Q. Write short notes on the following:
♦ Meaning and Definition of Monopoly:
The word monopoly is made up of two syllables – “MONO” means single and “POLY” means to sell. Thus, monopoly means existence of a single seller in the market. Monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitutes. Monopoly may be defined as a condition of production in which a person or a number of persons acting in combination have the power to fix the price of the commodity or the output of the commodity. It is a situation where there exists a single control over the market producing a commodity having no substitutes and no possibilities for anyone to enter the industry to compete.
According to Prof. Watson: A monopolist is the only producer of a product that has no close substitutes.
♦ Characteristics of Monopoly:
1. Anti-Thesis of competition
Absence of competition in the market creates a situation of monopoly and hence the seller faces no threat of competition.
2. Existence of a single seller
There will be only one seller in the market who exercises single control over the market.
3. Absence of substitutes
There are no close substitutes for his product with a strong cross elasticity of demand. Hence, buyers have no alternatives.
4. Control over supply
He will have complete control over output and supply of the commodity.
5. Price Maker
The monopolist is the price – maker and in taking decisions on price fixation, he is independent. He can set the price to the best of his advantage. Hence, he can either charge a high price for all customers or adopt price discrimination policy.
6. Entry barriers
Entry of other firms is barred somehow. Hence, monopolist will not have direct competitors or direct rivals in the market.
7. Firm and industry is same
There will be no difference between firm and an industry.
8. Nature of firm
The monopoly firm may be a proprietary concern, partnership concern, Joint Stock Company or a public utility which pursues an independent price-output policy.
9. Existence of super normal profits
There will be place for supernormal profits under monopoly, because market price is greater than cost of production.
♦ Meaning and Definition of Oligopoly:
The term oligopoly is derived from two Greek words “Oligoi” means a few and “Poly” means to sell. Under oligopoly, we come across a few producers specializing in the production of identical goods or differentiated goods competing with one another. The products traded by the oligopolists may be differentiated or homogeneous. In the case of former, we can give the e.g., of automobile industry where different model of cars, ambassador, fiat etc., are manufactured. Other examples are cigarettes, refrigerators, T.V. sets etc., pure or homogeneous oligopoly includes such industries as cooking and commercial gas cement, food, vegetable oils, cable wires, dry batteries, petroleum etc., In the modern industrial set up there is a strong tendency towards oligopoly market situation. To avoid the wastes of competition in case of competitive industries and to face the emergence of new substitutes in case of monopoly industries, oligopoly market is developed. e.g., an electric refrigerator, automatic washing machines, radios etc.
♦ Characteristics of Oligopoly:
Each and every firm has to be conscious of the reactions of its rivals. Since the number of firms is very few, any change in price, output, product etc., by one firm will have direct effect on the policy of other firms. Therefore, economic calculations must be made always with reference to the reactions of the rival firms, as they have a high degree of cross elasticity’s of demand for their products.
2. Indeterminateness of the demand curve:
Under oligopoly, there will be the element of uncertainty. Firms will not know the particular factors which could affect demand. Naturally rise or fall in the demand for the product cannot be speculated. Changes that would be taking place may be contrary to the expected changes in the product curve.. Thus, the demand curve for the product will be indeterminate or indefinite. Prof. Sweezy explains it as a kinky demand curve.
3. Conflicting attitude of firms:
Under oligopoly, on the one hand, firms may realize the disadvantages of competition and rivalry and desire to unite together to maximize their profits. On the other hand firms guided by individualistic considerations may continuously come in clash and conflict with one another. This creates uncertainty in the market.
4. Element of monopoly and competition:
Under oligopoly, a firm has some monopoly power over the product it produces but not on the entire market. But monopoly power enjoyed by the firm will be limited by the extent of competition.
5. Price rigidity:
Generally, prices tend to be sticky or rigid under oligopoly. This is because of the fact that if one firm changes its price, other firms may also resort to the same technique.
6. Aggressive or defensive marketing methods:
Firms resort to aggressive and sometimes defensive marketing methods in order to either increase their share of the market or to prevent a decline of their share in the market. If one adopts extensive advertisement and sales promotion policy it provokes others to do the same. Prof. Boumal rightly remarks in this connection- “Under oligopoly, advertising can become a life and death matter where a firm which fails to keep up with the advertising budget of its competitors may find its customers drifting off to rival firms”.
7. Constant struggle:
Competition is of unique type in an oligopolistic market. Hence, competition consists of constant struggle of rivals against rivals.
8. Lack of uniformity:
Lack of uniformity in the rise of different oligopolies is another remarkable feature.
9. Small number of large firms:
The numbers of firms in the market are small. But the size of each firm is big. The market share of each firm is sufficiently large to dominate the market.
10. Existence of kinked demand curve:
A kinked demand curve is said to occur when there is a sudden change in the slope of the demand curve. It explains price rigidity under oligopoly.