Lesson at a Glance
Monopoly: Derived from two Greek words: ‘Monos’ means single and ‘polus’ means a seller. Monopoly refers to a market situation where there is a single seller selling a product that has no close substitutes. For example, Railways in India.
Features of Monopoly:
1. Single Seller: Under monopoly, there is a single seller selling the product. As a result, the monopoly firm and industry are one and the same thing and the monopolist has full control over the supply and price of the product. However, there is a large number of buyers of monopoly products and no single buyer can influence the market price.
2. No Close substitutes: The product produced by a monopolist has no close substitutes. So, the monopoly firm has no fear of competition from new or existing products. For example, there is no close substitute for electricity services provided by NDPL. However, the product may have distant substitutes like inverters and generators.
3. Restrictions on Entry and Exit: There exist strong barriers to entry of new firms and exit of existing firms. As a result, a monopoly firm can earn abnormal profits in the long run. These barriers may be due to legal restrictions like licensing or patent rights or due to restrictions created by firms in the form of cartels.
4. Price Discrimination: A monopolist may charge different prices for his product from different sets of consumers at the same time. It is known as ‘Price Discrimination’.
Implication Price Maker:
In the case of monopoly, firm, and industry are one and the same thing. So, the firm has complete control over the industry output. As a result, the monopolist is a price-maker and fixes its own price. It can influence the market price by changing the supply of the product.
In real life, it is a monopolistic competitive market that generally exists. It is that situation of the market wherein there are many sellers of the product, but the product of each seller is a bit different from the products of other sellers.
There are many examples relating to this kind of market. Firms producing different brands of toothpaste, such as Pepsodent, Colgate, Close-up, etc. are operating under monopolistic competition. This market situation is a combination of monopoly and competition.
Features of Monopolistic Competition:
1. Large Number of Firms: There are a large number of sellers selling closely related but not homogeneous products. Each firm acts independently and has a limited share of the market.
2. Product Differentiation: The distinct feature of monopolistic competition is product differentiation. Though the number of firms is large their products differ from one another, in color, shape, brand, quality, durability, etc. These products are close substitutes. Product differentiation has many examples i.e. in the case of soaps, we have several brands such as Lux, Hamam, Godrej, Pears, Palmolive, etc., and in the case of tea, Lipton, Brooke Bond, Taj Mahal, and in the case of tooth-paste, Close-up, Colgate, etc. Because of product differentiation, each firm can decide its price policy independently. So that each firm has partial control over the price of its product.
3. Freedom of Entry and Exit of Firms: Firms are free to enter into, or exit from the industry. But new firms have no absolute freedom of entry into industry. They may have to face several difficulties. Products of some firms may be legally patented. New firms cannot produce those products. No rival firm can produce and sell a patented item like Woodland shoes.
4. Selling Cost: Each firm has to spend a lot on the advertisement of its products. In order to sell more units of the product, it gives wide publicity of its product in newspapers, cinemas, journals, radio, TV, etc. The expenses on advertisement and publicity are called selling costs.
Oligopoly: Oligopoly is a market structure in which there are only a few sellers (but more than two) of the homogeneous or differentiated products. So, oligopoly lies in between monopolistic competition and monopoly. Oligopoly refers to a market situation in which there are a few firms selling homogeneous or differentiated products. Oligopoly is, sometimes, also known as ‘competition among the few’ as there are few sellers in the market, and every seller influences and is influenced by the behavior of other firms.
Example: (i)Automobiles, steel, etc.
Features of Oligopoly:
(a) Few Dominant Firms: Oligopolists are often large firms, each producing a significant portion of the total market output. There are only a few rival firms.
(b) Mutual Interdependence: Since the market is dominated by a few firms, the price and output decisions of one firm affect the profitability of the remaining firms in the market. Mutual interdependence is an incentive to develop alternatives to price competition in the pursuit of economic profit.
(c) Barriers to Entry: Barriers to entry limit the threat of competition and facilitate the ability of firms to earn long-run economic profits.
(d) Homogeneous or Differentiated Products: The output of an oligopolistic market may be either homogeneous or differentiated.
(e) Implication Demand Curve: In an Oligopoly, due to a high degree of interdependency amongst oligopolistic firms, we cannot define the demand curve faced by an oligopolist firm. Hence, the solution is indeterminate.
(f) Price Rigidity: In oligopolistic firms, prices are administered. Each rival firm reacts immediately to the changed price, due to which the price remains rigid in the market.
- NCERT Revision Notes for Class 12 (All Subjects)
- CBSE Class 12 Economics Notes
- NCERT Solutions for class 12th Economics Part A Chapter 6 Non Competitive Markets