Introduction to Monopoly Concept

1. MONOPOLY---IN MICROECONOMICS
----------NILORMI DAS

2. MARKET STRUCTURES
In economics, monopoly is a pivotal area to the study
of market structures, which directly concerns
normative aspects of economic competition, and
sets the foundations for fields such as industrial
organization and economics of regulation. There are
four basic types of market structures under
traditional economic analysis: perfect competition,
monopolistic competition, oligopoly and monopoly.
A monopoly is a market structure in which a single
supplier produces and sells the product. If there is a
single seller in a certain industry and there are no
close substitutes for the goods being produced, then
the market structure is that of a "pure monopoly".
Sometimes, there are many sellers in an industry
and/or there exist many close substitutes for the
goods being produced, but nevertheless firms retain
some market power. This is called monopolistic
competition, whereas in oligopoly the main
theoretical framework revolves around firm's
strategic interactions.

3. MONOPOLY
In economics, a monopoly (from Greek monos /
μονος (alone or single) + polein / πωλειν (to sell))
exists when a specific individual or an enterprise is
the only supplier of a particular kind of product or
service
While a competitive firm is a price taker, a
monopoly firm is a price maker.
A firm is considered a monopoly if . . .
it is the sole seller of its product.
its product does not have close substitutes.

4. Why Monopolies Arise
The fundamental cause of monopoly is
• The fundamental cause of
barriers to entry.
monopoly is barriers to entry
Barriers to entry have three sources:
Ownership of a key resource.
This tends to be rare. De Beers is an example
The government gives a single firm the exclusive
right to produce some good.
Patents, Copyrights and Government
Licensing.
Costs of production make a single producer more
efficient than a large number of producers.
Natural Monopolies

5. Monopoly versus Competition
Monopoly Competitive Firm
 Is the sole producer Is one of many producers
 Has a downward-sloping Has a horizontal demand curve
demand curve
Is a price taker
 Is a price maker Sells as much or as little at same
 Reduces price to increase sales price

6. A Monopoly’s Marginal Revenue
• A monopolist’s marginal revenue is always less than the price of its good.
 The demand curve is downward sloping.
 When a monopoly drops the price to sell one more unit, the revenue received from
previously sold units also decreases .
A MONOPOLY’S REVENUE
• Total Revenue
P x Q = TR
• Average Revenue
TR/Q = AR = P
• Marginal Revenue
TR/ Q = MR

7. A Monopoly’s Total, Average, and Marginal
Revenue
Quantity(Q) Price(P) Total Revenue Average Marginal
(TR=P×Q) Revenue Revenue
(AR=TR/Q) (MR)
0 $11.00 $0.00 - -
1 $10.00 $10.00 $10.00 $10.00
2 $9.00 $18.00 $9.00 $8.00
3 $8.00 $24.00 $8.00 $6.00
4 $7.00 $28.00 $7.00 $4.00
5 $6.00 $30.00 $6.00 $2.00
6 $5.00 $30.00 $5.00 $0
7 $4.00 $28.00 $4.00 -$2.00
8 $3.00 $24.00 $3.00 -$4.00

8. A Monopoly’s Profit
• Profit equals total revenue minus total costs.
• Profit = TR - TC
• Profit = (TR/Q - TC/Q) x Q
• Profit = (P - ATC) x Q
MONOPOLIST’S PROFIT
• The monopolist will receive economic profits as long as price is greater than average total
cost

9. Potential Benefits from Monopoly
• A high market concentration (fewness of sellers) does not
always signal the absence of competition
• Important in essays and data questions
• Increasingly markets where a monopoly appears to exist are
actually becoming more contestable
• So what are the main advantages of a market dominated by a
few sellers?
• Economies of Scale
• A monopolist might be better positioned to exploit economies
of scale leasing to an equilibrium which gives a higher output
and a lower price than under competitive conditions.

10. EXAMPLE OF THE BEFITS OF MONOPOLY
For example the unit cost of
A Boeing 747-400 is $228-260 million (2007)
Boeing 747-8 $285.5-300 million (2007)
In 2007, there were orders for only 16 aircraft. Clearly an industry
like this is going to have huge economies of scale. To develop a
Boeing 747 is very expensive. The unit cost of over $200 million
dollars means that it would not make sense to have more
competition in this market. If there was competition, then the unit
costs would probably increase substantially making it potentially
unprofitable. The Boeing will have various economies of scale such
as:
Specialisation
Technical economies
Bulk buying
financial economies
marketing economies
This is an example of a market where firms with monopoly power are
likely to lead to better deals for consumers. In developing the next
generation of jumbo jets, the firms will require huge amounts of
investment. This investment is only viable for a firm with a high
market share and large profit.

11. CHARACTERISTICS OF MONOPOLY
• Profit Maximiser: Maximizes profit.
• Price Maker: Decides the price of the good or product to be sold.
• High Barriers to Entry: Other sellers are unable to enter the
market of the monopoly.
• Single seller: In a monopoly there is one seller of the good who
produces all the output. Therefore, the whole market is being
served by a single firm, and for practical purposes, the firm is the
same as the industry.
• Market power: Market power is the ability to affect the terms and
conditions of exchange so that the price of the product is set by
the firm (price is not imposed by the market as in perfect
competition). Although a monopoly's market power is high it is
still limited by the demand side of the market. A monopoly faces a
negatively sloped demand curve not a perfectly inelastic curve.
Consequently, any price increase will result in the loss of some
customers.
• Firm and industry: In a monopoly, market, a firm is itself an
industry. Therefore, there is no distinction between a firm and an
industry in such a market.
• Price Discrimination: A monopolist can change the price and
quality of the product. He sells more quantities charging less price
against the product in a highly elastic market and sells less
quantities charging high price in a less elastic market.

12. SUMMARY OF MONOPOLY