Simple Monopoly in the Commodity Market

A market structure in which there is a single seller is called a monopoly. This one-line definition hides several conditions that must be stated explicitly. 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
• sufficient restrictions on entry are in place to prevent any other firm from entering the market and selling the commodity, so that the situation persists over time.

To compare the equilibrium under monopoly with that under other structures, we also assume that all other markets remain perfectly competitive — in particular, (i) all consumers are price takers, and (ii) the markets for the inputs used to produce this commodity are perfectly competitive on both the supply and the demand side. When all these conditions hold, we have a monopoly in a single commodity market. …