MONOPOLY

The Word Monopoly is a Latin Term.

‘Mono’ means Single and ‘Poly’ means
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.
 True monopolies generally exist in government
controlled markets.

 Monopoly in private business is rare.

 Private firms who have considerable market share.
 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.

 Price Discrimination.

 Downward Sloping Demand Curve.

Causes and sources of monopoly power
 Control over Raw Materials or Ownership of Natural Resources.

 Patents.

 Technical Barriers.

 Government Policy.

 Historical and Entry Lag.

 Limit-Pricing Policy or Unfair Competition.

 Capital Size.

 Business Mergers.
 Types of Monopoly
 Natural monopoly,

 Geographic monopoly,

 Technological monopoly,

 Government monopoly,
 Type of Barriers to Entry
 Institutional barriers to entry.
 Exclusive franchising
 Licences
 Patent protection

 Technical barriers to entry.

 Unique resources
 Economies of scale and scope
 Economy of experiences
Type of Barriers to Entry
 Strategic barriers to entry.
 Limit pricing
 Excess capacity
 Product differentiation (brand
proliferation)
 MONOPOLY
v/s
PERFECT COMPETITION
Monopoly
Perfect competitive Firm
 Is the sole producer
Is one of many producers
 Has a downward-sloping demand curve

Has a horizontal demand curve

 Is a price maker

Is a price taker  Reduces price to increase sales

Sellsas much or as little at

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

Demand

Demand

0 Quantity of 0 Quantity of
Output Output
DEMAND AND REVENUE UNDER
MONOPOLY
 In a monopoly situation, there is no difference between firm
& industry.
 Under monopoly situation, firm’s demand curve also
constitutes industry’s demand curve.
 Demand curve of the monopolist is also average revenue
curve.
 It slopes downward. It means if the monopolist fixes high
price, the demand will shrink or decrease. On the contrary, if
he fixes low price, the demand will expand or increase.
 Under monopoly, average revenue and marginal revenue
curves are separate from one another. Both slope
downwards.
 Fig.1 will show average revenue (demand) curve & marginal
revenue curve. Both are sloping downward. Marginal revenue
curve is below average revenue or demand curve.
A Firm’s Revenue

 Total Revenue
TR = P  Q
 Average Revenue
AR = TR/Q = P
 Marginal Revenue
MR = DTR/DQ
A Monopoly’s Total, Average,
and Marginal Revenue

Note that P = AR > MR.

Recall that, in perfect

competition, P = AR =
MR.
 Demand and Marginal-Revenue Curves for a Monopoly

Price
$11 Note that P = AR > MR
10 at all quantities.
9
8
7
6
5
4
3 Demand
2 Marginal (average
1 revenue revenue)
0
–1 1 2 3 4 5 6 7 8 Quantity of Water
–2
–3
–4
Profit Maximization

 For any firm, the profit-maximizing

quantity is that at which marginal
revenue equals marginal cost;
MR = MC.
 A monopoly firm then uses the
demand curve to find the price that
will induce consumers to buy the
profit-maximizing quantity.
 Profit Maximization for a Monopoly
Costs and
Revenue 2. . . . and then the demand 1. The intersection of the
curve shows the price marginal-revenue curve
consistent with this quantity. and the marginal-cost
curve determines the
B profit-maximizing
Monopoly quantity . . .
price
3. Note that P > MR = MC in equilibrium.

Average total cost

MC A

Marginal Demand
cost

Marginal revenue

0 Q QMAX Q Quantity
PRICE DETERMINATION UNDER SHORT RUN

A Monopolist in Equlibrium may face any of Three Situations in

the Short period .

1. Super Normal Profit

2. Normal Profit

3. Minimum Loss
 SUPER NORMAL PROFIT
 In This Figure ,The
Y
Monopolist is in
equilibrium at point E . MC

 Because at this point AC

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

 At this output AC Curve A

P
Touches Average Revenue(AM)
curve at point A.
 At point ‘A’ price OP (AM) is
equal to the average Cost of E
the product . AR
 Therefore firms earn only
normal profit in equilibrium
situation as at equilibrium MR
output its AC=AR X
O M OUTPUT
 MINIMUM LOSS

 In this Figure , The monopolist Y

is in equilibrium at point E ,
Where MC=MR & produces MC
OM output.
AC
 The price of equilibrium
output OM is fixed at OP1 N
P
(AM). Loss
P1 A
 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
Prevailing Price AR
 .The firm will bear the loss MR X
of fixed cost , AN per Unit. O
M OUTPUT

The firm will bear total loss equivalent to NAP1P as shown

by the shaded area.
Misconceptions about Monopoly
Pricing
Highest Price
 Often, monopolists will try to get highest
possible price for their goods and services,
because they can manipulate price, but there are
some prices for which monopolists will get
smaller-than-maximum profit, so they will try to
avoid them. Monopolists are trying to get
maximum total profit, but not maximum price.
Some High prices will reduce dramatically
quantity sold and total revenue, so that
monopolists will try to produce a decrease in
cost.
 Misconceptions about
Monopoly Pricing
Highest Price
Profit
Monopolists seek maximum
total product, not maximum
unit profit. They will choose
smaller unit profit, not the
maximum one, because
additional sales add to total
revenue. For example a profit-
seeking monopolist will sell
five units of a good at Php100
(total profit Php500) than four
units at Php100 (total profit
Php400)
Losses
Monopolists are more likely to get economic
profit than pure competitor. In long run pure
competitor is destined to get only normal profit,
but price adjustment ability and barriers at
entry at monopolists offer them possibility to
get economic profit.
But pure monopoly doesn’t always guarantee
profit. It is neither immune to change in taste of
consumers that reduces demand for the
product nor to change in price of resources. So
an industry can suffer great losses because of
relatively low demand and high resource prices.
Like pure competitors, monopolists won’t
continue to operate in an industry where they
get continued losses. So if they are faced with
this situation, pure monopolists may move their
resources to alternative uses that offer better
opportunities for economic profit. Thus,
monopolies can also realize normal profit in
long run.
 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 long run average N
A
LMC
LAC
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 Profit OUTPUT X
O M
will be ABPN as Shown by
Shaded Area
 Size of Plant Adjustment
•Less Than Most Efficient Size SMC
of Plant
 Monopolists market is so
SAC
limited that the marginal LMC
revenue curve cuts the long- P
run average cost curve to the
C
left of its minimum point LAC

Qm MR
 Size of Plant Adjustment
•Most Efficient Size of Plant

SMC
 Monopolist market and cost curves LMC
are such that the marginal revenue
curve hits the minimum point of the P
long-run average cost(LAC) curve. The
long-run profit maximizing out is Qm, SAC
at which is the long-run marginal cost
equals marginal revenue, LAC

Qm MR
 Price Discrimination
 This refers to the situation when the
monopolist knows exactly the
willingness to pay each customer
and can charge each customer a
different price.
Three important effects in price discrimination
1. It can increase the monopolist’s profits.
2. Need to separate customer according to their ability to pay.
•No arbitrage, the process of buying a good in one market at a
low price and selling it in another market at a higher price
3. It can reduce deadweight loss.
 A. Single Price Monopolist B. Perfectly Discriminating
PRICE PRICE
MONOPOLY
Monopolist
PRICE

Consumer Surplus

Deadweight loss

PROFIT

MC

QUANTITY 0 QUANTITY
0
D
MR
Quantity D Quantity
sold sold
 Monopoly Regulation

 Because monopolies lower the economic output of a

society, and therefore, its wealth, governments regulate
monopolies with the objective of benefiting societies more
than would be the case if the monopolies maximized their
profits.
 There are 3 major methods to increase the benefits of
monopolies to society:
1. removing or lowering barriers to entry through antitrust
laws so that other firms can enter the market to compete;
2. regulating the prices that the monopoly can charge;
3. operating the monopoly as a public enterprise.
 Price Regulation
 Government may regulate the prices that the monopoly charges.
 The regulator may force the monopolist to implement the efficient outcome
◦ Recall that the allocation of resources is efficient when price is set to equal marginal
cost (P = MC).
◦ But it might be difficult for government regulators to force the monopolist to set P =
MC

 There are some products that can be provided at a lower cost by what is
called a natural monopoly than what could be provided by competing firms.
The primary characteristic of a natural monopoly is that its average total
cost declines continually over any quantity demanded by the market. If the
industry has a large fixed cost, then a single firm can provide the product at
a much lower cost than several or many firms, because the average total
cost of each firm will be much higher than it will be for the natural
monopoly. Hence, a natural monopoly can provide a product for a lower
price if there is no competition. Some examples of a natural monopoly
include the distribution of natural gas, electricity, and landline phone service.
 For a competitive firm, profit is maximized
when marginal cost (MC) equals market price.
However, since the average total cost of a natural
monopoly continually declines, the marginal cost will
always be less than the average total cost (ATC), since
the average total cost is the average of all costs
including the large fixed costs while the marginal cost
is only the extra cost of producing an additional unit.
Therefore, a natural monopoly will continually lose
money if the price that they can charge is limited to its
marginal cost.
 A better regulated price would be one that allowed
the monopoly to charge a price — sometimes
referred to as the fair-return price that is equal to its
average total cost, which in economics, also includes
a normal profit.
 This would allow the natural
monopoly to survive as a going
concern, but it would not incentivize
the owners to reduce costs. So this
type the regulation can be enhanced
by allowing the monopolist to keep
some of the profits earned by
reducing costs. Note not this price is
Monopoly
less than the price charged by a profit-
Price maximizing monopoly, which selects
the price corresponding to the point
where marginal cost equals marginal
Fair-Return Price revenue (MR).
Marginal Cost
PUBLIC POLICY TOWARD
MONOPOLIES
 Governments may respond to the
problem of monopoly in one of four ways.
◦ Making monopolized industries more
competitive.
◦ Regulating the behavior of monopolies.
◦ Turning some private monopolies into public
enterprises.
◦ Doing nothing at all.
 Increasing Competition with Antitrust Laws

 Antitrust laws are laws aimed at curbing monopoly power.

 Antitrust laws give government various ways to promote
competition.
◦ They allow government to prevent mergers.
◦ They allow government to break up companies.
◦ They prevent companies from performing activities that make
markets less competitive.
 Two Important Antitrust Laws
◦ Sherman Antitrust Act (1890)
 Reduced the market power of the large and powerful “trusts” of that
time period.
◦ Clayton Act (1914)
 Strengthened the government’s powers and authorized private lawsuits.
 The height of the
Demand curve at any
The Efficient Level of Output quantity shows the
value of the
Price commodity to
Marginal cost whoever bought the
last unit.
So, the height of the
Demand curve at any
quantity shows the
social benefit of the
Value Cost
to last unit.
to
buyers When this is no less
monopolist
than the marginal cost
of the last unit, the last
unit is socially
Demand desirable.
Cost Value (marginal value to buyers)
to to
monopolist buyers

0 Quantity

Value to buyers Value to buyers

is greater than is less than
cost to seller. cost to seller.
Efficient
quantity
 The Inefficiency of Monopoly

P > MC;
monopoly
Price
Deadweight Marginal cost
loss

Monopoly
price
P = MC; perfect
competition and
optimum

The monopolist
Marginal produces less than
revenue Demand the socially
efficient quantity

0 Monopoly Efficient Quantity

quantity quantity
 Sales Promotion

-It may be to the advantage of the monopolist to engage in sales

promotion activities of this kind. The monopolist may use sales
promotion to enlarge his market, that is, to shift his demand curve to
the right.

Example: Manila Electric Company

Philippine Long Distance

These monopolies advertise for several reasons: to enlarge their

respective markets; to promote goodwill or good public relations
with the consumers; and to make the public aware that their
companies exist and are doing good service to the public
 Monopolies in the Philippine
Setting
We have had unpleasant experiences with monopolies in the
Philippines. Consumers have been abuses committed by monopolies in
the Philippines. Pressures have been exerted by concerned citizens and
consumers’ union to make these monopolies conscious not only of
monopoly profits but also of public welfare.

We are obviously moving away from centralization, monopolies and

regulations. We have taken steps to deregulate the coconut industry by
allowing, among other things, all oil millers to export their products to
overseas markets.