NCERT Books Class 12 Microeconomics Chapter 6- Non-Competitive Markets

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We recall that perfect competition is a market structure where both consumers and firms are price takers. The behaviour of the firm in such circumstances was described in the Chapter 4. We discussed that the perfect competition market structure is approximated by a market satisfying the following conditions:

There exist a very large number of firms and consumers of the commodity, such that the output sold by each firm is negligibly small as compared to the total output of all the firms combined, and similarly, the amount purchased by each consumer is extremely small in comparison to the quantity purchased by all consumers together.

In this chapter, we shall discuss situations where one or more of these conditions are not satisfied. If assumption (ii) is dropped, and it becomes difficult for firms to enter a market, then a market may not have many firms. In the extreme case a market may have only one firm. Such a market, where there is one firm and many buyers is called a monopoly. A market that has a small number of large firms is called an oligopoly. Notice that dropping assumption (ii) leads to dropping assumption (i) as well. Similarly, dropping the assumption that goods produced by a firm are indistinguishable from those of other firms (assumption iii) implies that goods produced by firms are close substitutes, but not perfect substitutes for each other. Such markets, where assumptions (i) and (ii) may hold, but (iii) does not hold are called markets with monopolistic competition. This chapter examines the market structures of monopoly, monopolistic competition and oligopoly.

6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET

A market structure in which there is a single seller is called monopoly. The conditions hidden in this single line definition, however, need to be explicitly stated. A monopoly market structure requires that there is a single producer of a particular commodity; no other commodity works as a substitute for this commodity; and for this situation to persist over time, sufficient restrictions are required to be in place to prevent any other firm from entering the market and to start selling the commodity. 

In order to examine the difference in the equilibrium resulting from a monopoly in the commodity market as compared to other market structures, we also need to assume that all other markets remain perfectly competitive. In particular, we need (i) All the consumers are price takers; and (ii) that the markets of the inputs used in the production of this commodity are perfectly competitive both from the supply and demand side. 

If all the above conditions are satisfied, then we define the situation as one of monopoly in a single commodity market.