company, and it sets all the rules, prices, and terms.
  • Monopolist businesses can maximize their profits by calculating the optimal price and quantity, as the cross-elasticity of demand between the product and that of competitors is minimal or nil.
  • The fundamental features of a monopoly are a single firm selling a unique product or offering in a market, and there are constraints on entry and exit for other firms in the industry.

Pure Monopoly Explained

Pure monopoly refers to a market in which there is only one vendor. Monopoly stems from two Greek words: mónos, which means “single,” and plein, which means “to sell.” Monopolies are therefore defined by a lack of economic rivalry to manufacture the commodity or service, a scarcity of viable replacement goods, and the potential of a high monopoly price significantly higher than the seller’s marginal cost, leading to a high monopoly profit.

In the United States manufacturing industry, monopolies are practically nonexistent. However, several elements contribute to establishing any monopoly, as a monopoly cannot be formed by a single entity. Let us examine the factors that might lead to monopoly formation:

  • Pure monopoly companies own a rare resource exclusively, such as Microsoft owning the Windows operating system brand, it has monopolistic power over that resource, making it the only company to exploit it.
  • Governments may provide monopoly status to a company, as Oliver Cromwell did in 1654 when he granted monopoly status to the Post Office. However, the Royal Mail Group lost its monopoly status when the market became open to competition in 2006.
  • Producers may hold patents on designs or copyright on concepts, characters, pictures, sounds, or names, granting them the exclusive authority to sell a product or service comparable to a songwriter’s monopoly over their own compositions.
  • A monopoly might result from the merging of two or more companies. Given that this will lessen competition, these mergers are subject to stringent regulation. For example, they may be prohibited if the combined market share of the two enterprises exceeds 25 percent.

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Video Explanation of Monopoly Examples

 

Graph Of Pure Monopoly

Let us have a look at the graph of pure monopoly to understand how it earns supernormal profit

Pure Monopoly Graph

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The figure visually depicts the extent of monopoly profits by considering the marginal cost (MC), marginal revenue curve (MR), average revenue curve (AR), and average cost curve (AC). Here, ‘X’ on the horizontal axis denotes quantity, and ‘Y’ on the vertical axis denotes price.

To maximize profit, a monopolist supplies’ X’ until marginal cost equals marginal income. Then, the price ‘Y’ is determined by the market’s willingness to pay, as indicated by the marginal income curve. The per-unit profit of a monopolist is the difference between the price and the unit cost. The total profit is calculated by multiplying the profit per unit by the quantity sold, as shown in the shaded rectangle indicating monopoly profit.

A monopolist will maximize profits by establishing production so that MR = MC. This will be reflected in the production quantity Xm and price Ym. Compared to a market with competition, the monopolist raises prices and decreases production. Shaded region = Monopoly Profit (AR-AC) * X.

Characteristics

1. One seller and several buyers

The monopolist’s company is the sole business in its industry. However, many purchasers rely upon and buy from the pure monopolist.

2. No Close Substitutes

No close substitutes exist for the product sold by the pure monopolist. Therefore, the cross-elasticity of demand between the product and that of pure monopoly competition has is minimal or nil.

3. Difficulty of New Firms’ Entry

There are either natural or artificial barriers to entry into the business, even if a company produces excessive profits.

4. Monopolies are themselves an Industry

As in a monopoly, there is only one company within an industry. The distinction between business and industry comes to an end.

5. Price Setter

In a monopoly, the monopolist controls the commodity’s supply. However, because of the vast number of purchasers, the desire of every individual buyer represents a small portion of the entire demand. Consequently, customers must pay the price set by the monopolist.

Examples

Let us look at the following Pure Monopoly examples to understand the concept better.

Example #1

Due to the ever-increasing number of users on social networks, businesses want to tap into that market. And in return, social network takes a slice of their profit by charging them for promotions. 

Facebook dominates this business model. It showed this with its acquisition of WhatsApp and Instagram. As a result, Facebook controls the majority of the market for personal social networking. Although it cannot be considered a Pure monopoly as Twitter and Snapchat are unquestionably Facebook’s competitors. However, they have minor stakes, almost unimportant compared to Facebook. 

Consider a future scenario where all users only use Facebook, Instagram, or WhatsApp. In that case, it can be considered a case of pure monopoly. 

Example #2

An article by Washington Monthlydescribes how monopoly affects inflation and other firms in the industry. It highlights that dominating companies employ Predatory practices, such as price gouging, loss-leading, and price discrimination. It elaborates on how chain stores sell below cost and compels their suppliers to put mom-and-pop shops out of business and establish monopolistic price power

The article also highlights a recent case of the Pandemic in 2020, when the meat-packing industry’s monopolistic pricing accounted for half of the increase in food prices. Meatpackers justify that they are just passing along increased expenses yet fail to explain their ever-increasing profits. 

Similarly, the article also describes the example of Amazon, founded by Jeff Bezos. It is a fact that it has sold virtually everything at a loss for almost a decade. In reality, it created a retail platform with a massive market share that merchants must now pay monopolistic pricing to access.

This monopolistic conduct has not just an inflationary effect but is also likely to result in a recession. In a typical competitive market, these companies would invest in additional factories and capacity to keep the economy humming without inflation. Instead, by increasing prices, they are pushing inflation and nearly compelling the government to raise interest rates, which may result in a economic recession.

Frequently Asked Questions (FAQs)

What are the major features of pure monopoly?

The fundamental features of pure monopoly are (1) a single firm selling all products in a market, (2) a unique product or offering, (3) constraints on entry and exit for other firms in the industry, (4) intelligent information regarding production processes that is inaccessible to those other in the industry.

What is the difference between monopoly and pure monopoly?

A monopoly arises when one business acquires the majority, but not all, of the market share. Consider, for instance, a market with only one vendor and no close substitutes. In this instance, the market structure is a “pure monopoly.” Simply stated, a monopoly can exist in a market with several providers. In contrast, a pure monopoly has just one market supplier.

Does pure monopoly exist?

A pure monopoly develops when a single company dominates a product’s market. Due to its nature, Pure monopolies are extremely uncommon in the actual world. It rarely exists, such as the government’s control over some public services.

This has been a guide to Pure Monopoly and its definition. We explain the characteristics, graph of pure monopoly along with examples. You may learn more from the following articles –

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