MONOPOLY

MEANING OF MONOPOLY

• Monopoly is defined as that market form in which a single producer controls the whole supply of a single commodity which has no close substitute. Three points should be noted in regard to this definition.

1. There must be a single producer2. There must be only one commodity produced by

the firm for which there is no substitute.3. There are strong barriers for the firms to enter into

the industry.

Definitions of Monopoly

• Monopoly is a market situation in which there is s single seller. There are no close substitutes of the commodity it produces, there are barriers to entry – Koutsoyiannis.

• A pure monopoly exists when there is only one producer in the market. There are no dire competitions – Ferguson.

• Thus monopoly can be defined as that market form in which a single producer controls the whole supply of a single commodity which has no close substitute.

Features of Monopoly

• Single seller in the market• No close substitutes• No competition• Price maker• Monopoly is also an industry• Difficult entry of new firms• Can fix both price and output by himself.• Price discrimination

• Examples of Monopoly– Electricity utilities, – Gas – Water– Public Tramsport– Telecommunications

Price and Output determination in Monopoly Markets

• Price/Output Decisions• A monopoly firm is the

market.• Market and firm demand

curve slopes downward.• Monopoly demand curve is

always above the marginal revenue curve, P = AR > MR.

• Monopoly position allows above-normal profits.P > AC in long-run

equilibrium.• Set Mπ = MR - MC = 0 to

maximize profits.• MR=MC at optimal output.

Discriminating Monopoly(Price Discrimination)

• Monopoly firms have the sole objective of earning maximum profits. They may charge uniform price for their products to all the consumers or they may charge different prices for their product to different consumers.

• Charging different prices to different consumers of their product is called price discrimination.

Types of Price Discrimination

• Personal: • Local Discrimination: Ex: Dumping• Discriminating According to use or trade:• Product discrimination: Ex: surf excel• Age discrimination• Sex discrimination• Size discrimination• Quality variation discrimination

When is price discrimination possible?

• the nature of product or service should be such that there is no possibility transfer of product from one market to another.

• When the markets are separated by large distance or tariff barriers.

• When buyers have let go attitude.• When buyers have an illusion