Monopoly is said to exist when one firm is the sole producer or seller of a product which has no close substitutes. According to this definition, there must be a single producer or seller of a product. If there are many producers producing a product, either perfect competition or monopolistic competition will prevail depending upon whether the product is homogeneous or differentiated. On the other hand, when there are few producers, oligopoly is said to exist. A second condition which is essential for a firm to be called a monopolist is that no close substitutes for the product of that firm should be available.
From the above discussion it follows that for monopoly to exist, following conditions are essential:
One and only one firm produces and sells a particular commodity or a service.
There are no rivals or direct competitors of the firm.
No other seller can enter the market for whatever reasons — legal, technical or economic.
Monopolist is a price maker. He tries to take the best of whatever demand and cost conditions exist without the fear of new firms entering to compete away his profits.
In the case of monopoly one firm constitutes the whole industry. Therefore the entire demand of the consumers for that product faces the monopolist; which slopes downward. Monopolist can lower the price by increasing his level of sales and output and he can raise the price by reducing his level of sales. Demand curve facing the monopolist will be his average revenue curve, which also slopes downward. Since average revenue curve slopes downward, marginal revenue curve will be below it.