Monopoly

1. MonopolyMonopoly

2. Defining Monopoly
Monopoly is a market structure in
which a single seller of a product
with no close substitutes serves the
entire market.

3. Three characteristics of monopoly
1. There is only one firm in the
industry, the monopolist.
2. There are no close substitutes for the
product.
3. There are substantial barriers to
entry.

4. Four Sources of Monopoly
1. Ownership of strategic raw materials, or exclusive
knowledge of production techniques.
2. Patent rights for a product or for a production process.
3. Government licensing, or imposition of foreign trade
barriers to exclude foreign competitors.
4. The size of the market may be such as not to support
more than one plant of optimal size. The technology
may be such as to exhibit substantial economies of
scale, which require only a single plant , if they are to be
fully reaped (natural monopoly).

5. Revenue Curves
The downward sloping demand curve for the industry must
also be the demand curve for the firm. This gives the
monopolist the power to be a price maker, he can set the
price and then sell whatever quantity consumers are willing
to buy at that price. Rather than setting the price, he can set
the quantity he wishes to sell and then accept the price the
market is willing to pay.
Ideally the monopolist would like to be able to sell a large
quantity at a high price, however it can only set one or the
other. It is because of this we say that the monopolist is
constrained by the demand curve, as shown overleaf.
The demand curve is relatively inelastic as there are no
substitutes available.

6. Average and marginal revenue under monopoly
The monopolist's demand curve
downward sloping
MR below AR

7. -4
-2
0
2
4
6
8
1 2 3 4 5 6 7
AR and MR curves for a monopoly
Q
(units)
1
2
3
4
5
6
7
P
=AR
(Rs.)8
7
6
5
4
3
2
AR
AR,MR(£)
Quantity

8. -4
-2
0
2
4
6
8
1 2 3 4 5 6 7
Q
(units)
1
2
3
4
5
6
7
P
=AR
(Rs)8
7
6
5
4
3
2
TR
(Rs)
8
14
18
20
20
18
14
MR
(Rs.)
6
4
2
0
-2
-4
AR,MR(Rs.)
Quantity
AR
AR and MR curves for a monopoly

9. -4
-2
0
2
4
6
8
1 2 3 4 5 6 7
Q
(units)
1
2
3
4
5
6
7
P
=AR
(£)8
7
6
5
4
3
2
TR
(£)
8
14
18
20
20
18
14
MR
(£)
6
4
2
0
-2
-4
MR
AR,MR(Rs.)
Quantity
AR
AR and MR curves for a monopoly

10. Managing a Monopoly
Market power permits you to price above MC
Is the sky the limit?
No. How much you sell depends on the price you set!

11. Short run equilibrium under Monopoly
Equilibrium price and output
MC = MR
There are three possible
outcomes:
1. abnormal profits
2. normal profits and
3. losses.

12. Total profit
Rs.
QO
MC
AC
Qm
MR
AR
AC
AR
Abnormal profits (AR>AC)

13. Normal profits (AR=AC)

14. O
Costsandrevenue(£)
Quantity
MC
AC
AR
MR
Q
AC
AR
Loss-minimising output (AR less than AC).
LOSS

15. Long run equilibrium
If losses persist in the long run the monopolist
will leave the market (unless it receives a
subsidy or it has an objective other than making
a profit).
If abnormal or normal profits are being earned,
the monopolist will remain in the market in the
long run. Unlike perfect competition, it is
possible to earn abnormal profits in the long run
due to the presence of barriers to entry, which
prevent firms entering the industry and eroding
the profits.

16. AR = D
MC
MR
£
QO Q1
P1
Monopoly
Equilibrium of industry under perfect competition
and monopoly: with the same MC curve

17. £
QO
MC ( = supply under
perfect competition)
Q1
MR
P1
P2
Q2
AR = D
Comparison with
Perfect competition
Equilibrium of industry under perfect competition
and monopoly: with the same MC curve

18. Arguments for and against Monopoly
Disadvantages of monopoly
high prices / low output: short run
high prices / low output: long run
lack of incentive to innovate
X-inefficiency
Advantages of monopoly
economies of scale

19. Bilateral Monopoly
Bilateral monopoly is said to exist when a
single seller of a product or input faces a
single buyer of that. Thus, under bilateral
monopoly, a single seller or supplier is
monopolist of his product or input, and the
single buyer is monopsonist of that product or
input. That is under bilateral monopoly,
monopolist faces the monopsonist.