Market Structure: Monopoly

Samarth Gupta

February 2023

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Monopoly

A market with only one firm. Another extreme form of market structure;
more common than Perfect Competition.

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Monopoly

A market with only one firm. Another extreme form of market structure;
more common than Perfect Competition.
Firm is a price-setter (and not price-taker ).

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Monopoly

A market with only one firm. Another extreme form of market structure;
more common than Perfect Competition.
Firm is a price-setter (and not price-taker ).
Consumers have the choice between buying from the firm and not
buying.

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Monopoly

A market with only one firm. Another extreme form of market structure;
more common than Perfect Competition.
Firm is a price-setter (and not price-taker ).
Consumers have the choice between buying from the firm and not
buying.
Competitors cannot enter. Market has high entry barriers.
▶ Technological
▶ Consumer Behaviour of Network Effects
▶ Asymmetric Information

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Price-Setting Behaviour
Monopolist faces the entire demand curve. Without any competitors, the
monopolist can increase (decrease) price by decreasing (increasing)
quantity. In Perfect Competition, if a firm increased prices consumers shift
away to the competitors.

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Price-Setting Behaviour
Monopolist faces the entire demand curve. Without any competitors, the
monopolist can increase (decrease) price by decreasing (increasing)
quantity. In Perfect Competition, if a firm increased prices consumers shift
away to the competitors.
Price-setting behaviour does not imply that a monopolist can charge
whatever price it wants.

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Price-Setting Behaviour
Monopolist faces the entire demand curve. Without any competitors, the
monopolist can increase (decrease) price by decreasing (increasing)
quantity. In Perfect Competition, if a firm increased prices consumers shift
away to the competitors.
Price-setting behaviour does not imply that a monopolist can charge
whatever price it wants.
High Price: Consumers can decide not to buy
Low Price: More new consumers but revenue loss from all the
previous consumers.
Thus, the behaviour of consumers can discipline the monopolist’s
price-setting behaviour.
Monopolist takes into account the behaviour of the consumers.

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Graphical Modelling: Inverse Demand Function
Inverse Demand Fn. P = 100 − 5.Q.
100
80
Fitted values
40 20
0 60

0 5 10 15 20
Quantity

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Marginal Revenue and Price
In PC, P =MR. But not in Monopoly! How?

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Marginal Revenue and Price
In PC, P =MR. But not in Monopoly! How?

TR2 − TR1
MR =
Q2 − Q1

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Marginal Revenue and Price
In PC, P =MR. But not in Monopoly! How?

TR2 − TR1
MR =
Q2 − Q1
P2 Q2 − P1 .Q1
=⇒ MR =
Q2 − Q1

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Marginal Revenue and Price
In PC, P =MR. But not in Monopoly! How?

TR2 − TR1
MR =
Q2 − Q1
P2 Q2 − P1 .Q1
=⇒ MR =
Q2 − Q1
P2 Q2 − P1 .Q1 + P2 Q1 − P2 Q1
=⇒ MR =
Q2 − Q1

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Marginal Revenue and Price
In PC, P =MR. But not in Monopoly! How?

TR2 − TR1
MR =
Q2 − Q1
P2 Q2 − P1 .Q1
=⇒ MR =
Q2 − Q1
P2 Q2 − P1 .Q1 + P2 Q1 − P2 Q1
=⇒ MR =
Q2 − Q1
P2 Q2 − P2 Q1 − P1 .Q1 + P2 Q1
=⇒ MR =
Q2 − Q1

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Marginal Revenue and Price
In PC, P =MR. But not in Monopoly! How?

TR2 − TR1
MR =
Q2 − Q1
P2 Q2 − P1 .Q1
=⇒ MR =
Q2 − Q1
P2 Q2 − P1 .Q1 + P2 Q1 − P2 Q1
=⇒ MR =
Q2 − Q1
P2 Q2 − P2 Q1 − P1 .Q1 + P2 Q1
=⇒ MR =
Q2 − Q1
Q2 − Q1 P2 − P1
=⇒ MR = P2 + Q1
Q2 − Q1 Q2 − Q1

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Marginal Revenue and Price

Q2 − Q1 P2 − P1
MR = P2 + Q1
Q2 − Q1 Q2 − Q1

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Marginal Revenue and Price

Q2 − Q1 P2 − P1
MR = P2 + Q1
Q2 − Q1 Q2 − Q1
P2 − P1
=⇒ MR = P2 + Q1
Q2 − Q1

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Marginal Revenue and Price

Q2 − Q1 P2 − P1
MR = P2 + Q1
Q2 − Q1 Q2 − Q1
P2 − P1
=⇒ MR = P2 + Q1
Q2 − Q1

If Q2 > Q1 , then P2 < P1 . Therefore, Q1 QP22 −P

−Q1 < 0
1

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Marginal Revenue and Price

Q2 − Q1 P2 − P1
MR = P2 + Q1
Q2 − Q1 Q2 − Q1
P2 − P1
=⇒ MR = P2 + Q1
Q2 − Q1

If Q2 > Q1 , then P2 < P1 . Therefore, Q1 QP22 −P

−Q1 < 0
1

Therefore,
MR < P2

For a monopolist, Marginal Revenue is always lower than Price.

Intuition: As a monopolist lowers the price, it receives lower revenue from
the last unit as well as all units prior to that.

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Graphical Modelling: Marginal Revenue Curve
MR < P
100
80
60
40
20
0

0 2 4 6 8 10
Quantity

Inverse Demand Function Marginal Revenue

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Graphical Modelling: Eqm. Quantity
Step-1: Eqm. Q where MR = MC .
100
80
Fitted values
40 20
0 60

0 2 4 6 8 10
Quantity

Fitted values Fitted values

Fitted values

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Graphical Modelling: Eqm. Price
Step-2: Eqm. Price where P = 100 − 10.Q ∗
100
80
Fitted values
40 20
0 60

0 2 4 6 8 10
Quantity

Fitted values Fitted values

Fitted values

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Dead Weight Loss

Recall DWL: Welfare (Consumer + Producer) of those who are unable to

participate in the market (after taxes)
Monopolist produce less than what a perfectly competitive firm would
produce.
Therefore, DWL is the amount of welfare lost due to lower production in
monopoly compared to Perfect Competition.

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How do monopolies arise? Network Effects

When the value for one consumers depends on the presence of other
consumers. You will use Uber app only if enough drivers use it, and vice
versa.

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How do monopolies arise? Network Effects

When the value for one consumers depends on the presence of other
consumers. You will use Uber app only if enough drivers use it, and vice
versa.
Network effects: Size itself is the driver of growth. More people on the
network, more new people will join. More people on a network, less likely
anyone will leave.

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Exercise

Which of the following activities exhibit network effects between a

consumer?
Dining at a Restaurant
E-Commerce: Amazon, Flipkart
Using Zoom, Google Meet etc.

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What can policymakers do if there are Network Effects?
Fintech Industry

Payment apps like PayTM, GooglePay etc. should exhibit Network Effects
because one user will choose the app that others also use.
However, Fintech industry in India is not monopolistic. Why? What did
the policymakers in India do that prevented monopolization of this
industry?

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What can policymakers do if there are Network Effects?
Fintech Industry

Payment apps like PayTM, GooglePay etc. should exhibit Network Effects
because one user will choose the app that others also use.
However, Fintech industry in India is not monopolistic. Why? What did
the policymakers in India do that prevented monopolization of this
industry?
Unified Payment Interface (UPI): Allows users of one payment app to
transact with any other app; breaks down network behaviour of
users.
Similar solution: Read up on Account Aggregator Framework of
India.

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How do monopolies arise? Asymmetric Information

Patents: R&D investments can allow some firms to produce a good that
others cannot. Thus, monopolies created.

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