Monopoly

MONOPOLY
It is a form of market structure in which a single seller or
a firm has control over the entire market supply, as
there are no close substitutes for his products and
there are barriers to the entry of rival producers.
• Single firm
• No substitutes
• Anti-thesis of competition
• Price maker
• Entry barriers
• Price-cum-output determination
Indian Railways
Single seller many buyers

No substitutes ‘not even close’

Closed entry

Price Maker

Price discrimination
Senior citizen
Students
Army officials, etc
A snacks bar at airport charging 100 Rs.for a
cup of tea
Movie Theater and snack bar
 Monopoly Demand & Rev structure

• Identical with industry

demand curve Output Price TR AR MR
• Downward sloping
1 25 25 25 25
• Relatively inelastic
demand 2 24 48 24 23
• MR < AR
3 23 69 23 21
• When AR falls, MR falls
at twice the rate of fall 4 22 88 22 19
in price
5 21 105 21 17
• P= a – bQ
• TR= (a-bQ). Q= aQ-bQ^2
• AR= a-bQ
• MR= a- 2bQ
• Relation between AR & MR?
Comparison between Perfect Comp & Monopoly

• No of Sellers
• Control over Market supply
• Industry
• Entry conditions
• Degree of knowledge
• Price control
• AR & MR behaviour
• Long run equilibrium
 Sources of Monopoly
• Natural resources such as land, precious metals, oil deposits,
fields, etc. the supply of each is limited by a specific and
measurable amount.
ii) In some situations large amount of capital is required to be
invested right from the beginning. Steel production, railway
construction etc. are examples of such enterprises.
iii) In certain enterprises, specialized technical resources are
required to be employed. Ship building, aeronautics, space
research are real world examples. Those who possess such
technical resources will have monopoly power.

• De Beers- supply of diamond

iv) In modern times certain legal provisions
create monopoly rights. These are in the form of
copyright norms, patent norms, standardization,
etc. leading to monopoly power.

v) Finally there are monopolies in the form of

public utilities. Road construction, postal
services, water supply, telecommunications, etc.
are some of the examples. In the case of such
services it is necessary to maintain a high quality
and a uniformity of products or services. These
types of utilities result in monopoly power
 Monopoly
• Indian Railways has monopoly in Railroad
transportation
• State Electricity board have monopoly over generation
and distribution of electricity in many of the states.
• Hindustan Aeronautics Limited has monopoly over
production of aircraft.
• There is Government monopoly over production of
nuclear power.
• Operation of bus transportation within many cities.
• Land line telephone service in most of the country is
provided only by the government run BSNL.
• In Saudi Arabia the government has sole control over
the oil industry.
 Cable Television

Consider the provision of cable television as an example.

Cable television providers are often given monopoly status by
their local city governments.
In other words, the company is the only one legally allowed
to provide cable television to the residents of the town. Does
cable television really fit the abstract, conceptual model of
monopoly? Yes and no. The key to monopoly rests with the
number and closeness of available substitutes.
A growing category of monopoly markets falls in the
pharmaceutical industry, the provision of drugs and other
medications. In some cases, a firm develops a drug that is
unlike anything previously available. The drug treats an
ailment that has never before been treated. Many drugs,
however, are improved methods of treating an ailment. The
previous method might not be as effective, but it does
represent a substitute.
 Comparing LR Equilibrium in PC and MC
Price, cost, (a) Long-Run Price, cost, (b) Long-Run Equilibrium
marginal Equilibrium in Perfect marginal in Monopolistic
revenue Competition revenue Competition

MC ATC MC ATC

P = ATC
MC MC
PPC = MC = D =MR =P
PC PC
ATC
PC MC
MC D
MR MC
MC
Q Quantity Q Quantity
PC MC
Minimum-cost output Minimum-cost output

17
Excess Capacity
Firms in a monopolistically competitive industry have excess capacity: they
produce less than the output at which average total cost is minimized.
Price exceeds marginal cost, so some mutually beneficial trades are unexploited.
The higher price consumers pay because of excess capacity is offset to some
extent by the value they receive from greater diversity.
Hence, it is not clear that this is actually a source of inefficiency.
 Price discrimination- Pigou
• 1st degree- charging different price for each unit sold and charges
each consumer the maximum price he is willing to pay –consumer
surplus transformed into revenue

• Absolute maximum price- reservation price

• Auctions, services of specialized nature

• 2nd degree- products are grouped into blocks and each block is
charged a different price.
• Photocopy, telephone calls

• 3rd degree- markets are subdivided into many sub-markets, market

segmentation
club n non-club members, region or area wise, movie tickets,
commercial and non-commercial use
 Conditions for price discrimination
• Existence of monopoly powers
• Different markets for same commodity
• Different degrees of elasticity
• No resale- no arbitrage condition
• Cost of separating markets should be low
• Legal Sanction
Basis for price discrimination
• Personal
• Geography
• Time
• Purpose of use
Discuss the benefits of price discrimination to
producers and consumers
• Microsoft : In computer OS Microsoft has  monopoly. Apple is not yet
successful in penetrating into Indian markets.
Coal India,  largest market share in
production  and marketing of coal
Hindustan Aeronautics Limited, India's only
manufacturer or jets and helicopters
Natural monopoly
• https://www.economicsonline.co.uk/Business_economics/
Natural_monopolies.html
Measures of Monopoly
1. Herfindahl’s Index
2. Lerner’s measure of monopoly
3. Bain’s measure of monopoly power

Refer notes
 MONOPOLISTIC COMPETITION
• Introduced by Prof. Chamberlin
• Mixture of monopoly and perfect competition
• It is a market where there is keen competition but neither
perfect nor pure, among a group of large number of small
producers, having some degree of monopoly power
because of their differentiated products.
Features
• Large number of sellers
• Product differentiation
• Large number of buyers
• Free entry
• Selling costs
• Two dimensional competition- Price & non-price
• The group
Equilibrium
• Short-run
• Profit
• Loss
• Long-run
• Normal profit
 Monopolistic Competition
• Some restaurants enjoy monopolistic competition because
of their popularity and reputation.
• Manufacture of some high precision products, such as multi-
cylinder diesel engine fuel injection pumps, enjoy
monopolistic competition because their competitors are not
able to match their quality
• Banking sector
 Monopolistic or Imperfect Competition
• Restaurants
• Plumbers/electricians/local builders
• Solicitors
• Private schools
• Insurance brokers
• Health clubs
• Hairdressers
• Estate agents
• With Ciaz, the company is making a comeback in the segment, post
its failure of SX4 sedan within this category. Ciaz is priced between
Rs 6.99-9.80 lakh (ex showroom Delhi) across petrol and diesel
variants and will replace SX4 across the country.
• The company received 10,000 bookings for the car before the price
announcement, it told agencies in New Delhi on the sidelines of the
launch.
• Known for its entry-level and compact cars, Maruti is betting big
with the launch of Ciaz in order to boost sales in the premium
category. Ciaz has been designed keeping in mind aspirations of a
mid-size premium sedan customer. A complete package, the Ciaz
offers European styling, premium rich interiors and a host of
upmarket features. Ciaz diesel is India's most fuel-efficient car. We
are confident that Ciaz will be warmly received as the preferred
upgrade by compact cars owners."
• While the petrol version gives 20.73 kmpl, the diesel variant gives
26.21 kmpl.