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Presented By: PUSHPALATA KAYASTHA

A monopoly (from Greek monos / (alone or

single) + polein / (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity. (This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry). Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods. The verb "monopolise" refers to the process by which a company gains much greater market share than what is expected with perfect competition.

Historical monopolies
The term "monopoly" first appears in Aristotle's

Politics, wherein Aristotle describes Thales of Miletus' cornering of the market in olive presses as a monopoly. Vending of common salt (sodium chloride) was historically a natural monopoly. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for producing salt from the sea, the most plentiful source.

Changing sea levels periodically caused salt "famines"

and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (e.g. the Sahara desert) requiring well-organised security for transport, storage, and distribution. The "Gabelle", a notoriously high tax levied upon salt, had a role in the beginning of the French Revolution, when strict legal controls specified who was allowed to sell and distribute salt.

Robin Gollan argues in The Coalminers of New South Wales

that anti-competitive practices developed in the coal industry of Australia's Newcastle as a result of the business cycle. The monopoly was generated by formal meetings of the local management of coal companies agreeing to fix a minimum price for sale at dock. This collusion was known as "The Vend". The Vend ended and was reformed repeatedly during the late 19th century, ending by recession in the business cycle. "The Vend" was able to maintain its monopoly due to trade union assistance, and material advantages (primarily coal geography). During the early 20th century, as a result of comparable monopolistic practices in the Australian coastal shipping business, the Vend developed as an informal and illegal collusion between the steamship owners and the coal industry, eventually resulting in the High Court case.

Natural monopoly
A natural monopoly is a company which experiences

increasing returns to scale over the relevant range of output. A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand". The relevant range of product demand is where the average cost curve is below the demand curve. When this situation occurs it is always cheaper for one large company to supply the market than multiple smaller companies, in fact, absent government intervention in such markets will naturally evolve into a monopoly.

Government-granted monopoly
A government-granted monopoly (also called a "de

jure monopoly") is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. Copyright, patents and trademarks are examples of governmentgranted monopolies.

Market structures
In economics, the idea of monopoly is important for the

study of market structures, which directly concerns normative aspects of economic competition, and provides the basis for topics such as industrial organization and economics of regulation. There are four basic types of market structures by traditional economic analysis: perfect competition, monopolistic competition, oligopoly and Monopoly.

A monopoly is a market structure in which a single

supplier produces and sells a given product. If there is a single seller in a certain industry and there are not any close substitutes for the product, then the market structure is that of a "pure monopoly". Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced, but nevertheless companies retain some market power. This is termed monopolistic competition, whereas by oligopoly the companies interact strategically.

In general, the main results from this theory compare

price-fixing methods across market structures, analyze the effect of a certain structure on welfare, and vary technological/demand assumptions in order to assess the consequences for an abstract model of society. Most economic textbooks follow the practice of carefully explaining the perfect competition model, only because of its usefulness to understand "departures" from it (the so-called imperfect competition models).

Characteristics
Profit Maximiser: Maximizes profits. Price Maker: Decides the price of the good or product to be sold. High Barriers to Entry: Other sellers are unable to enter the

market of the monopoly. Single seller: In a monopoly there is one seller of the good which produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. Price Discrimination: A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.

Sources of monopoly power


Monopolies derive their market power from barriers to

entry circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry;
Economic barriers Legal barriers

Deliberate actions

Economic barriers
Economies of scale
Capital requirements Technological superiority

No substitute goods
Control of natural resources Network externalities

Legal barriers
Legal rights can provide opportunity to monopolise

the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.

Deliberate actions
A company wanting to monopolise a market may

engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force. In addition to barriers to entry and competition, barriers to exit may be a source of market power.

Price discrimination
Improved price discrimination allows a monopolist to

gain more profit by charging more to those who want or need the product more or who have a greater ability to pay. For example, most economic textbooks cost more in the United States than in "Third world countries" like Ethiopia. The three basic forms of price discrimination are first, second and third degree price discrimination.

first degree price discrimination


In first degree price discrimination the company

charges the maximum price each customer is willing to pay. The maximum price a consumer is willing to pay for a unit of the good is the reservation price. Thus for each unit the seller tries to set the price equal to the consumers reservation price.[56] Direct information about a consumers willingness to pay is rarely available. Sellers tend to rely on secondary information such as where a person lives (postal codes); for example, catalog retailers can use mail high-priced catalogs to high-income postal codes.

First degree price discrimination most frequently

occurs in regard to professional services or in transactions involving direct buyer/seller negotiations. For example, an accountant who has prepared a consumer's tax return has information that can be used to charge customers based on an estimate of their ability to pay.

second degree price discrimination


In second degree price discrimination or quantity

discrimination customers are charged different prices based on how much they buy. There is a single price schedule for all consumers but the prices vary depending on the quantity of the good bought. The theory of second degree price discrimination is a consumer is willing to buy only a certain quantity of a good at a given price. Companies know that consumers willingness to buy decreases as more units are purchased. The task for the seller is to identify these price points and to reduce the price once one is reached in the hope that a reduced price will trigger additional purchases from the consumer.

third degree price discrimination


In third degree price discrimination or multi-market

price discrimination [ the seller divides the consumers into different groups according to their willingness to pay as measured by their price elasticity of demand. Each group of consumers effectively becomes a separate market with its own demand curve and marginal revenue curve. The firm then attempts to maximize profits in each segment by equating MR and MC,Generally the company charges a higher price to the group with a more price inelastic demand and a relatively lesser price to the group with a more elastic demand.

Countering monopolies
According to professor Milton Friedman, laws against

monopolies cause more harm than good, but unnecessary monopolies should be countered by removing tariffs and other regulation that upholds monopolies. A monopoly can seldom be established within a country without overt and covert government assistance in the form of a tariff or some other device. It is close to impossible to do so on a world scale. The De Beers diamond monopoly is the only one we know of that appears to have succeeded. In a world of free trade, international cartels would disappear even more quickly.

Monopolist shutdown rule


A monopolist should shut down when price is less

than average variable cost for every output level. in other words where the demand curve is entirely below the average variable cost curve. Under these circumstances at the profit maximum level of output (MR = MC) average revenue would be less than average variable costs and the monopolists would be better off shutting down in the short term.

Breaking up monopolies
When monopolies are not ended by the open market,

sometimes a government will either regulate the monopoly, convert it into a publicly owned monopoly environment, or forcibly fragment it. Public utilities, often being naturally efficient with only one operator and therefore less susceptible to efficient breakup, are often strongly regulated or publicly owned. American Telephone & Telegraph (AT&T) and Standard Oil are debatable examples of the breakup of a private monopoly by government: When AT&T, a monopoly previously protected by force of law, was broken up into various components in 1984, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market.

Law
Competition law
The existence of a very high market share does not

always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share company's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power a monopoly may confer, for instance through exclusionary practices.

First it is necessary to determine whether a company is

dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer". As with collusive conduct, market shares are determined with reference to the particular market in which the company and product in question is sold. The HerfindahlHirschman Index (HHI) is sometimes used to assess how competitive an industry is. In the US, the merger guidelines state that a post-merger HHI below 1000 is viewed as unconcentrated while HHI's above that provoke further review.

By European Union law, very large market shares raises a

presumption that a company is dominant, which may be rebuttable. If a company has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market". The lowest yet market share of a company considered "dominant" in the EU was 39.7%. Certain categories of abusive conduct are usually prohibited by a country's legislation.The main recognised categories are: Limiting supply Predatory pricing Price discrimination Refusal to deal and exclusive dealing Tying (commerce) and product bundling

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