MONOPOLY

References: Koutsoyannis and Ferguson & Gould

MONOPOLY
❖ 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.

❖ Example : Indian Railways

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 Monopolies exist because of barriers to
entry into a market that prevent
competition.
 The monopoly firm (monopolist):
May be small or large.
Must be the only supplier of the product.
Sells a product for which there are only
close substitutes.
➢ To some extent true monopolies generally exist
in government controlled markets.
✓ Ex. : Indian railway

➢ Monopoly in private business is rare.

❖ Private firms who have considerable market
share.
Like : Google
Microsoft
Apple
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 Features
✓ One seller and large number of Buyers.

✓ Monopoly is also an Industry.

✓ Restrictions on the Entry of the New Firms.

✓ No close Substitutes.

✓ Price Maker.

✓ Price Discrimination.

✓ Downward Sloping Demand Curve.

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 CAUSES AND SOURCES OF MONOPOLY POWER
✓ Control over Raw Materials or Ownership of Natural Resources.

✓ Patents.

✓ Technical Barriers.

✓ Government Policy.

✓ Historical and Entry Lag.

✓ Limit-Pricing Policy or Unfair Competition.

✓ Capital Size.
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✓ Business Mergers.
 Types of Monopoly
 Natural monopoly: A monopoly that arises from
economies of scale. The economies of scale arise from
natural supply and demand conditions, and not from
government actions.
 Local monopoly: a monopoly that exists in a limited
geographic area.
 Regulated monopoly: a monopoly firm whose behavior
is overseen by a government entity.
Barriers to Entry
 Institutional barriers to entry.
Exclusive franchising
Licences
Patent protection

 Technical barriers to entry.

Unique resources
Economies of scale and scope
Economy of experiences

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Barriers to Entry

 Strategic barriers to entry.

Limit pricing
Excess capacity
Product differentiation (brand
proliferation)

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 Monopoly
V/S
Perfect Competition
Perfect competitive Firm Monopoly
◆ Is one of many producers ◆ Is the sole producer

◆Has a horizontal demand ◆ Hasa downward-sloping

curve demand curve

◆ Is a price taker ◆ Is a price maker

◆Sellsas much or as little ◆ Reduces price to 10

at same price increase sales
 (A)Perfect competitive (b) AMonopolist’s
Firm Demand Curve
Price Price

Demand
(AR Curve)

Demand
(AR Curve)
0 Quantity of 0 Quantity of
Output Output 11
Demand & Revenue Under Monopoly

▪ In a monopoly situation, there is no difference between firm &

industry.
▪ Under monopoly situation, firm’s demand curve also constitutes industry‟s
demand curve.
▪ Demand curve of the monopolist is also average revenue
curve.
▪ It slopes downward. It means if the monopolist fixes high price,
the demand will shrink or decrease. On the contrary, if he fixes
low price, the demand will expand or increase.
▪ Under monopoly, average revenue and marginal revenue curves
are separate from one another. Both slope downwards.
▪ Next fig. will show average revenue (demand) curve & marginal
revenue curve. Both are sloping downward. Marginal revenue
curve is below average revenue or demand curve.
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 Demand & Revenue Under Monopoly

Revenue, Cost & Price

• Demand curve of the
monopolist is also
P L
average revenue (ARC)
N
curve. It slopes
downward. It means if
the monopolist fixes D = Average Revenue
high price, the demand O Marginal revenue X
will shrink. Q OUTPUT

• Demand rises with fall in price(AR)

• At point N total revenue (TR) will be maximum.( i.e. ,TR = P x Q)
• Average revenue (AR) is never zero, but marginal revenue (MR) may be
zero or even negative
• At OP price, the monopolist will produce OQ quantity of output, because
this price affords him maximum total revenue. 13
PRICE DETERMINATION UNDER SHORT RUN

A Monopolist in Equlibrium may face any of Three

Situations in the Short Run.

1. Super Normal Profit

2. Normal Profit

3. Loss
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 SUPER NORMAL PROFIT
 In This Figure ,The
Y
Monopolist is in
MC
equilibrium at point E .
 Because at this point AC

MC=MR . C A

 The Monopolist Produces D B

OM Units & sell it at AM
price E
 Thus in this Situation the AR
super normal profit of the
monopolist will be ABCD
MR
 Profit = OMAC-OMBD X
O M OUTPUT
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= DBAC
 NORMAL PROFIT
 In This Figure ,The Firm is in Y MC
equilibrium at point E .
 Where MR = MC & OM is
the equilibrium output . AC

 At this output AC Curve P

A
Touches Average
Revenue(AM) curve at point
A.
 At point A price OP (AM) is E
equal to the average Cost of AR
the product .
 Therefore firms earn only
normal profit in equilibrium MR
situation as at equilibrium X
OUTPUT
output its AR = AC O M
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 Profit = OMAP-OMAP = 0
 LOSS
 In this Figure , The monopolist Y
is in equilibrium at point E ,
Where MR=MC & produces MC
OM output. AC
 The price of equilibrium output
OM is fixed at OP1 (AM). N
P
 At this Price The Average
Loss A
P1
Variable Cost(AVC) Curve AVC
Touches AR curve at point „A‟.
E
 At this situation the firm will
get only AVC from the
Prevailing Price AR
 .The firm will bear the loss of
MR X
fixed cost , AN per Unit. O
M OUTPUT
 Profit = OMAP1 – OMNP = -
ANPP1 17
The firm will bear total loss equivalent to NAP1P as shown
by the shaded area.
 PRICE DETERMINATION UNDER LONG RUN
 In the Figure ,Point E Indicates the equilibrium of the monopolist .

 At Point E, MR = LMC . Hence OM is Y

the equilibrium Output & ON (=AM) is
the equilibrium Price.BM is the long
run average cost.
A LAC
 Price (Average Revenue) AM is N LMC
being more than long run average B
P
cost (AR > LAC), the Monopolist
earn (AM–BM =AB) Super Normal
Profit Per Unit. E AR

 The Firm’s Super Normal Profit will

be ABPN as Shown by Shaded Area MR
OUTPUT X
O M
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