Introduction

Monopoly is a market structure characterized by a single seller, selling a unique product in the
market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods
with no close substitute. Such as WASA & DESCO.

In a monopoly market, factors like government license, ownership of resources, copyright and
patent and high starting cost make an entity a single seller of goods. All these factors restrict the
entry of other sellers in the market. Monopolies also possess some information that is not known
to other sellers.

Characteristics associated with a monopoly market make the single seller the market controller
as well as the price maker. He enjoys the power of setting the price for his goods.

Monopoly Vs Competitive Firm

Monopoly Firm:

 Is the sole producer

 Has a downward sloping demand curve

 A price maker

 Reduces price to increase sales

Figure: Monopoly Firm Demand Curve

Competitive Firm:

• Many producer

• Has a horizon demand curve

• A price taker

• Sales as much or as little at same price

Figure: Competitive Firm Demand Curve

Key features of Monopoly:

We may state the features of monopoly as:

One Seller and Large Number of Buyers:

The monopolist’s firm is the only firm; it is an industry. But the number of buyers is assumed to
be large.

No Close Substitutes: There shall not be any close substitutes for the product sold by the
monopolist. The cross elasticity of demand between the product of the monopolist and others
must be negligible or zero.

Difficulty of Entry of New Firms: There are either natural or artificial restrictions on the entry
of firms into the industry, even when the firm is making abnormal profits.
Why Monopolies arise BARRIER
Economies of scale: In some industries, low average total costs are only obtained through large
scale production. If only one firm can survive in that industry, the firm is called a natural
monopoly.

Legal Barriers: A public franchise is a right granted to a firm by government that permits the
firm to provide a particular good or service and excludes all others from doing the same. Public
franchise (like the Bangladesh Govt’s Postal Service, a public franchise to deliver first-class
mail)

Exclusive Ownership of a Necessary Resource: Existing firms may be protected from entry of
new firms by the exclusive or near-exclusive ownership of a resource needed to enter the
industry.

Consumer lock-in: Potential entrants can be deterred if they believe high switching costs will
keep them from inducing many consumers to change brands

Network externalities: Occur when value of a product increases as more consumers buy & use
it and make it difficult for new firms to enter markets where firms have established a large
network of buyers

Brand loyalties: Strong customer allegiance to existing firms may keep new firms from finding
enough buyers to make entry worthwhile
Types of Monopolies
Natural Monopoly

A natural monopoly exists when a variety of factors make competition unworkable, financially
unfeasible or impossible. Many local telephone carriers have a natural monopoly in a certain
area, as the extensive infrastructure necessary to support wired telephone service is too expensive
for new competitors. Additionally, the new infrastructure would require unnecessary telephone
poles and other unsightly equipment that local regulators would not allow. As a result, the
existing local telephone company maintains a natural monopoly in its service area, with
emerging competitors typically leasing time on the company’s network to resell to customers.
Similar natural monopolies exist in local electrical services and cable providers, but governments
often regulate natural monopolies to ensure fair practices and pricing for customers.

Local Monopoly or Geographical Monopoly

When only one business provides products or services to a local area, that business is a
geographic monopoly. Typically, geographic monopolies emerge because the customer base is
not large enough to support competition. Rural areas and very small towns may have only one
gas station or grocery store, for example, because the population is too small to support more
than one of these stores. Competitors do sometimes appear in these areas, but one of the
competing businesses typically closes, reasserting the geographic monopoly.

Regulated Monopoly

It is a monopoly firm whose behavior is overseen by a government entity. Governments must

exist as monopolies by necessity, as constituents can't follow the rules of two simultaneous
governing bodies. Some governments go as far as to provide retail stores and other services
under tightly-controlled monopolies, like government-run alcohol sales and national health-care
programs.
Technological Monopolies

A business that's first to market a product or service may get a patent or copyright. That legal
protection makes the business a technological monopoly. For example, if an electronics company
would have a technological monopoly if it patents a new product, and competitors are prevented
from offering the same product at different price points. Similarly, products with specific and
very precise components, like electronics and pharmaceuticals, are subject to technological
monopolies because competitors cannot create a functional competing product without violating
the original company’s patent.

Discriminative monopoly
when a monopoly firm changes different prices for the same goods or services to different
consumers it is known as discriminative monopoly.

Simple or single monopoly

It is a type of monopoly in which a single seller controls the entire market, by selling the
commodity at a single price for all the consumer. There is no price discrimination in the market.

Imperfect monopoly
It is a type of monopoly in which a single seller controls the entire supply of the market which
does not have a close substitute. But there might be remote substitute for the product available in
the market.
Market Behavior of Monopoly

The existence of barriers to entry means that a monopoly can earn supernormal profits in the
long run. Firms outside the industry may not be aware of the high profits being earned. Even if
they do know about the high profits and want to enter the industry, they are kept out by the high
barriers to entry and exit. A monopoly has control over the supply of the product but though it
can seek to influence the demand, it does not have control over it. In fact, a monopoly has to
make a choice. It can set the price, but then it has to accept the level of sales, consumers is
prepared to buy at that price. If, on the other hand, it chooses to sell a given quantity, the price
will be determined by what consumers are prepared to pay for this quantity. Fig. 1 shows that if a
firm sets a price P, the demand curve determines that it will sell amount Q. If it decides to sell
amount Q1, it will have to accept a price of P1.

The demand curve of Monopoly is downward sloping as higher output causes the lower output.
Profit determination

Monopoly determined its profit by following this equation:

 ( y )  p( y ) y  c( y )
  TR  TC
When MR(Marginal Revenue) is equal to MC(Marginal Cost) the profit is maximized.
At the profit-maximizing output level, the slopes of the revenue and total cost curves are equal,
i.e.
MR(y*) = MC(y*)
Monopoly is also an Industry

Under monopoly there is only one firm which constitutes the industry. Difference between firm
and industry comes to an end.

Price Maker: Under monopoly, monopolist has full control over the supply of the commodity.
But due to large number of buyers, demand of any one buyer constitutes an infinitely small part
of the total demand. Therefore, buyers have to pay the price fixed by the monopolist.

Under monopoly, for the equilibrium and price determination there are two different
conditions which are:

1. Marginal revenue must be equal to marginal cost.

2. MC must cut MR from below.

However, there are two approaches to determine equilibrium price under monopoly which
are:

1. Total Revenue and Total Cost Approach.

2. Marginal Revenue and Marginal Cost Approach.

Marginal Revenue and Marginal Cost Approach:

The study of equilibrium price according to this analysis can be conducted in two-time periods.

1. The Short Run

2. The Long Run

Here, we’ll only talk about short-run equilibrium under monopoly.

1. Short Run Equilibrium under Monopoly: Short period refers to that period in which the
monopolist has to work with a given existing plant. In other words, the monopolist cannot
change the fixed factors like, plant, machinery etc. in the short period. Monopolist can increase
his output by changing the variable factors. In this period, the monopolist can enjoy supernormal
profits, normal profits and sustain losses. These three possibilities are described as follows:
Super Normal Profits

If the price determined by the monopolist in more than

AC, he will get super normal profits. The monopolist will
produce up to the level where MC=MR. This limit will
indicate equilibrium output. In Figure 3 output is
measured on X-axis and price on Y-axis. SAC and SMC
are the short run average cost and marginal cost curves
while AR or MR are the average revenue or marginal
revenue curves respectively.

The monopolist is in equilibrium at point E because at point E both the conditions of equilibrium
are fulfilled i.e., MR = MC and MC intersect the MR curve from below. At this level of
equilibrium, the monopolist will produce OQ1 level of output and sells it at CQ1 price which is
more than average cost DQ1 by CD per unit. Therefore, in this case total profits of the
monopolist will be equal to shaded area ABDC.

Normal Profits

A monopolist in the short run would enjoy normal profits when

average revenue is just equal to average cost. We know that
average cost of production is inclusive of normal profits. This
situation can be illustrated with the help of figure: 4

In Fig. 4 the firm is in equilibrium at point E. Here marginal

cost is equal to marginal revenue. The firm is producing OM
level of output. At OM level of output average cost curve
touches the average revenue curve at point P. Therefore, at
point ‘P’ price OR is equal to average cost of the total product. In this way, monopoly firm
enjoys the normal profits.
Minimum Losses

In the short run, the monopolist may have to incur

losses. This situation occurs if in the short run price falls
below the variable cost. In other words, if price falls due
to depression and fall in demand, the monopolist will
continue to produce as long as price covers the average
variable cost. Once the price falls below the average
variable cost, monopolist will stop production. Thus, a
monopolist in the short run equilibrium has to bear the
minimum loss equal to fixed costs. Therefore, equilibrium price will be equal to average variable
cost. This situation can also be explained with the help of Fig. 5.

In Fig. 5 monopolist is in equilibrium at point E. At point E marginal cost is equal to marginal

revenue and he produces OM level of output. At OM level of output, equilibrium price fixed by
the monopolist is OP1. At OP1 price, AVC touches the AR curve at point A.

It signifies that the firm will cover only average variable cost from the prevailing price. At
OP1 price, firm will bear loss of fixed cost i.e., A per unit. The firm will bear the total loss equal
to the shaded area PP1 AN. Now if the price falls below OP1, the monopolist will stop
production. It is so because if he continues production, he will have to bear the loss of variable
costs along with fixed costs.
Price Discrimination
Price discrimination refers to charging different price to different segments of market .It is
basically a strategy adopted by the monopolists to charge different prices for the products they
sell, and the price differences do not reflect costs. Example: Movie tickets, Airline tickets,
Discount coupons, Financial aid Quantity discounts

Types of Price Discrimination

o Perfect Price Discrimination: sells each unit separately and charges the highest
price each consumer would be willing to pay for the product. For example: Doctor
fee, Lawyer fee etc
o Second Degree Discrimination: it charges a uniform price per unit for one
specific quantity, a lower price for an additional quantity, and so on. Example:
Electricity bill, Gas bill etc
o Third Degree Discrimination: it charges a different price in different markets or
charges a different price to different segments of the buying population. Example:
Movie ticket, Airplane ticket, Amusement Park, Car parking etc

Conditions of Price Discrimination

For the monopolist who practices perfect price discrimination, price equals marginal
revenue.

– The seller must exercise some control over price; it must be a price searcher.

– The seller must be able to distinguish among buyers who would be willing to pay
different prices.

– It must be impossible or too costly for one buyer to resell the good at other
buyers. The possibility of arbitrage or “buying low and selling high” must not
exist.
Benefits of Price Discrimination

Price discrimination is basically a strategy adopted by the monopolists to charge different prices
for the products they sell to charge different price to different segments of market with a view to
obtaining a few benefits such as;

• Increase in production: A price-discriminating monopolist is able to sell a larger

quantity than a single-price monopolist

• Extra profits: A price-discriminating monopolist can enjoy extra profits by selling more
of its goods or services.

How price discrimination enhances economic efficiency

A non-discriminating monopolist sets a price of $12 and sells 3,000 units. Consumer surplus is
shown by the green area. Producer surplus is shown by the blue area. The deadweight loss of
monopoly is shown by the purple area. The deadweight loss is a measure of the inefficiency
because of underproduction by the monopolist.

Figure: price discrimination enhances economic efficiency

How price discrimination enhances economic efficiency

If the monopolist discriminates by charging $12 for the first 3,000 units and $9 for any additional units,
consumers buy 4,500 units. The deadweight loss disappears. A portion of the deadweight loss is added to
producer surplus, and the rest of the deadweight loss is added to consumer surplus. Price discrimination
in this example benefits both sellers and buyers.

20 Consumer
Surplus
18
Producer
16 Surplus
14 Deadweight
Loss
12 MC

10
8
6
4 D

2
MR
0
0 1 2 3 4 5 6 7 8

Figure: price discrimination enhances economic efficiency

Effects of Price Discrimination

 In many markets, demand fluctuates systematically, often by time of day or day of the
week or seasonally.
 Demand fluctuations result in crowding of facilities during peak periods and excess
capacity during off-peak periods.
 Price discrimination reallocates demand from peak times to off-peak times. With lower
demand during peak times, the capacity of a facility needed to serve the market is smaller
and fewer resources are required to satisfy consumer demand.
Conclusion: In conclusion, monopoly is only a seller but many buyers in a market. A
monopolist is selling unique product and the design and idea create by his own. The seller
is 'price maker', he decided to set the product price and maximize the profit. Therefore,
monopoly is an absence of competition, which often results in high prices. Besides, a
monopolistic also needs to control some company no entry in monopoly market because
some firms are strong to take advantages in the company.
References:
1. Pindyck S. Robert, Rubinfeld L.Daniel, Mehta L. Prem. Managerial Economics, 7th
edition. pearson
2. https://www.ukessays.com/.../conclusion-of-perfect-competition-monopolistic-competitive.
3. www.econ.jku.at/members/WinterEbmer/files/Teaching/managerial/Lecture4.pdf
4. https://economictimes.indiatimes.com › Definitions › Economy
5. https://study.com/academy/.../pure-monopoly-definition-characteristics-examples.html
https://www.scribd.com/document/.../Monopolistic-Competition-Written-Report
7. Last but not least lecture sheets given our Course Instructor Dr. K.M. Zahidul Islam,
Professor, IBA-JU