MONOPOLY---IN MICROECONOMICS ----------NILORMI DAS
MARKET STRUCTURESIn economics, monopoly is a pivotal area to the studyof market structures, which directly concernsnormative aspects of economic competition, andsets the foundations for fields such as industrialorganization and economics of regulation. There arefour basic types of market structures undertraditional economic analysis: perfect competition,monopolistic competition, oligopoly and monopoly.A monopoly is a market structure in which a singlesupplier produces and sells the product. If there is asingle seller in a certain industry and there are noclose substitutes for the goods being produced, thenthe market structure is that of a "pure monopoly".Sometimes, there are many sellers in an industryand/or there exist many close substitutes for thegoods being produced, but nevertheless firms retainsome market power. This is called monopolisticcompetition, whereas in oligopoly the maintheoretical framework revolves around firmsstrategic interactions.
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.
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
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
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
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
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.
EXAMPLE OF THE BEFITS OF MONOPOLYFor example the unit cost ofA 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 industrylike this is going to have huge economies of scale. To develop aBoeing 747 is very expensive. The unit cost of over $200 milliondollars means that it would not make sense to have morecompetition in this market. If there was competition, then the unitcosts would probably increase substantially making it potentiallyunprofitable. The Boeing will have various economies of scale suchas:SpecialisationTechnical economiesBulk buyingfinancial economiesmarketing economiesThis is an example of a market where firms with monopoly power arelikely to lead to better deals for consumers. In developing the nextgeneration of jumbo jets, the firms will require huge amounts ofinvestment. This investment is only viable for a firm with a highmarket share and large profit.
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 monopolys 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.