The monopoly, in its pure sense, is said to exist when there is only one seller from whom a given goods can be obtained, and if we do not buy from him or his product, we have to go without the use of that product. But if that goods has some close substitutes, which are readily available, the seller of this product will have little or no power to squeeze the buyers because he has to compete with the sellers of the substitute goods. A seller has got the buyer under his thumb only when the buyers has to take what he sells and that too at his terms because the buyer cannot get any close substitute from any other seller. The power of the seller to fix the terms, on which he will sell, is called the monopoly power or the degree of monopoly. Clearly, this power depends upon the extent to which competition from close substitutes is absent. If there is no competition at all, the monopoly power is high. But if there is perfect competition, monopoly power is nil or the degree of monopoly is zero.
A number of methods are used to ascertain the monopoly power. One common method is to ascertain monopoly power by the difference between the price and the marginal cost. We know that under perfect competition, P = MC and that degree of monopoly or monopoly power is zero. But under monopoly, price is more than the marginal cost or P < MC. The greater the monopoly power of a firm.
Another method of assessing the monopoly power is suggested by Learner. According to him, monopoly power
MP = P – C/P
Where MP is the monopoly power, P is the price or AR, C is the marginal cost of production. Now under conditions of equilibrium, MC = MR, and therefore, the formula can be rewritten as
MP = AR – MR /AR (:. P = AR)
This formula is the inverse of the formula for the elasticity of demand, where e = AR /AR – MR and the degree of monopoly or the monopoly power is inversely proportional to the elasticity of demand. In other words, it means that higher the elasticity of demand, the smaller is the degree of monopoly and lower the elasticity, higher the monopoly power.