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MONOPOLY

MONOPOLY
 The Word Monopoly is a Latin Term. ‘Mono’
means Single and ‘Poly’ means to control,
implying one Seller.

 Monopoly is a form of Market Organization in


which there is only One Seller of the
Commodity.

 There are No Close Substitutes for the


Commodity sold by the Seller.
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 Example : Indian Railways


DEFINITIONS
 According To Koutsoyiannis ,
“Monopoly Is a Market Situation in Which There is
A single Seller, There are no close substitutes for
commodity it produces ,there are barriers to entry.”

 According To Baumol ,
“ A pure Monopoly is defined as the firm that is also
an industry. It is the only supplier of some particular
commodity for which there exist no close substitutes.”

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 True monopolies generally exist in
government controlled markets.
 Ex. : Indian railways, Nuclear
Energy related Minerals (Uranium)

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FEATURES OR ASSUMPTIONS OF MONOPOLY
 One seller and large number of Buyers.

 Monopoly is also an Industry.

 Restrictions on the Entry of the New Firms.

 No close Substitutes.

 Price Maker. (full control over the supply of


commodity)

 Price Discrimination.

 Downward Sloping Demand Curve. 5


CAUSES AND SOURCES OF MONOPOLY POWER
 Control over Raw Materials or Ownership of Natural Resources.
 Patents.- when firm invents new technique to make a product,
Patent law gives the inventor the exclusive control in the use of
invented means of production.
 Technical Barriers.- only few firms have the technology to
produce aircraft.
 Government Policy.: goods and services of strategic importance
to nation ( Coal Allocation)
 Limit-Pricing Policy or Unfair Competition.: A limit pricing is a
price, or pricing strategy, where products are sold by a supplier
at a price of which is lower than the average cost of production
or at a price low enough to make in unprofitable for other
players to enter the market.
 Capital Size 6
MONOPOLY
V/S
PERFECT COMPETITION

Perfect competitive Firm Monopoly


Is one of many producers  Is the sole producer

Has a horizontal demand  Hasa downward-


curve sloping demand curve

Is a price taker  Is a price maker

Sellsas much or as little  Reduces price to 7


at same price increase sales
(A)Perfect competitive (b) A Monopolist’s
Firm Demand Curve
Price Price

Demand

Demand

0 Quantity of 0 Quantity of
Output Output 8
DEMAND AND REVENUE UNDER
MONOPOLY
Y

A
 Demand curve of the
monopolist is also average E > 1 Increase In TR

revenue (ARC) curve. It

Revenue
E=1 (TR Maximum)
L
slopes downward. It P
N
means if the monopolist E<1 (Decrease inTR)
fixes high price, the
demand will shrink. D = Average Revenue
O Marginal revenue X
Q OUTPUT

 Demand rises with fall in price(AR)


 At point ‘N’ , total revenue will be maximum.( i.e. ,TR = P x
Q)
 Average revenue is never zero, but marginal revenue may
be zero or even negative
 At OP price, the monopolist will produce OQ quantity of 9
output, because this price affords him maximum total
revenue.
DETERMINATION OF PRICE AND EQUILIBRIUM
UNDER MONOPOLY IN SHORT RUN
 In case of monopoly, one can know about price
determination or equilibrium position with the
help of MR & MC analysis. According to this
analysis, a monopolist will be in equilibrium
when 2 conditions are fulfilled, i.e.,
1. MC=MR
2. MC curve cuts MR curve from below. A
monopolist earns maximum profit when he is
in equilibrium.
 Price & equilibrium determination
under monopoly are studied with
reference to 2 time periods:
A. Short period
B. Long period 10
MR AND MC ANALYSIS
A Monopolist in Equlibrium may face any of Three
Situations in the Short period .

1. Super Normal Profit

2. Normal Profit

3. Minimum Loss
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SUPER NORMAL PROFIT
 In This Figure ,The Y
Monopolist is in MC
equilibrium at point E .
AC
 Because at this point
A
MC=MR . C
D B
 The Monopolist
Produces OM Units & E
sell it at AM price AR
 Thus in this Situation
the super normal profit
MR
of the monopolist will be OUTPUT X
O M 12
ABCD
NORMAL PROFIT
 In This Figure ,The Firm is Y MC
in equilibrium at point E .
 Where MC=MR & OM is
the equilibrium output . AC

 At this output AC Curve P


A
Touches Average
Revenue(AM) curve at point
A.
 At point ‘A’ price OP (AM) E
is equal to the average Cost AR
of the product .
 Therefore firms earn only
normal profit in MR
equilibrium situation as at X
equilibrium output its O M OUTPUT
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AC=AR
MINIMUM LOSS
 In this Figure , The Y
monopolist is in equilibrium
at point E , Where MC=MR MC
& produces OM output. AC
 The price of equilibrium
output OM is fixed at OP1 P
N
(AM). Loss A
P1
 At this Price The Average AVC
Variable Cost(AVC) Curve
Touches AR curve at point ‘A’. E
 At this situation the firm
will get only AVC from the
AR
Prevailing Price
 .The firm will bear the loss O
MR X
of fixed cost , AN per Unit. M OUTPUT

The firm will bear total loss equivalent to NAP1P as shown 14

by the shaded area.


PRICE DETERMINATION UNDER LONG
RUN
 In the Figure ,Point E
Indicates the equilibrium of
the monopolist . Y
 At Point E, MR = LMC .
Hence OM is the equilibrium
Output & ON (=AM) is the
equilibrium Price.BM is the N
A
LMC
LAC
long run average cost. P B
 Price (Average Revenue ) AM
is being more than long run
average cost (AR > LAC), the E AR
Monopolist earn (AM –BM
=AB) Super Normal Profit Per
Unit.
MR
 The Firm’s Super Normal O M OUTPUT X
Profit will be ABPN as Shown 15
by Shaded Area
PRICE
DISCRIMINATION

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Price discrimination occurs when
a business charges a different
price to different groups of
consumers for the same good or
service, for reasons not associated
with costs.
PRICE DISCRIMINATION
TYPES OF PRICE DISCRIMINATION

1. First-degree price discrimination occurs


when each unit of output is sold at a different
price such that all consumer surpluses go to the
seller.
2. Second-degree price discrimination occurs
when the seller prices the first block of output
at a higher price than subsequent blocks of
output.
3. Third-degree price discrimination occurs
when different prices are charged to groups of
buyers in totally separate markets
 1st Degree Price Discrimination
This type of discrimination, also known as perfect price
discrimination, essentially states the company charges
the consumer the maximum price that individual is
willing to pay for that product. This extracts all the
consumer surplus and earns the firms the highest
possible profits. This method of discrimination is also one
of the most difficult to adopt because it requires the
company knows each of its customers perfectly at each
level of consumption (Baye, 2006). This can best be seen
in car dealers, where the price on the car is negotiable,
and the dealers job is to get the most out of the consumer
as possible, the consumer surplus will be 0. The aim of
first degree price discrimination is for the firm to
appropriate the entire consumer surplus. Eg: Car
dealerships mechanics, doctors, and lawyers (service 20

related business).
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2nd Degree Price Discrimination
In this type of discrimination the companies are actually not able to
differentiate between the different types of consumers. This practice creates
a schedule of declining prices for different quantities. Using this strategy the
company can extract some of the consumer surplus without knowing much
about the individual consumer. The consumer chooses the amount of
product they wish to consume with the posted prices, and this allows
consumers to differentiate themselves according to preference. This type of
discrimination can easily be seen in the bulk purchases of large consumers
like Walmart, who in turn pass the savings onto the eventual consumer.
This can also be seen in quantity discounts, the more you purchase the
more you save. A family pack of soap powder or biscuits tends to cost less
per kg than smaller packs. This of course discriminates against people
living alone, often pensioners and students. In some supermarkets the price
per kg of product is listed, which helps the customer by providing
information on which to base decisions on.

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Examples of 2nd degree price discriminators:
Electric utilities, cable companies, water & sewage companies, trash collection
3rd Degree Price Discrimination
This type of price discimination, is based around the idea that
the firm sets prices that will accomodate the consumer. The
firms know broad demographics about the particular types of
consumers they will supply, and charge prices such that
everyone will be able to consume the product. In order for this
form of discrimination to work the firm must be able to predict
the elasticity of demand in various consumers. This type of
discrimination can be seen in the movie theater business.
Student and senior discounts are given because these groups
of consumers have more elastic price elasticity of demand. It is
because of this discrimination that the firm is able to extract the
consumer surplus of those who might not otherwise pay the
standard rate. Third degree price discrimination relies on the
firm being able to separate the segments. If separation of
segments is not possible then the product can be transferred.
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FIND PRICE DISCRIMINATION HERE!
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