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MONOPOLY

GROUP 1 – Jubal, Jobi, Madhuri, Santosh, Vinayak, Devendra, Noel, Owais,

Masroor

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MONOPOLY

• The Word Monopoly is a Latin Term. ‘Mono’ means Single and ‘Poly’ means Seller.

• Monopoly is a form of Market Organization in which there is only One Seller of the Commodity.

• There are No Close Substitutes for the Commodity sold by the Seller.

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Features Of Monopoly

1. Single Person or a Firm.

2. No Close Substitutes.

3. Large Number of Buyers.

4. Price Maker.

5. Downward Sloping Demand Curve.

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Types Of Monopoly PracticesPerfect Monopoly: It is also called as absolute monopoly.

• There is only a single seller of product having no close substitute; not even remote one.

• There is absolutely zero level of competition.• Such monopoly is practically very rare.

Ex: Bill Gates played Perfect Monopoly in US for MS Word.

Imperfect Monopoly: It is also called as relative monopoly.• It refers to a single seller market having no close substitute.• It means in this market, a product may have a remote substitute. So, there

is fear of competition to some extent.• e.g. Vodafone is having competition from fixed landline phone service

industry BSNL.

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Types Of Monopoly Practices

Private Monopoly: When production is owned, controlled & managed by the individual, private body or private organization, it is called private monopoly.

• e.g. Tata, Reliance, Bajaj groups in India.

Public Monopoly: A Government monopoly is a form of coercive monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law.

• It is a Monopoly created by the Government.• The Indian Railways is entirely government run

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Types Of Monopoly PracticesSimple Monopoly: It is also called Single-Price Monopoly.

• Simple monopoly firm charges a uniform price or single price to all the customers.

• He operates in a single market.

Discriminating Monopoly: Such a monopoly firm charges different price to different customers for the same product. It prevails in more than one market.

• An example is an airline monopoly which sell various seats at various prices based on demand.

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Types Of Monopoly PracticesLegal Monopoly: It is a monopoly that is protected by law from competition.

• A government-regulated firm that is legally entitled to be the only company offering a particular service in a particular area.

• For example, AT&T operated as a legal monopoly until 1982 because it was supposed to have cheap and reliable service for everyone.

Natural Monopoly: A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry.

• Government often regulate certain natural monopolies to ensure that consumers get a fair deal.

• The utilities industry is a good example of a natural monopoly—Gas , Water, Power.

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Types Of Monopoly Practices

Technological Monopoly: It emerges as a result of economies of large scale production, use of capital goods, new production methods, etc.

• E.g. engineering goods industry, automobile industry, software industry, etc.

• Internet Explorer was the only browser available to browse the web between 1995-2000.

Pure Monopoly: A pure monopoly thus is an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.

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Barriers to Entry• Things that prevent new firms from entering and competing in imperfectly

competitive industries include:

• Government franchises, or firms that become monopolies by virtue of a government directive.

• Patents or barriers that grant the exclusive use of the patented product or process to the inventor.

• Economies of scale and other cost advantages enjoyed by industries that have large capital requirements. A large initial investment, or the need to embark in an expensive advertising campaign, deter would-be entrants to the industry.

• Ownership of a scarce factor of production: If production requires a particular input, and one firm owns the entire supply of that input, that firm will control the industry.

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Price: The Fourth Decision Variable

• Firms with market power must decide:1. how much to produce,2. how to produce it,3. how much to demand in each input

market, and4. what price to charge for their output.

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Price and Output Decisions in Pure Monopoly Markets

• To analyze monopoly behavior we assume that:– Entry to the market is blocked– Firms act to maximize profit– The pure monopolist buys in competitive

input markets– The monopolistic firm cannot price

discriminate– The monopoly faces a known demand curve

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Price and Output Decisions in Pure Monopoly Markets

• With one firm in a monopoly market, there is no distinction between the firm and the industry. In a monopoly, the firm is the industry.

• The market demand curve is the demand curve facing the firm, and total quantity supplied in the market is what the firm decides to produce.

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Price and Output Decisions in Pure Monopoly Markets

• The demand curve facing a perfectly competitive firm is perfectly elastic; in a monopoly, the market demand curve is the demand curve facing the firm.

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Price and Output Choice for a Profit-Maximizing Monopolist

• A profit-maximizing monopolist will raise output as long as marginal revenue exceeds marginal cost (like any other firm).

• The profit-maximizing level of output is the one at which MR = MC.

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The Absence of a SupplyCurve in Monopoly

• A monopoly firm has no supply curve that is independent of the demand curve for its product.– A monopolist sets both price and quantity,

and the amount of output supplied depends on both its marginal cost curve and the demand curve that it faces.

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Price and Output Choices for a Monopolist Suffering Losses in the Short-Run

• It is possible for a profit-maximizing monopolist to suffer short-run losses.

• If the firm cannot generate enough revenue to cover total costs, it will go out of business in the long-run.

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Perfect Competition andMonopoly Compared

• In a perfectly competitive industry in the long-run, price will be equal to long-run average cost. The market supply is the sum of all the short-run marginal cost curves of the firms in the industry.

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Perfect Competition andMonopoly Compared

• Relative to a competitively organized industry, a monopolist restricts output, charges higher prices, and earns positive profits.

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PRICE DISCRIMINATION

• Price discrimination is the business practice of selling the same good at different prices to different customers, even though the cost of production is the same for all customers.

• Price discrimination is not possible in a competitive market

• In order to price discriminate, the firm must have some market power.

• It increases the monopolist’s profits.• It reduces the consumer surplus.

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CONCLUSION

• We have seen that monopoly is inefficient. But how widespread is monopoly? How worried should we be?– Monopolies are common.

• Most firms have some control over their prices because of differentiated products.

• ButFirms with substantial monopoly power are rare.

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