MONOPOLY

2009
INTRODUCTION
In economics, a monopoly (from Greek monos / (alone or single) +
polein (to sell)) exists when a specific individual or an enterprise has
sufficient control over a particular product or service to determine
significantly the terms on which other individuals shall have access to
it.Monopolies are thus characteried !y a lack of economic competition for
the good or service that they provide and a lack of via!le su!stitute
goods."he ver! #monopolie# refers to the process !y which a firm gains
persistently greater market share than what is expected under perfect
competition.
$ monopoly must !e distinguished from monopsony, in which there is only
one buyer of a product or service % a monopoly may also have monopsony
control of a sector of a market. &ikewise, a monopoly should !e
distinguished from a cartel (a form of oligopoly), in which several providers
act together to coordinate services, prices or sale of goods. Monopolies can
form naturally or through vertical or horiontal mergers. $ monopoly is said
to !e coercive when the monopoly firm actively prohi!its competitors from
entering the field.
In many 'urisdictions, competition laws place specific restrictions on
monopolies. (olding a dominant position or a monopoly in the market is not
illegal in itself, however certain categories of !ehaviour can, when a
!usiness is dominant, !e considered a!usive and therefore !e met with legal
sanctions. $ government)granted monopoly or legal monopoly, !y
contrast, is sanctioned !y the state, often to provide an incentive to invest in
a risky venture or enrich a domestic constituency. "he government may also
reserve the venture for itself, thus forming a government monopoly.
Economic analysis
In economics, the study of market structures under imperfect competition
!egins with the analysis of Monopoly. If there is a single seller in a certain
industry and there are no close su!stitutes for the goods !eing produced,
then the market structure is that of a #pure monopoly#. *ometimes, there are
many sellers in an industry and+or there exist many close su!stitutes for the
goods !eing produced, !ut nevertheless firms retain some market power.
"his is called monopolistic competition, whereas oligopoly refers to the case
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where the main theoretical framework revolves around firm3s strategic
interactions.
Basic market structures
"here are four !asic types of market structures under traditional economic
analysis, perfect competition, monopolistic competition, oligopoly and
monopoly. $ Monopoly is a market structure is which a single supplier
produces and sells the product.
Characteristics of a monopoly
Single Seller: In a monopoly there is one seller of the monopolied
good who produces all the output. "he firm and industry are identical. In a
20 market there are an infinite num!er of sellers each producing an
infinitesimally small 4uantity of output.
Market Power5 Market 2ower is the a!ility to affect the terms and
conditions of exchange. It is the a!ility to set your own price. $lthough a
monopoly3s market power is high it is not a!solute. $ monopoly faces a
negatively sloped demand curve not a perfectly inelastic curve.
0onse4uently, any price increase will result in the loss of some customers.
"he monopoly3s o!'ective is to maximie profits.
High Barriers to Entry an !ompetition: Monopolies derive their
market power from !arriers to entry ) circumstances that prevent or greatly
impede a potential competitor3s entry into the market or a!ility to compete in
the market. "here are three ma'or types of !arriers to entry% economic, legal
and deli!erate.
E"onomi" Barriers56conomic !arriers include economies of scale,
capital re4uirements, cost advantages and technological superiority.
E"onomies o# s"ale5 Monopolies are characteried !y declining costs
over a relatively large range of production.7eclining costs coupled with
large start up costs give monopolies an advantage over would !e
competitors. Monopolies are often in a position to cut prices !elow a new
entrant3s operating costs and drive them out of the industry.8urther the sie
of the industry relative to the minimum efficient scale may limit the num!er
of firms that can effectively compete within the industry. If for example the
industry is large enough to support one firm of minimum efficient scale then
other firms entering the industry will operate at a sie that is less than M6*
meaning that these firms cannot produce at an average cost that is
competitive with the dominant industry.
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!apital re$%irements5 2roduction processes that re4uire large
investments of capital, or large research and development costs or
su!stantial sunk costs limit the num!er of firms in an industry.&arge fixed
costs also make it difficult for a small firm to enter an industry and expand.
&e"hnologi"al S%periority5 $ monopoly may !e !etter a!le to
ac4uire, integrate and use the !est possi!le technology in producing its
goods while entrants do not have the sie or fiscal muscle to use the !est
availa!le technology. In plain 6nglish one large firm can sometimes produce
goods cheaper than several small firms.
No Substitute Goods:A monopoly sells a good for whih there is no lose
s!"stit!tes. The a"sene of s!"stit!tes ma#es the demand for the good relatively inelasti
ena"ling monopolies to e$trat positive profits.
Control of Natural Resources% A prime so!re of monopoly power is the ontrol
of reso!res that are ritial to the prod!tion of a final good.
Legal Barriers: &egal rights an provide opport!nity to monopoli'e the
mar#et in a good. Intellet!al property rights( inl!ding patents and opyrights( give a
monopolist e$l!sive ontrol over the prod!tion and selling of ertain goods. )roperty
rights may give a firm the e$l!sive ontrol over the materials neessary to prod!e a
good.
Deliberate Actions: $ firm wanting to monopolie a market may engage
in various types of deli!erate action to exclude competitors or eliminate
competition. *uch actions include collusion, lo!!ying governmental
authorities, and force.
In addition to !arriers to entry and competition, !arriers to exit may !e a
source of market power. 9arriers to exit are market conditions that make it
difficult or expensive for a firm to leave the market. (igh li4uidation costs
are a primary !arrier to exit.
:;<=
Market exit and shutdown are separate
events. "he decision whether to shut down or operate is not affected !y exit
!arriers. $ firm will shut down if price falls !elow minimum average
varia!le costs.
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$dvantages >f Monopoly
?esearch and 7evelopment. *upernormal 2rofit can !e used to fund
high cost capital investment spending. *uccessful research can !e used for
improved products and lower costs in the long term. 6.g.
"elecommunications and 2harmaceuticals.
6conomies of scale. Increased output will lead to a decrease in
average costs of production. "hese can !e passed on to consumers in the
form of lower prices.
*ee5 6conomies of *cale
If a monopoly produces at output @<, average costs ($0<) are much lower
than if a competitive market had firms producing at @;.
International 0ompetitiveness. $ domestic firm may have Monopoly
power in the domestic country !ut face effective competition in glo!al
markets. 6.g. 9ritish *teel
$ firm may !ecome a monopoly through !eing efficient and dynamic.
$ monopoly is thus a sign of success not inefficiency. 8or example ) Google
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Government regulation of monopolies means annual price increases
can !e controlled
*ome of the monopolies profits may !e used to invest in research and
development
"his expenditure on innovation and invention could lead to efficiency
gains in the market
'isa(antages o# Monopolies
It is argued that monopolies producer at a lower output with higher
prices than a producer in a competitive market would
"his leads to a reduction in the consumer surplus and an increase in
producer surplus
*upernormal profits are earned !y the monopoly at the expensive of
allocative efficiency
"he lack of any competition in the market can increase inefficiency as
customers are stripped of the a!ility to choose
7ynamic efficiency may !e lost if monopolist limits consumer choice
and innovates less
S%mmary
$ monopoly is where there is one producer who dominates the market
In a monopoly the monopolist sets prices as they have market power
Monopolists can !enefit from economies of scale which may !e
passed onto consumers in the form of lower prices
Monopolists may conduct more research and development
Monopolies produce less at higher prices reducing the consumer
surplus
6conomists view monopolies as market failure
Monopolies donAt allocate resources in the most effective way
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Monopoly an e##i"ien"y
$ccording to the standard model, in which a monopolist sets a single price
for all consumers, the monopolist will sell a lower 4uantity of goods at a
higher price than would firms under perfect competition. 9ecause the
monopolist ultimately forgoes transactions with consumers who value the
product or service more than its cost, monopoly pricing creates a deadweight
loss referring to potential gains that went neither to the monopolist or to
consumers. Given the presence of this deadweight loss, the com!ined
surplus (or wealth) for the monopolist and consumers is necessarily less than
the total surplus o!tained !y consumers under perfect competition. Bhere
efficiency is defined !y the total gains from trade, the monopoly setting is
less efficient than perfect competition.
It is often argued that monopolies tend to !ecome less efficient and
innovative over time, !ecoming #complacent giants#, !ecause they do not
have to !e efficient or innovative to compete in the marketplace. *ometimes
this very loss of psychological efficiency can raise a potential competitor3s
value enough to overcome market entry !arriers, or provide incentive for
research and investment into new alternatives "he theory of contesta!le
markets argues that in some circumstances (private) monopolies are forced
to !ehave as if there were competition !ecause of the risk of losing their
monopoly to new entrants. "his is likely to happen where a market3s !arriers
to entry are low. It might also !e !ecause of the availa!ility in the longer
term of su!stitutes in other markets. 8or example, a canal monopoly, while
worth a great deal in the late eighteenth century Cnited -ingdom, was worth
much less in the late nineteenth century !ecause of the introduction of
railways as a su!stitute.
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*urpluses and deadweight loss created !y monopoly price setting.
Pri"e 'is"rimination
$ seller of a product in a competitive industry (i.e., one characteried !y
many competing sellers of a good or service) generally can only charge a
single price (i.e., the price that its competitors are charging) to all of its
customers. (owever, monopolists not only have the a!ility to charge a
higher price than would competitive firms supplying the same product, !ut
they also have the a!ility to charge significantly different prices to different
customers for the same product.
Monopolists are invaria!ly well aware !oth of this a!ility and of the fact that
!y taking advantage of it they can often gain much greater profits than they
could !y 'ust charging a single price to all customers. "hat is, a monopolist
can maximie its profits !y charging a separate profit)maximiing price for
each type or group of customers (e.g., different income levels, professions,
education levels, geographic locations or ethnicities) rather than !y charging
one profit maximiing price to all customers taken as a whole, !ecause of
the differences that generally exist among the different types or groups of
customers with respect to their a!ility and willingness
D
to pay. "his !ehavior
is termed price discrimination.
"he a!ility to engage successfully in price discrimination depends on the
degree of separation of markets, that is, how difficult or costly it is for
!uyers to transfer the product among themselves. 8or example, small, easily
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transporta!le items (e.g., those that come in a small !ox or that can !e
delivered via the Internet) are generally easier to transfer among !uyers than
are large, heavy products (e.g., hydroelectric generators and steel !eams),
customied products (e.g., consulting services or dental work) or products
that make extensive use of a local language (e.g., !ooks and some computer
software). If a product is easy for !uyers to resell, then !usinesses or
individuals who can !uy it at lower prices would have a profit incentive to
resell it to others who would !e charged a higher price !y the monopolist.
Monopolists generally are strongly opposed to such transferring of their
products among !uyers, and they tend to devote considera!le effort to
attempting to stop or minimie it.
$mong the many tactics used !y monopolists to attempt to separate their
markets are the use of warranties that are only valid in the country of
purchase and la!eling a product and manuals for it only in the local language
for each country or region. 8or example, a software developer could charge
a relatively low price for its product in "hailand (a relatively low income
country) and discourage its transfer to *ingapore or .apan (relatively high
income countries) for resale there in competition with the higher prices it
charges in those countries !y having the software operate only in the "hai
language, which is generally not understood !y people outside of "hailand,
rather than having it !e ad'usta!le !y the user to operate in any of a num!er
of languages.
Region codes for computer games and 7E7s (digital versatile disks) are
also an attempt at price discrimination. "hese are codes that incorporated
into the games and disks as well as into the players for them. "hey are
designed to allow any game or disk to play only in the region in which it was
sold, there!y allowing the sellers to control release dates and charge the
profit maximiing price for each region. (owever, this is not always
effective !ecause some countries have outlawed the practice and re4uired
that players sold in their country !e a!le to play games or disks from any
region. $lso, some users have !een a!le to circumvent such regional
lockout !y modifying their players so that they can play games or disks
from any region.
$nother common example is student discounts, which are often availa!le for
some products, such as computer software, !ecause suppliers of such
products are well aware that the profit maximiing price for this class of
customers is lower than that for people who work full time. *ale of the
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products at the special student prices is restricted through the re4uirement of
student identification at the time of purchase, and su!se4uent resale is
discouraged through such means as identification checks in order to use
warranties and o!tain upgrades.
&ower prices on some products are likewise often availa!le for senior
citiens, !ecause, as is the case with students, the profit maximiing price is
lower for them as a group due to their lower average income. *uch recipients
of lower prices will, of course, feel happy and feel as if they are receiving
something special. "his will help make a monopolist seem !enevolent and
can create goodwill for it. (owever, what is often !eing overlooked is the
fact that this is not necessarily 'ust !enevolence (although it might !e in
some cases), !ut it is definitely profit maximiing !ehavior. In any event, the
recipients of the lower prices will still likely !e paying much more than the
actual cost of providing the product.
$irlines are very efficient at separating their markets. "his can !e seen !y
the fact that tickets to any given destination are typically sold for a wide
range of prices (generally with little relationship to the cost of providing the
trip), even for ad'acent seats on the same airplane. 8or example, a num!er of
techni4ues are used to charge higher fares for !usiness travelers (who are
typically more concerned a!out convenience and time saving than a!out
fares) than for leisure travelers (who are usually on tighter !udgets),
including !y charging higher fares for people not making reservations far in
advance or not willing to stay at a destination through a weekend (!oth of
which !usiness travelers often prefer not to do). "he airlines are a!le to
prevent the reselling of their tickets (and there!y maintain their separation of
markets) through the use of identification checks at check)in and !oarding
times
F
.
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&ypes o# Monopoly
Nat%ral monopoly
In economics, a nat%ral monopoly occurs when, due to the economies of
scale of a particular industry, the maximum efficiency of production and
distri!ution is realied through a single supplier, !ut in some cases
inefficiency may take place.
Gatural monopolies arise where the largest supplier in an industry, often the
first supplier in a market, has an overwhelming cost advantage over other
actual or potential competitors. "his tends to !e the case in industries where
capital costs predominate, creating economies of scale which are large in
relation to the sie of the market, and hence high !arriers to entry% examples
include water services and electricity. It is very expensive to !uild
transmission networks (water+gas pipelines, electricity and telephone lines),
therefore it is unlikely that a potential competitor would !e willing to make
the capital investment needed to even enter the monopolist3s market.
It may also depend on control of a particular natural resource. 0ompanies
that grow to take advantage of economies of scale often run into pro!lems of
!ureaucracy% these factors interact to produce an #ideal# sie for a company,
at which the company3s average cost of production is minimied. If that ideal
sie is large enough to supply the whole market, then that market is a natural
monopoly.
*ome free)market)oriented economists argue that natural monopolies exist
only in theory, and not in practice, or that they exist only as transient states.
Legal monopoly
$ legal monopoly, stat%tory monopoly, or de jure monopoly is a
monopoly that is protected !y law from competition. $ statutory monopoly
may take the form of a government monopoly where the state owns the
particular means of production or government)granted monopoly where a
private interest is protected from competition such as !eing granted
exclusive rights to offer a particular service in a specific region while
agreeing to have their policies and prices regulated. :;= "his type of
monopoly is usually contrasted with de facto monopoly which is a !road
category for monopolies that are not created !y government.
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Lo"al monopoly
$ local monopoly is a monopoly of a market in a particular area, usually a
town or even a smaller locality5 the term is used to differentiate a monopoly
that is geographically limited within a country, as the default assumption is
that a monopoly covers the entire industry in a given country. "his may
include the a!ility to charge (to some extent) monopoly pricing, for example
in the case of the only gas station on an expressway rest stop, which will
serve a certain num!er of motorists who lack fuel to reach the next station
and must pay whatever is charged.
P%re Monopoly:
a market structure in which5
one firm sells a uni4ue product ) no s%)stit%tes
entry is !locked
o the single firm (control over product price)
o (owever, still needs to deal with customers
o "hey have considera!le (not whole) control over price.
o nonprice competition
*o(ernment monopoly
In economics, a go(+ monopoly (or p%)li" monopoly) is a form of coercive
monopoly in which a government agency is the sole provider of a particular
good or service and competition is prohi!ited !y law. It is a monopoly
created !y the government.
:;=
It is usually distinguished from a government)
granted monopoly, where the government grants a monopoly to a private
individual or company.
$ government monopoly may !e run !y any level of government ) national,
regional, local% for levels !elow the national, it is a local monopoly. "he
term state monopoly usually means a government monopoly run !y the
national government, although it may also refer to monopolies run !y
regional entities called #states# (nota!ly the C.*. states).
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Bilateral monopoly
In a )ilateral monopoly there is !oth a monopoly (a single seller) and
monopsony (a single !uyer) in the same market.
In such, market price and output will !e determined !y the non economic
forces like !argaining power of !oth !uyer and seller. $ !ilateral monopoly
model is often used in situations where the switching costs of !oth sides are
prohi!itively high.
9ilateral monopoly situations are commonly analyed using the theory of
Gash !argaining games.
$n example of a !ilateral monopoly would !e when a la!or union and a
monopolist negotiate.
!a%ses o# Monopoly
Monopolies have existed throughout much of human history. "his is !ecause
powerful forces exist !oth for the creation and maintenance of monopolies
H
.
$t the root of these forces is the natural human desire for wealth and power
together with the fact that monopolies can !e immensely profita!le and
provide their owners with tremendous financial, political and social power.
Monopolistic power existed even in primitive societies !ecause limited
technical knowledge, poor transportation and small, scattered populations
left little room for the emergence of numerous, competitive suppliers for
some goods and services. In medieval 6urope, guilds arose as transportation
improved, economies grew and competition increased. Guilds were cartels
formed !y artisans and merchants for the purpose of controlling output,
setting prices and esta!lishing restrictions on new producers and sellers.
Bhen nation)states !egan to emerge in the late ?enaissance, monopolies
proved to !e a useful device for their leaders to ac4uire the resources to
maintain large armies and extravagant life styles. Ma'or 6uropean nations
also granted monopoly powers to private trading companies in order to
stimulate the exploration and exploitation of new lands in the $mericas,
$sia, $frica, etc.
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Monopolies can arise in some circumstances as the result of normal !usiness
practices that are characteristic of firms in a highly competitive industry. >r
they can arise as a conse4uence of what economists term anti-competitive
practices, that is, !ehavior that is intended to destroy competition through
means other than competing on the !asis on price and 4uality (including the
4uality of services associated with the product). More specifically,
monopolies can arise in any of the following, non)mutually exclusive, ways5
,-. 9y developing or ac4uiring control over a uni4ue product that is difficult
or costly for other companies to copy. "his can occur as a result of a
purchase, merger or research and development. $n example is
pharmaceuticals, which can !e extremely expensive and risky to develop
(and which are also protected !y patents), there!y locking out all !ut a few
large, well funded companies with ample talent. 0losely related to this is
control over a uni4ue input for a product, such as a uni4ue natural resource.
(<) 9y having a lower production cost than competitors. "his can result from
having a more efficient (i.e., more output per unit of input) production
techni4ue or from having access to a uni4ue source of low cost inputs (e.g., a
mine containing exceptionally high grade ore). In some cases, a greater
efficiency is the result of economies of scale, which means that the
production cost per unit of product declines as the volume of output
increases due to the a!ility to use some resource more intensively (e.g., a
steel mill or railroad with lots of excess capacity).
"his category includes natural monopolies. $ natural monopoly exists
for a product for which there are sufficient economies of scale such that the
product can !e produced or supplied !y a single company at lower cost than
!y multiple, competing companies. 6xamples include utilities such as
railroads, pipelines, electric power transmission systems and wired
telephone systems. It is often wasteful (for consumers and the economy) to
have more than one such supplier in a region !ecause of the high costs of
duplicating the infrastructure (e.g., parallel railroad networks in a region or
two sets of telephone wires to every house).
,/. 9y using various legal and+or illegal tactics, often referred to as
predatory tactics, aimed specifically at eliminating existing or potential
competition, such as (a) !uying out or merging with competitors, (!)
temporarily charging prices !elow cost to drive competitors out of !usiness
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(often referred to as predatory pricing or dumping), (c) using a
monopoly in one product to create a monopoly with regard to another
product (sometimes referred to as the bundling or tying of products), (d)
taking control of suppliers of inputs re4uired !y competitors or conspiring
with them to raise their prices (or lower their 4uality of service, etc.) to
competitors (e) taking control of, or conspiring with, suppliers of other
products used !y competitors3 customers, (f) threatening costly litigation
(e.g., regarding allegations of patent or copyright infringements regardless of
the legal merits of such claims), which large companies can easily afford !ut
small companies often cannot and (g) using !lackmail or threats of violence.
Horizontal integration is the gaining of control !y one company over
other producers or sellers of the same product. "he ac4uired companies can
appear to !e 4uite diverse. >ften the ac4uisition of control is not pu!licied,
and sometimes different !randing is used to create the illusion of
competition. 8or example, a !roadcasting company might ac4uire various
radio and+or television channels each with a different focus in order to gain
control of most of the entire listener or viewer market in a region and
there!y prevent the emergence of competitors.
*uch seeming diversity can also offer offer other !enefits to a monopolist. In
particular, it can !e valua!le in separating markets, there!y allowing the
monopolist to charge separate, profit maximiing prices in each. It can also
make the existence of a monopoly less conspicuous and less of a target for
pu!lic criticism, government intervention and the emergence of new
competitors.
,0. 9y controlling a platform and using vendor lock-in. $ platform is a
standardied specification for a product that allows its providers and users
and their products to interoperate without special arrangement. "his reduces
the overall costs of conducting transactions !y removing some of the costs
of matching up products with !uyers. &ock)in is the practice of designing a
product that cannot interoperate with products made !y other companies in
order to make it difficult and+or costly for users to switch to competing
systems. &ock)in is also used so that replacement parts or add)on
enhancements must !e purchased from the same manufacturer. 6xamples
would include a computer operating system or a porta!le music
storage+replay device that is controlled !y a single company.
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,1. 9y receiving a government grant of monopoly status, i.e., !ecoming a
government-granted monopoly. "oday this is usually accomplished
through the ac4uisition of a license, patent, copyright, trademark or
franchise. 0ommon examples include a franchise for ca!le television for a
certain city or region, a trademark for a popular !rand, copyrights on certain
cartoon characters or a patent for a uni4ue product or production techni4ue.
$s governments usually have the final authority regarding the creation,
maintenance and extension of monopolies, pu!lic relations, particularly
lo!!ying and advertising, are important tools for monopolists for convincing
politicians to ignore, approve or even !less anti)competitive ac4uisitions,
mergers, etc. $mong the arguments typically made !y monopolists are that
such ac4uisition or merger is in the pu!lic interest !ecause it would allow
them to (;) spend more money on research and development in order to
develop new and improved products, (<) standardie what would otherwise
!e a chaotic market (i.e., vigorous competition) and (I) reduce costs, and
thus prices, through (a) the reduction of redundant production facilities and
employees, (!) concentrating production at the most efficient production
facilities and (c) o!taining greater economies of scale. Monopolists also
fre4uently support such re4uests with the claim that they are model
corporate citiens and that they are great contri!utors to charita!le and
educational causes.
"he term barriers to entry is used !y economists to refer to o!stacles to
!usinesses or to individuals wanting to enter a given field. *ome of these
!arriers occur naturally, whereas others are erected or strengthened !y
monopolies in order to maintain or enhance their monopoly positions.
6xamples include the extremely high cost of developing new drugs, limited
sources for a low cost input, a dominant platform for software or other
products, patent protection of a low cost production techni4ue, the difficulty
of trying to compete with famous !rands and air transport agreements that
make it difficult for new airlines to o!tain landing slots at popular airports.
In economics, a firm is said to reap monopoly pro#its when a lack of via!le
market competition allows it to set its prices a!ove the e4uili!rium price for
a good or service without losing profits to competitors. Monopoly profit is a
type of economic profit, that is, it is a profit greater than the normal profit
that is typical in a perfectly competitive industry. "he resulting price is
known as the monopoly pri"e.
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In a perfectly competitive market, firms are said to !e pri"e takers:
since a customer can !uy widgets from one producer as easily as another,
any widget producer on the market faces a horizontal demand curve at the
e4uili!rium price5 if the firm tries to sell widgets a!ove the e4uili!rium
price, customers will simply !uy their widgets elsewhere and the firm will
lose all of their !usiness. (In actual markets, of course, there is never a
situation where exactly compara!le goods are availa!le just as easily from
one firm as from another J the theory of perfect competition is a useful
idealied model rather than a naturalistic description.)
9y contrast, lack of competition in a market creates a downward sloping
demand curve for a monopolist or oligopolist5 although they will lose some
!usiness !y raising prices, they will not lose it all, and it may !e more
profita!le in most situations to sell at a higher price. "his does not mean that
monopolists are not price takers. It only says that they have the option of
!eing either a #price taker# (at a level of output of their own choosing), or a
#4uantity taker# (at a price of their own choosing). "hey can set their own
price and accept a level of output determined !y the market, or they can set
their output 4uantity and accept the price determined !y the market. "hey
cannot set !oth price and output.
$ firm with monopoly power setting prices will typically set price at the
profit maximiing level. "he most profitable price that they can set (the
monopoly pri"e) is where the optimum output level (where marginal cost
(MC) e4uals marginal revenue (MR) as seen on the diagram !elow) meets the
demand curve. Cnder normal market conditions for a monopolist, this price
will !e higher than the e4uili!rium price (which is the price at which
marginal cost for the producer e4uals marginal !enefit for the consumer). In
the chart !elow the shaded area represents the profits of the monopolist. "he
lower half represents the normal profits that would go to a competitive firm
(ignoring output losses). "he upper half represent the additional economic
profit going to the monopolist.
,-.. *omaiya college of *ci/0omm1 2age 1-
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2009
Pro#it Ma2imi3ation
?ecall that the o!'ective of a !usiness is to maximie profits. $s such, a
company should produce where profit is at a maximum. In marginal terms,
;. If M0 K M?, producing ; more unit will add more to "? than to "0,
so the monopoly should increase 4uantity.
<. If M0 L M?, producing ; more unit will add more to "0 than to "?,
so the monopoly should decrease 4uantity.
I. >nly when M? M M0 (and M0 cuts M? from !elow) is profit
maximied.
$ monopolist will generally produce less than a socially efficient level of
output, and charge too high a price. $re the a!ove normal profits of
monopoly a social costN Got usually, since profit is still part of surplus !ut
has !een transferred from consumers to producers. *ocial cost arises from
inefficiently low output which leads to the dead weight loss. (owever, if the
monopolist uses some of its normal profits to lo!!y in order to maintain a
monopoly (rent seeking), then this can !e a welfare cost to society.
Pri"e 'is"rimination
2rice discrimination is selling the same good to different customers+markets
at different prices. 6xamples include movie tickets, airline tickets, and
discount coupons. In order to practice price discrimination, there must !e
,-.. *omaiya college of *ci/0omm1 2age 1.
MONOPOLY
2009
easy to separate customer into groups. "hese groups are determined !ased
on their elasticities to demand. "he company must also !e a!le to prevent
resales !etween groups, as well as ar!itrage, which is !uying where a good
is cheap and selling where it is expensive.
2rice 7iscrimination can increase the profit of monopolies, since they can
charge a higher price to those with less elastic demand, and a lower price to
those with more elastic demand. In this manner, a !usiness does not have to
lower prices to all !uyers in order to sell more goods.
*upplier of 0hoice aims to stimulate growth in
diamond demand and close this opportunity gap.
,-.. *omaiya college of *ci/0omm1 2age 1/
MONOPOLY
2009
I have selected and listed these companies using some selection
criteriaAs. $s the first, companies listed here have one or more product that is
into the monopolistic position in Indian market and merely impossi!le to
!eat their position !y others. *econdly, these companies have efficient
management with innovative ideas and strong network across India. 8inally,
these companies have very few or no de!t and registering year to year
yearning growth.
-+ Britannia 4n%stries
Go to any shop, whether it is small or large mall, anywhere in India, whether
it is a metropolitan city or remote village, you are a!le to find 9ritannia
!iscuits. *uch strong !rand along with extra ordinary sales network, !ring
this company as one of the gem in India.
2+ 4&!
"here is only one name in India for cigarettes. I"0. "hrough itAs wide
presence to each and every corner in India, efficient management, innovative
,-.. *omaiya college of *ci/0omm1 2age 10
MONOPOLY
2009
ideas, I"0 a!le to reward its investors to the utmost. It has strong !rand like
Bills, Gold 8lakes that no one can !eat in India market. I"0 already
operating to the 8M0G sector and its !rand started its strong presents all
over India.
/+ Nestle
Go name in India other than Gestle in the 0hild food sector. Gestle left no
room for its competitors in this segment for decades. $lso, there is no name
in India market, famous than Maggi in the noodles segment. $long with
a!ove < strong monopolistic !rands, Gestle manufacturing and marketing
!iscuits and confectionaries too. Gestle have real monopolistic !usiness that
each and every value investor looking for.
0+ H5L
Go need to say anything a!out (industan Cnilever. 2eople in India cannot
survive without (C& products. It is operating into the 8M0G sector with
vast list of products where, most of them have clear monopolistic position in
Indian market. *ome of them are *urf 6xcel, &ux, &ife!ouy, sunsilk, ponds
are some !ut very few in their list. "o identify the power of (C& product,
try to find a shop or a corner where any of the (C& product have no
presence.
1+ 5nite Spirits
*pirit is one of the most profita!le !usiness in the world. In India, spirit
!usiness providing maximum income to most of the states. It is difficult to
find an adult in India who has not heard a!out Mc7owellAs or any of its
variants. "hat is Cnited *pirits. 2resence in each and every corner of India,
,-.. *omaiya college of *ci/0omm1 2age 21
MONOPOLY
2009
and !eing the Dth largest spirit company in the world, Mc7owell put its
signature among other Indian companies as one of the !est to invest. $n
only difference from others in this list is, Cnited *pirit have de!t !ut simply
managea!le. 9uy this stock when the prices are down, hold it and see how
your wealth ooming.
6+ *la2o !ons%mer !are
0an any one !eat (orlicks or 9oost in IndiaN or 0rocinN Impossi!le. 9oth of
these three are the un!eaten !rands from G*- consumer (ealthcare for
decades and will remain as stronger for next decades too. If the company has
such solid !rand names with monopolistic position, there are no points of
thinking to invest on the stocks of this company. Bait to get the stock in the
minimum price, that very rarely happening, and invest maximum.
7+ P8*
7id you ever hear the products Eicks and BhisperN funny right. In India it is
difficult to find a person who never used Eicks and difficult to find a women
who not aware a!out Bhisper. Eicks !rand is a clear monopoly and even
whisper too. 2/G has special focus to feminine care which leads them to
have one of the most admired feminine !rands along with its long trusted
monopolistic !rand Eicks. Oes, these two !rands are sufficient to select this
company with confidence, to invest and oom your wealth.
9+ 4!4!4 )ank
I0I0I !ank has large num!er of !ranches across India with second largest
!ank in India status. "heir credit card division is the !est in India in the
sense of services and products. I0I0I direct is the most favored online
,-.. *omaiya college of *ci/0omm1 2age 21
MONOPOLY
2009
trading platform for several years. 9ank has efficient management and sales
team with huge marketing network across India. "his stock will !e !etter to
hold for long term and can consider as wealth oomer. (igh volatility is the
only draw!ack with this stock !ut recovery will !e faster. 0onsider to have
this stock in the portfolio for long term !y carefully !uying when the prices
are down to the maximum.
9+ :sian Paints
$sian paints are IndiaAs most favorite decorative paint company with posh
huge decorative paint collections. $nywhere in India, $sian paints are the
well known name !etween !ig companies to small home makers. "his is a
classic good stock to generate long term wealth !y taking advantage from its
monopolistic position in the paint industry and most innovative ideas time to
time.
-0+ Bl%estar
Oou may feel wonder why I have added 9luestar with the a!ove Indian
Germs. "here are reasons. 7rastic changes in Indian climate which !eing
hotter and hotter. 9luestar is the makers of $ir conditioners and yes, it has
the monopolistic !usiness in India. In the coming years, re4uirements for air
conditioners in offices as well as home, going to up and that add value to
9luestarAs !usiness. $ future !ased pick of this stock certainly add value to
your portfolio as well as wealth too.
Bhen selecting stocks, give preference to companies have at least one
product in market that have monopolistic position. ?emem!er to avoid sick
commodity !ased companies !y considering huge competitors in the same
,-.. *omaiya college of *ci/0omm1 2age 22
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2009
!usiness, less earning and ina!ility to meet inflation ad'usted price to its
products. *uch !usiness certainly have huge de!t !ase and well organied
la!or force. $irline industry is the !est example for organied la!or, which
can affect their operation in case of any strikes happening. *teel
manufacturing industries are the example for sick, commodity type !usiness
with the a!ove mentioned reasons.
$ll the a!ove listed companies are a!le to ad'ust their price to !eat inflation
in a great way. 7ue to their monopolistic position in the market, they never
loose the customers in case of any hike in price re4uired due to inflation. $s
they donAt have any competitors, their customers will !e with them. "his is a
wonder which help investors to oom wealth to a great extend.
,-.. *omaiya college of *ci/0omm1 2age 2*