Monopoly

MONOPOLY

Presented by:

Group:4

Table of content

1. Market structure

2. Introduction to Monopoly

3. Features of Monopoly

4. Types of Monopoly

5. Average revenue and Marginal revenue

6. Elasticity under Monopoly

7. Equilibrium Under Monopoly

8. Price discrimination

Market structure

Perfect competition

Pure Monopoly

More competitive

Market structure

Perfect competition

Pure Monopoly

Less competitive

Market structure

Pure Monopoly

The right on the scale, the greater the degree of monopoly power exercised by the firm.

Perfect Competition

Monopolistic Competition Oligopoly Duopoly Monopoly

Monopoly• "Monopoly refers to a market where there is a single seller

for a product and there is no close substitute of the commodity that is offered by the sole supplier to the buyers. The firm constitutes the entire industry".

• 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.

Features of Monopoly

Single person or a firm

No close substitutes

Large number of buyers

Price maker

Types of Monopoly

Natural monopoly

Legal monopoly

Voluntary monopoly (cartel, Trust )

Public monopoly

Private monopoly

Simple monopoly

Discriminating monopoly

Perfect monopoly

Imperfect monopoly

Average Revenue & marginal Revenue• In monopoly, the marginal revenue curve lies below

the average revenue curve and normally slopes downwards more swiftly than the average revenue curve.

• The two curves are separate, the marginal revenue curve being steeper than the average revenue curve.

Monopoly & Elasticity• It is a relationship to price elasticity of demand. • when demand is elastic, a decline in price will increase

total revenue. • When demand is inelastic, a decline in price of a good

will decrease its revenue.• Applying this , a monopolist will fix the amount of his

product at a level where the elasticity of his average revenue curve is greater than one (E > 1). It causes total revenue to increase.

• Here marginal revenue is positive. A monopolist does not push his produce to the point where the marginal revenue becomes negative.

• The monopolist choice of price when faced with varying degree of elasticities is now explained with the help of a diagram.

Short run equilibrium under monopoly• In the short period, the monopolist behaves like any other

firm. A monopolist will maximize profit or minimize losses by producing that output for which marginal cost (MC) equals marginal revenue (MR).

• Whether a profit or loss is made or not depends upon the relation between price and average total cost (ATC). It may be made clear here that a monopolist does not necessarily makes profit. He may earn super profit or normal profit or even produce at a loss in the short run.

1) Short Run Monopoly Equilibrium With super normal Profit

• In the short period, if the demand for the product is high, a monopolist increase the price and the quantity of output.

• He can increase the, output by hiring more labor, using more raw material, increasing working hours etc.

• However, he cannot change his fixed plant and equipment.

• In case, the demand for the product falls, he then decreases the use of variable inputs, (like labor, material etc.).

Short Run Equilibrium With Losses Under Monopoly

• A monopolist also accepts short run losses provided the variable costs of the firm are fully covered. The loss minimizing short run equilibrium analysis is presented graphically.

Long Run Equilibrium Under Monopoly

• The monopolist creates barriers of entry for the new firms into the industry.

• The entry into the industry is blocked by having control over the raw materials needed for the production of goods or he may hold full rights to the production of a certain good (patent) or the market of the good may be limited.

• If new firms try to enter in the field, it lowers the price of the good to such on extent that it becomes unprofitable for new firms to continue production etc.

• When there is no threat of the entry of new firms into the industry, the monopoly firm makes long run adjustments in the scale of plant.

• If the market size is large and permits to expand output, then the monopolist would build an optimum scale of plant and would produce goods at the minimum cost per unit.

• The long run equilibrium of a monopoly firm is now explained with the help of the following diagram.

Monopoly Price Discrimination

• "Price discrimination is the act of selling the same article produced under single control at a different prices to the different buyers".

• In price determination under monopoly, it was assumed that a monopolist charges only one price for his product from all the customers in the market.

• But it often so happens that a monopolist, by virtue of his monopolistic position, may manage to sell the same commodity at different prices to different customers or in different markets. 

• The practice on the part of the monopolist to sell the identical goods at the same time to different buyers at different prices when the price difference is not Justified by difference in costs in called price discrimination. In the words of Mrs. Joan Robinson

Types of Price Discrimination

• Price discrimination may be of various types. It may either be

(i) Personal

(ii) trade discrimination

(iii) local discrimination.

Personal Discrimination• It is personal, when separate price is charged from each

buyer according to the intensity of his desire or according to the size of his pocket.

• For example, a doctor may charge RS.20,000 from a rich person for an eye operation and RS.5,000 only from a poor man for the similar operation.

Trade discrimination• It may take place when a monopolist charges

different prices according to the uses to which the commodity is put. 

• For example, an electricity company may charge low rate for electric current used in an industrial concern than for the electricity used for the domestic purpose.

Local Discrimination• It occurs when a monopolist charges different

prices for the same commodity at different places. • This type of discrimination is called dumping.• For example, charges for cold drinks are high in

theater or in hotel then in any outlet or retail shop

Essentials of price discrimination1. There should be monopolist firm i.e. sole seller.

2. There should be at least two or more markets or group of buyers for the monopoly product or service.

3. The elasticity of the demand for the product should be different in different markets.

4. The cost of keeping different markets separate would not be too high relative to the difference in the elasticities of demand.