A monopoly is a market structure with a single seller of a product without close substitutes. Key characteristics include one seller, a unique product with no close substitutes, and high barriers to entry. A monopolist faces a downward sloping demand curve and can set either price or quantity but not both. They will produce where marginal cost equals marginal revenue to maximize profits. While monopolies may earn economic profits in the short run, they also reduce overall welfare by limiting output and choice for consumers.

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MONOPOLY (By Etee Eze)
1. MEANING:
The word monopoly is derived from two Greek word, ‘mono’ and ‘polie’. The
word ‘mono’ means one and ‘polie’ means seller. So the word monopoly stands for
‘one seller’. Thus, the word monopoly describe a market structure in which there is
only a single seller of a homogenous product for which there is no close substitute
and there are effective barriers to entry into the market.
Monopoly (i.e. single seller) is the extreme opposite of the perfectly
competitive market (where there are many sellers).
In a monopoly situation, all market power is concentrated in only one source.
In other words, in a monopolistic market the product is only limited by the tastes
and incomes of the consumer, this single seller has direct control over the market
price and can flood or starve the market of supplies of the commodity according to
his wishes.
Where no new firms (i.e. rivals) may enter the industry (i.e. the market) and
where no drastic change in demand conditions can occur the position of the single
seller becomes absolute. Such a situation is usually described as pure monopoly, i.e.
one firm constitutes the industry and, therefore that firm’s demand curve is the
market demand curve (which is downward sloping). Hence, any change in price is
responded by change in quantity demanded for a reverse or inverse sign. Given the
industry’s demand curve, the monopolist is a price giver or price maker, he can fix
his price and sell specific output and obtain the profit he can for it. In a monopoly
situation, the firm can fix either output or price, but not both at the same time.
2. CHARACTERISTICS OF THE MONOPOLY:
The following are the characteristic of the monopoly.

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i. A Single Seller: In perfect competition, many sellers make up the industry. In
contrast, a monopoly means that a single seller is the industry. One seller
provides the total supply of a product in a given market. In real world, local
monopolies are more common approximation of the model than national or
international market monopolies. For example, the provision store, the
barber and the beer store are all examples of local monopolies but outside
the village where they are located, you see many sellers.
ii. A Product with no close Substitute: The product offered for sale by the
monopolist has no close substitute. The monopolist needs not fear the action
of rival as he faces little or no competition. However, in reality, there are few
of any products that have no close substitutes.
iii. Barrier to entry: in perfect competition, there is freedom of entry into the
industry and as such no constraint to prevent new firm from entering the
industry. In a monopoly, there are extremely high barriers that make it
impossible for new firm to enter the industry and compete with the
monopolist.
1. THE CAUSES OF MONOPOLY:
Though absolute monopoly does not exist in the read world, a Large measure of
monopoly can sometimes arise through a variety of causes such as the Following:
i. Exclusive Knowledge of production Technique: A firm may erect an artificial
barrier to entry and thus become a monopoly if it has an exclusive knowledge
of production technique. Exclusive knowledge and possession of Technical
knowledge developed through operating experience can give a firm an edge
which competitors can only acquire at huge expenses and thereby suffer cost
and other disadvantages. In this situation, the firm with exclusive knowledge
and possession of production technique can make itself a monopoly by under
cutting its disadvantage competitors.

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ii. Ownership and control of strategic can materials: The ownership and control
of strategic raw materials or resources may constitute a formidable barrier to
entry to other firms and thus create a monopoly. Such strategic raw material
or resources may include managerial talents, a plant with an extra ordinary
location or key raw material that is indispensable in the production process.
iii. Licensing: The Government may permit certain monopolies to exist or create
them through its Licensing Laws. Literal of these are Laws which restrict the
number of public houses (i.e. pubs or hotels) within a given area, or to allow
only the post office to deliver mails thereby baring private firms which carry
letters direct to addressees or only national Electric power Authority (NEPA)or
power Holding company of Nigeria to produce electricity in Nigeria.
iv. The Need to Avoid Waste Resulting From Duplication of Service: where the
State considers that by allowing competition in the Supply of Essential Services (i.e.
public utilities) such as electricity, gas and water there would be a waste of
resources, the state may give monopoly power to one or few firms to supply such
services. The state normally takes over the Supply of Such public utilities because
the fixed cost of supplying such services is heavy, relating variable cost, and the
government would therefore want other firm to divert their resources in the supply
of other commodities beneficial to the public.
v. Branded Goods (Trade Marks): Branding of goods or trade mark can be used
to create monopoly. Branded goods are goods which have special names or
marks to differentiate them from other goods which serve similar purpose.
Branded gives rise to imperfect competition so long as the supply of a
branded good rests with the producer or seller concerned.
vi. Patent Rights and copyrights: A patent right is the right granted to an
inventor of a new machine or process, giving such an inventor a monopoly of
its use for a period of time which is renewable. A copyright similarly grants
the owner or owners the sole right to reproduce a literary or musical work for
a period of time. Patent right and copyright thus create imperfect
competition,

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vii. Local Monopolies: A monopoly situation arises when there is only one
supplier of a good or service near a market where transport costs are too
heavy to attract other firms to that locality. Such a single firm thus has the
power to raise its price, thereby obtaining a surplus (i.e. super normal profit).
viii. Tariffs: when the government wants to allow monopoly power for firms
producing a commodity for the home market, it usually imposes a tariff (i.e.
duty) on similar good imported, in order to restrictthe supply of such imports.
ix. Merger: when firms combine or enter into associations or organizations, they
acquire monopoly power e.g. cartel, trust etc
x. Restriction on entry to a certain occupation: the professions (e.g. medical,
accounting and legal professions) creates monopoly power for themselves by
controlling entry to such professions through insistence on lengthy training,
high entrance fees and high failure rate in examinations.
xi. Uses of violence: A firms may contrive an artificial barrier to entry by the uses
of violence, thugs and private armies to keep its rivals away from the industry
and thereby creating a monopoly
1. THE DEMAND CURVE AND MARGINAL REVENUE CURVE OF A
MONOPOLIST.
The demand curve faced by a monopolist is definite and downward sloping
from left to right; this is in contrast to the demand curve faced by a perfect
competitive firmwhich is perfectly elastic and horizontal. The distinguishing factor is
that while a monopolist is a price giver, a perfect competitive firm is a price taker. A
price giver is a firm that faces a downward sloping demand curve. Because the
monopolist firm is the only firm in the market, his demand curve is also the market
demand curve.
The market demand curve is also the average revenue (AR) curve for the
monopolist, but the corresponding marginal revenue (MR) which is the addition to

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total revenue by selling one unit more, the loss by selling one unit less of the
monopolist is also downward sloping and lies below the average revenue (AR)
Fig 1: Demand and Marginal revenue curve of the monopolist
For a downward sloping demand curve, marginal revenue is less than price; this is
because price must be lowered to sell an extra unit of output. Monopolist must
choose either the price or the quantity to sell and not both. The monopolist can set
price and allow market forces to determine the quantity to be sold at that price or
he determined the quantity and allow market forces to determine the price.
2. SHORT-RUN PURE MONOPOLY EQUILIBRIUM:
In the short-run, the monopolist equilibrium is attained if he fulfils two conditions.
These conditions are that his marginal cost (MC) equates his marginal revenue (MR)
and secondly, the slope of the marginal cost (MC) is greater than the slope of the
marginal revenue (MR) at the point of equalization.
Price
D = AR
Quantity
MR
O

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Fig2: Short-run monopoly (profit)
In fig 2 above, the short-run equilibrium of the monopolist is defined by point A
where the marginal cost (MC) cuts the marginal revenue (MR) from below fulfilling
the conditions for equilibrium. His total production is OPQB while he sells at OP1QC.
His total profit is the shaded area which is PP1BC (OP1QC – OPQB = PP1BC). His total
profit is the shaded area which is his total revenue (TR) minus his total cost (TC).
This shaded area is known as ‘Economic Profit’.
3. LOSSES UNDER MONOPOLY MODEL:
In the short-run, the monopolist could also be making supernormal losses
ACMC
D
MR
Quantity
C
B
QO
P
P1
Price
Q
P1
P
A
B
C
MC
AC
D
Quantity
MR
O
Price
PROFITS
LOSSES
Fig3: Short-run losses of the monopolist

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In fig 3 above, the monopolist total cost is OPQC while his total revenue is
OP1QB. The shaded area (P1PBC) represents his losses, i.e. OPQC – OP1QB = P1PBC
4. COMPARISON BETWEEN MONOPOLY AND PERFECT COMPETITION
While monopoly and perfect competition mark the extremes of market
structures, there exist some similarities which include:
i. Firms in both markets maximize profit at the output level where marginal cost
equals marginal revenue (MC=MR)
ii. The possibility of short-run supernormal profits exists in both markets.
Some of the more important distinctions between monopoly and perfect
competition are as follows:
i. Marginal Revenue and price; in perfectly competitive market, price equal
marginal cost. In a monopolistic market, however, price is set above marginal
cost.
ii. Production differentiation: there is zero product differentiation in a perfectly
competitive market. Every product is perfectly homogeneous and perfect
substitute for any other. With a monopoly, there is great to absolute product
differentiation in the sense that there is no available substitute for a
monopolized good. The monopolist is the sole supplier of the good in
question. A customer either buys fromthe monopolizing entity on its terms or
does without.
iii. Number of competitors: perfect competitive markets are populated by an
infinite number of buyer and sellers. Monopoly involves a single seller.
iv. Barriers to Entry: Barriers to entry are factors and circumstance that prevent
entry into market by would-be competitors and limit new companies from
operating and expanding within the market. Perfect competitive markets

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have free entry and exit. There are no barriers to entry, exit or competition.
Monopolies haverelatively high barriers to entry. The barriers must be strong
enough to prevent or discourage any potential competitor from entering the
market.
v. Elasticity of Demand: The price elasticity of demand is the percentage change
of demand caused by a one percent change of relative price. A successful
monopoly would have a relatively inelastic demand curve. A low coefficient of
elasticity is indicative of effective barriers to entry. A perfect competitor
company has a perfect elastic demand curve. The coefficient of elasticity for a
perfectly competitive demand curve is infinite.
vi. Excess profit: Excess or positive profit are profit that are more than the
normal expected return on investment. A perfect competitive company can
make excess profit in the short term but excess profits attract competitors,
which can enter the market freely and decrease price, eventually reducing
excess profit to zero. A monopoly can preserveexcess profits because barriers
to entry prevent competitors from entering the market.
vii. Price Maker and price Taker: In perfect competition, price at which individual
firms sell their products is determined for the entire industry by the forces of
demand and supply. The firm in a perfect competition accepts the price as
fixed and only adjusts its output to that price. On the other hand, in
monopoly, the firm is the industry which fixes its price for its product. It is
therefore a price maker whereas the firm in a perfect competition is a price
taker.

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1. PROBLEMS WITH MONOPOLY (WHAT IS WRONG WITH MONOPOLY
OR “THE WELFARE EFFECTS OF MONOPOLY”)
i. It limits output and keeps price high. This means that the monopolist
misallocates (and misuses) resources.
ii. The behaviour of the monopolist redistributes income from all the
consumers of the products (they are paying more than they need) to one
firm (the monopolist). This is an equity issue.
iii. A monopolist may develop political and social power over others which
reduce the efficiency of democracy and the amount of equity. There is a
strong political danger from a very few rich and powerful people emerging
and changing the course of events.
iv. A monopolist may behave badly in an antisocial way, for instance, he or
she may force out a potential rival firm by selling at give away price (well
below cost). After they have forced out the honest competitor, they will
put the price back up again.
v. Lack of competition tends to encourage inefficiency in the firm. The
monopolist tends to rest on his laurels, has no need to try hard and lacks
dynamism. As a result, we can get the emergence of lazy managers and
owners and it may mean that the technical progress is slow, leading to
show growth of the country as a whole, and a lower standard of living than
we could enjoy.
vi. Resources are misallocated – too many are going to the monopolist who
does not fully use them. This is a waste for society. It really means that the
price mechanism is prevented from working efficiently.
vii. A monopoly may reduce consumer choice. He may ignore small market
demand as he cannot be bothered to meet them. As Henry Ford is
reported to have said about his motor car “you can have any colour you
want, as long as it’s black”.

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1.9 PRICE DISCRIMINATION
Price discrimination arises when a producer sells a given commodity to at
least two buyers at different price even though the commodity is produced at the
same cost. It could be seen as an act of charging different consumers different price
on the same commodity whereprice difference is not justified by differences in cost.
The monopolist may find it more profitable to separate and keep separate two or
more markets for its products. The principle behind price discrimination is that
different buyer are ready to pay different amounts for the same commodity or
service and it may prove more profitable for the seller to take advantage of this
situation.
Fig 4: Price Discrimination.
In fig 4 above, there are two market segments, segment A and B, with market
B having greater elasticity of demands than market A.
Price
O
PB
PA
DA
DB
E1
E2 E
MC
MRA MRB
MR
XA XB
XX = XA + XB
=
Market A Market B

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This difference in elasticities makes the monopolist to be able to sell XB at a
higher price in market B and sell quantity XA in market A at a cheaper price. In each
market, profit is maximized by equating MR with MC. However, the marginal cost
(MC) is the same for the production in the two markets. The marginal revenue (MR)
differs in each market due to the differences in elasticity of demand. The marginal
revenue (MR) is the literal summation of the marginal revenues in markets A and B.
Thus; MR=MRA+MRB.
The intersection of the common MC with the MR gives the optional output at
point E, (X=XA+XB). The horizontal line drawn at point E shows the optional output
for market A and B separately. The intersection E1 gives the total output offer for
sale to the first segment by market A at PA price. The intersection E2 gives XB level of
output offered to the second segment by market B at PB price. The prices of each
market are found along its corresponding demand curves DA and DB.
The demand in market B is inelastic while the demand of A is elastic. Since the
elasticity in B is less, the monopolies will expand its output in that market and
restrict its output to market A with a higher elastic demand. This step is taken to
enable him add more to his revenue in B than he is taking away from A.
1.10 FACTORS THAT CAN LEAD TO MARKET SEGMENTATION:
The following factors can lead to market segmentation:
i. It may be personal: In this case, the basis of segmentation is the incomes of
the buyer. For example, a surgeon, a lawyer, may charge different prices to
different people depending on their income. Age, sex, military status of the
buyers may form another basis for discrimination. Children are charged a
lower price for a haircut than adults, females are allowed into discotheque for
little or no fee, military personnel are charged no fee or lower fee for some
service like bus riders etc.
ii. Location of the Buyer: This form of segmentation is known as geographical or
locational segmentation. This is when a monopolist charges higher price at

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one geographical location than the other. A good example of this form of
segmentation is dumping. Dumping takes place when a monopolist sells part
of his output in a foreign market at a very low price and the remaining output
at a higher price in the domestic market.
iii. Status of Buyer: The monopolist may charge lower price to new customers as
an incentive and charge lower price or give quantity discount to big buyers
than to small buyers.
iv. Use of the product: The price the monopolist charge may depend on the uses
to which the product is put to. A bus driver may charge lower fare for
transporting bags of rice than for taking dogs or goats to the same
destination.
v. Quality of the product: quality of products may lead to market segmentation.
Higher prices may be charged for a product with a perceived or real high
quality than for a product with o low quality, for example, a hard cover book
may attract a higher cost them a book with a soft cover.
1.11 CONDITION FOR PRICE DISCRIMINATION:
For a monopolist to engage in price discrimination, he must satisfy the
following conditions:
i. SEPARATE MARKETS: A monopolist can practice price discrimination by
separating his market and charging different price at the markets. For
example, the monopolist can sell at a high price in the domestic market and at
a low price in the foreign market. The two markets are kept separate by a
tariff wall where domestic buyers cannot place order abroad at the lower
foreign price and import the commodity. If the monopolist cannot keep its
market separate, all its buyers will make is purchase in the market with the
lowest price, thus frustrating the firm’s attempt to increase its profit through
price discrimination.

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ii. DIFFERENT ELASTICITIES: The price elasticity of demand for the monopolist
product must be different so that he can sell lower in the foreign market
because demand is elastic due to competition fromother similar products and
high in the domestic market where demand is inelastic and devoid of
competition.
iii. PREVENTION OF RESALE: It must be impossible or too costly for customers to
engage in arbitrage. Arbitrage is the buying or selling of product between two
or more markets in order to take profitable advantage of any differences in
the price quoted in these markets. By buying in a low-priced market and
selling in a high priced market, the seller can make profit from any disparity in
prices between the low prices market and the high priced market.
1.12 KINDS OF PRICE DISCRIMINATION:
There are three kinds of price discrimination:
i. First Degree Price Discrimination: this is also known as perfect price
discrimination. It is a situation where the monopolist sells different units of
output for different prices and these prices may differ from person to person.
For example, a doctor who charges different prices to different people due to
their occupation but suffering from the same sickness.
ii. Second Degree Price Discrimination: this shows that the monopolist sells
different units of output for different prices but every buyer who buys the
same amount of the commodity pays the same price. Indicating price
differentials across the units of the commodity, but not across buyers.
iii. Third Degree Price Discrimination: this is a situation where the monopolist
sells his commodity to different buyers for different prices, however, every
unit of output sold to a given set of buyers sells for the same price.

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1.13 EFFECTS OF PRICE DISCRIMINATION:
The likely effects of price discrimination are:
i. Higher profits and total revenue are enjoyed if markets are segmented.
ii. Output will generally be greater than when markets are not separated.
iii. With price discrimination, incomes of consumers are redistributed. The gaps
between different income groups are bridged.
1.14 WORKABLE COMPETITION AND WORKABILITY OF ALL COMPETITIONS:
Because of the dissatisfaction with the ability of the model of perfect
competition and monopoly competitions to act as ideal market structures for
policy purposes has led to various attempts to replace them with the
operationally more valid concept of workable competition. This phrase
originated with J.M Clark who argued that perfect competition and monopoly
does not and cannot exist, and has presumably never existed. He therefore sets
out to develop alternative criteria to those of perfect competition and monopoly
for use in assessing how well competition could actually work.
Substantial literature exists on the topic of workable competition. Scholars have
provided an outline of some criteria of workable competition under two major
headings which he called workable criteria:
1. Structural norms; and
2. Conduct criteria

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He tried to marry whatpeople havedone by bringing together the characteristics
of all market structures and called it workable criteria.
Structural Norms;
The structural norms states that:
i. Those members that should come under a market: i.e. those things that make
up a market should be the availability of those things that a market requires
for expansion. It implies a situation where those buying match those selling.
In the process, equilibrium exists.
ii. There should be no artificial barriers to movement, i.e. barriers to entry and
exit. These barriers he meant are the government policies that bar people
from entering a market. Again, anything that affects a market is barrier.
iii. There should be moderate and price sensitive and quality differential of
products offered by sellers for sale. The price should not be fixed but should
be moderate.
Conduct Criteria:
The conduct criteria states that:
i. Rivals should not be certain on whether price initiatives will be followed
without retaliation.
ii. Firms should strive to achieve their goals independently, without collusion
and merger
iii. there should be no predatory or coercive tactics adopted by the sellers to
enforce or improve ideas on the buyers
iv. Sales promotion should be allowed but not misreading. Promotional expenses
should not be excessive.
v. Harmful price discrimination should be completely discouraged if not absent
vi. the production operation of the firm should be efficient and effective

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Scherer goes on to note, however, that the above list begs a larger number of
questions. He therefore concludes that it is difficult to state apriori how we
formulate hard and fast rules for identifying cases in which a departure from
competition is desirable.
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Kofi, T.A. (1989): Basic Economics for West African, Idodo Umeh Publishers Ltd,
Benin.
Koutsoyianis, A. (2006): Modern Microeconomics, 2nd Edition, Macmillan Press Ltd,
London.
Omoke, P.C. (2002): Microeconomic Theory: Basic Principles and Applications,
Pack Publishers, Abakaliki, Ebonyi State.
Roger, A.A. (2008): Microeconomics, 8th
Edition, Thomson Publisher, USA.
Siyan, P. (2008): Intermediate Synthesis of Microeconomics, Joyce Publisher
Kaduna.
Varian, H.R. (2010): Intermediate Microeconomics: A Modern Approach, 8th
Edition,
W.W. Norton Company, New York.