H0t0P0lY

0ll60P0lY At0
KltKF0 0FHAt0
CuRvF
W A market ls any one of a varleLy
of sysLems lnsLlLuLlons procedures soclal
relaLlons and lnfrasLrucLures whereby parLles engage ln
exchange
W L may or may noL be a physlcal place
W Cenerally Lhe exchange Lakes place ln moneLory Lerms
LSSLN1IALS CI A MAkkL1
W ommodlLy for LransacLlon
W neLwork of buyers and sellers
W ompeLlLlon beLween buyers and sellers
W A place or a slLuaLlon for LransacLlon
%YPFS 0F HARKF%S
W Monopo||st|c compet|t|on also called compeLlLlve markeL
where Lhere are a large number of flrms each havlng a small
proporLlon of Lhe markeL share and sllghLly dlfferenLlaLed
producLs
W C||gopo|y ln whlch a markeL ls domlnaLed by a small number
of flrms LhaL LogeLher conLrol Lhe ma[orlLy of Lhe markeL
share
W opo|y a speclal case of an ollgopoly wlLh Lwo flrms
W Monopo|y where Lhere ls only one provlder of a producL or
servlce
W 9erfect compet|t|on ls a LheoreLlcal markeL sLrucLure LhaL
feaLures unllmlLed conLesLablllLy (or no barrlers Lo enLry) an
unllmlLed number of producers and consumers and a
perfecLly elasLlc demand curve
H0t0P0lY
W A monopoly ls a markeL sLrucLure ln whlch a slngle suppller produces and sells a
glven producL Monopolles are characLerlsed by a lack of economlc compeLlLlon Lo
produce Lhe good or servlce and a lack of vlable subsLlLuLe goods
W 1he verb monopollse refers Lo Lhe process by whlch a company galns much
greaLer markeL share Lhan whaL ls expecLed wlLh perfecL compeLlLlon
LkAM9LLS
W ndlan 8allways has monopoly ln 8allroad LransporLaLlon
W SLaLe LlecLrlclLy board have monopoly over generaLlon and dlsLrlbuLlon of
elecLrlclLy ln many of Lhe sLaLes
W PlndusLan AeronauLlcs LlmlLed has monopoly over producLlon of alrcrafL
W 1here ls CovernmenL monopoly over producLlon of nuclear power
W CperaLlon of bus LransporLaLlon wlLhln many clLles
W Land llne Lelephone servlce ln mosL of Lhe counLry ls provlded only by Lhe
governmenL run 8SnL
W 88 ls Lhe sole currency prlnLlng auLhorlLy of ndla
CHARAC%FRlS%lCS
W 9r|ce Maker uecldes Lhe prlce of Lhe good
or producL Lo be sold
W |gh 8arr|ers to Lntry CLher sellers are
unable Lo enLer Lhe markeL of Lhe monopoly
W S|ng|e se||er n a monopoly Lhere ls one seller
of Lhe good whlch produces all Lhe ouLpuL
1herefore Lhe whole markeL ls belng served by a slngle company and for
pracLlcal purposes Lhe company ls Lhe same as Lhe lndusLry
W 9r|ce |scr|m|nat|on A monopollsL can change Lhe prlce and quallLy of
Lhe producL Pe sells more quanLlLles charglng less prlce for Lhe producL
ln a very elasLlc markeL and sells less quanLlLles charglng hlgh prlce ln a
less elasLlc markeL
W |ose sst|ttes 1here are no close subsLlLuLes avallable for Lhe
producL belng sold by monopollsL
W Ine|ast|c demand crve L faces a downward sloplng demand curve
%YPFS 0F
H0t0P0lY
W NA1UkAL MCNC9CL Such monopolles arlses due Lo endowmenL of
resources by naLure naLural advanLages llke cllmaLlc condlLlons good locaLlon
avallablllLy of ceraLln mlnerals eLc creaLes naLural monopoly
W LLGAL MCNC9CL Such monopolles are creaLed by law and are also
known as sLaLuary monopolles
W 9UkL MCNC9CL n case of homogeneous producLs when only a slngle
seller serves Lo a large number of buyers and no close subsLlLues are avallable
such a monolpoly ls known as pure monopoly
W 9U8LI MCNC9CL When a monopoly flrm ls owned managed and
conLrolled by governmenL lLs called publlc monopoly
W CLkIVL MCNC9CL A monopoly ls sald Lo be coerclve when Lhe
monopoly acLlvely prohlblLs compeLlLors by uslng pracLlces (such as underselllng)
whlch derlve from lLs markeL o r pollLlcal lnfluence
S0uRCFS 0F H0t0P0lY
Monopolles derlve Lhelr markeL power from barrlers
Lo enLry clrcumsLances LhaL prevenL or greaLly
lmpede a poLenLlal compeLlLors ablllLy Lo compeLe
ln a markeL 1here are Lhree ma[or Lypes of barrlers
Lo enLry economlc legal and dellberaLe
W Lconom|c arr|ers Lconomlc barrlers lnclude
economles of scale caplLal requlremenLs cosL
advanLages and Lechnologlcal superlorlLy
W Lconom|es of sca|e Monopolles are characLerlsed
by decreaslng cosLs for a relaLlvely large range of
producLlon uecreaslng cosLs coupled wlLh large
lnlLlal cosLs glve monopolles an advanLage over
wouldbe compeLlLors Monopolles are ofLen ln a
poslLlon Lo reduce prlces below a new enLranLs
operaLlng cosLs and Lhereby prevenL Lhem from
conLlnulng Lo compeLe
W ap|ta| req|rements roducLlon processes LhaL requlre large
lnvesLmenLs of caplLal or large research and developmenL cosLs
llmlL Lhe number of companles ln an lndusLry Large flxed cosLs also
make lL dlfflculL for a small company Lo enLer an lndusLry and
expand
W 1echno|og|ca| sper|or|ty A monopoly may be beLLer able Lo
acqulre lnLegraLe and use Lhe besL posslble Lechnology ln
produclng lLs goods whlle enLranLs do noL have Lhe slze or flnances
Lo use Lhe besL avallable Lechnology
W No sst|tte goods A monopoly sells a good for whlch Lhere ls noL
any close subsLlLuLes 1he absence of subsLlLuLes makes Lhe
demand for Lhe good relaLlvely lnelasLlc enabllng monopolles Lo
exLracL poslLlve proflLs
W Lega| arr|ers Legal rlghLs can provlde opporLunlLy Lo monopollse
Lhe markeL of a good nLellecLual properLy rlghLs lncludlng paLenLs
and copyrlghLs glve a monopollsL excluslve conLrol of Lhe
producLlon and selllng of cerLaln goods roperLy rlghLs may glve a
company excluslve conLrol of Lhe maLerlals necessary Lo produce a
good
0ll60P0lY
W An o||gopo|y ls a markeL form ln whlch
a markeL or lndusLry ls domlnaLed by a
small number of sellers (ollgopollsLs)
W Slnce Lhere are few sellers each
ollgopollsL ls llkely Lo be aware of Lhe
acLlons of Lhe oLhers 1he declslons of
one flrm lnfluence and are lnfluenced
by Lhe declslons of oLher flrms
W SLraLeglc plannlng by ollgopollsLs needs
Lo Lake lnLo accounL Lhe llkely responses
of Lhe oLher markeL parLlclpanLs
CHARAC%FRlS%lCS
W 9rof|t max|m|zat|on cond|t|ons An ollgopoly maxlmlzes proflLs by
produclng where marglnal revenue equals marglnal cosLs
W A|||ty to set pr|ce Cllgopolles are prlce seLLers raLher Lhan prlce Lakers
W Lntry and ex|t 8arrlers Lo enLry are hlgh 1he mosL lmporLanL barrlers are
economles of scale paLenLs access Lo expenslve and complex Lechnology
and sLraLeglc acLlons by lncumbenL flrms deslgned Lo dlscourage or
desLroy nascenL flrms AddlLlonal sources of barrlers Lo enLry ofLen resulL
from governmenL regulaLlon favorlng exlsLlng flrms maklng lL dlfflculL for
new flrms Lo enLer Lhe markeL
W Nmer of f|rms 1here are [usL a handful of sellers 1here are so few
flrms LhaL Lhe acLlons of one flrm can lnfluence Lhe acLlons of Lhe oLher
flrms
W Long rn prof|ts Cllgopolles can reLaln long run abnormal proflLs Plgh
barrlers of enLry prevenL sldellne flrms from enLerlng markeL Lo capLure
excess proflLs
W 9rodct d|fferent|at|on roducL may be
homogeneous (sLeel) or dlfferenLlaLed (auLomoblles)
W 9erfect know|edge AssumpLlons abouL perfecL
knowledge vary buL Lhe knowledge of varlous
economlc acLors can be generally descrlbed as
selecLlve Cllgopolles have perfecL knowledge of Lhelr
own cosL and demand funcLlons buL Lhelr lnLerflrm
lnformaLlon may be lncompleLe 8uyers have only
lmperfecL knowledge as Lo prlce cosL and producL
quallLy
W Interdependence 1he dlsLlncLlve feaLure of an
ollgopoly ls lnLerdependence Cllgopolles are Lyplcally
composed of a few large flrms Lach flrm ls so large
LhaL lLs acLlons affecL markeL condlLlons 1herefore
Lhe compeLlng flrms wlll be aware of a flrms markeL
acLlons and wlll respond approprlaLely 1hls means
LhaL ln conLemplaLlng a markeL acLlon a flrm musL
Lake lnLo conslderaLlon Lhe posslble reacLlons of all
compeLlng flrms and Lhe flrms counLermoves
%YPFS 0F 0ll60P0lY
W 9UkL CLIGC9CL L ls a form of ollgopoly
where Lhe seller sells almosL slmllar
Lype of producLs LhaL ls homogeneous
producLs
W IIILkLN1IA1L CLIGC9CL 1he form of
ollgopoly ln whlch Lhe flrms may deal ln same
llne of buslness buL producLs are noL compleLely
homogeneous
Lxamp|es
W SupermarkeLs
W 8anklng lndusLry
W Medlclnal drugs
W Cll
W 8roadcasLlng
W chemlcals
Is OIigopoIy
Efficient??
W n ollgopoly prlce usually exceeds marglnal cosL So Lhe
quanLlLy produced ls less Lhan Lhe efflclenL quanLlLy Cllgopoly
suffers from Lhe same source of lnefflency as faced by
monopoly
W As ollgopoly ls lnefflclenL anLlLrusL regulaLlons and laws are
used Lo Lry Lo reduce Lhe markeL power and move Lhe
ouLcome closer Lo LhaL of compeLlLlon and efflclency
KltKF0 0FHAt0 CuRvF
W 1he demand crve ls
Lhe graph deplcLlng Lhe relaLlonshlp
beLween Lhe prlce of a
cerLaln commodlLy and Lhe amounL
of lL LhaL consumers are wllllng and
able Lo purchase aL LhaL glven prlce
uemand curves are used Lo esLlmaLe
behavlours ln compeLlLlve markeLs
W lnky demand curves and
LradlLlonal demand curves are slmllar
ln LhaL Lhey are boLh downward
sloplng 1hey are dlsLlngulshed by a
hypoLheslzed convex bend wlLh
a dlsconLlnulLy aL Lhe bend Lhe
klnk 1herefore Lhe flrsL derlvaLlve
aL LhaL polnL ls undeflned and leads
Lo a [ump dlsconLlnulLy ln
Lhe marglnal revenue curve
W lasslcal economlc Lheory assumes LhaL a proflLmaxlmlzlng producer wlLh
some markeL power wlll seL marglnal cosLs equal Lo marglnal revenue 1hls
ldea can be envlsloned graphlcally by Lhe lnLersecLlon of an upwardsloplng
marglnal cosL curve and a downwardsloplng marglnal revenue curve
(because Lhe more one sells Lhe lower Lhe prlce musL be so Lhe less a
producer earns per unlL)
W n classlcal Lheory any change ln Lhe marglnal cosL sLrucLure or Lhe marglnal
revenue sLrucLure wlll be lmmedlaLely reflecLed ln a new prlce and/or
quanLlLy sold of Lhe lLem 1hls resulL does noL occur lf a k|nk exlsLs
8ecause of Lhls [ump dlsconLlnulLy ln Lhe marglnal revenue curve marglnal
cosLs could change wlLhouL
necessarlly changlng Lhe prlce
or quanLlLy
MCCIC1
V/S
C1ICCIC1
MCNC9CL CLIGC9CL
1here ls only one seller 1here are a few handfull of flrms
roducLs are noL homogeneous roducLs may or may noL be
homogeneous
1here ls no compeLlLlon ln Lhls Lype of
markeL (slngle seller)
1here ls close compeLlLlon amongsL
exlsLlng sellers
1here ls no prlce rlgldlLy and prlce
sLablllLy
1here exlsLs prlce rlgldlLy and Lhus prlce
sLablllLy ln Lhe markeL
ulscrlmlnaLlon of buyers ls posslble ulscrlmlnaLlon amongsL buyers here ls
lmposslble
no compeLlLlon ls Lhere MarkeL may be colluslve or compeLlLlve
no need for adverLlslng s Lhere AdverLlslng and publlclLy ls done on large
scale
MCNC9CL CLIGC9CL
L exlsLs because Lhe free markeL has been
choked ouL
L exlsLs only ln a free markeL
Pere Lhe sole provlder names lLs prlce as
no one ls Lhere Lo compeLe wlLh Lhem
Pere Lhe servlce provlders usually seL a
frlendly compeLlLlon Lo Lry and lncrease
Lhe demand for Lhe producL Lype ln
general
L ls lndependenL Plgh degree of lnLerdependence ls Lhere