A Business Encyclopedia

Monopoly Theory of Profit

Definition: Another source of a pure profit (over and above the normal profit) is said to be a Monopoly, characterized by a single seller without any close substitute. Monopoly Theory of Profit posit that the firms enjoying the monopoly power restricts the output and charge higher prices for its products and services, than under perfect completion.

So far, all the theories of profit have been propounded on the premise of perfect competition. But theoretically, the perfect market condition is perceived as a non-existent or very rare phenomena. Thus, an extreme to the perfect competition is the monopoly market structure wherein the firms under monopoly can decide on the level of output and can charge a higher price for its products.

Monopoly in the market may arise due to the following factors:

  • Economies of scale, i.e. the cost decreases with the increase in production.
  • Mergers and takeovers
  • Ownership of unique materials
  • Legal sanction or protection

According to the monopoly theory of profit, an entrepreneur can earn a pure profit, also called as a monopoly profit and can maintain it for a longer time period by using his monopoly powers. These powers are:

  1. Power to control the supply and price of products.
  2. Power to prevent the entry of a new competitor into the market by price cutting.
  3. In certain situations, a monopoly power to control or regulate certain input markets.

Thus, a firm under monopoly can use any of these powers to earn a pure profit. Thus, monopoly serve as an important source to make a pure profit.  It is important to note that, monopoly too is a rare phenomenon. The Monopolies exists, especially in the government sectors such as production and supply of water, electricity, energy, etc. or come under the existence by the government sanction and are under the control and regulation of the government.

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