8.3 Monopoly
After an analysis of perfect competition it is usual to consider monopoly next.
Again, this is not because this is a frequently found type of market structure,
but because as an extreme form it provides a benchmark for comparison. As
we shall see, it can also be claimed that many firms are in effect limited
monopolies.
8.3.1 Conditions
Economists have defined monopoly in many different ways. Literally, it means
a single seller in an industry. However, it is preferable to define a monopoly as
being a firm that has the power to earn supernormal profit in the long run. This
ability depends on two conditions:
1 There must be a lack of substitutes for the product. This means that any
existing products are not very close in terms of their perceived functions
and characteristics. Electricity is a good example.
2 There must be barriers to entry or exit. These are important in the long run
in order to prevent firms entering the industry and competing away the
supernormal profit. We now need to examine them in detail.