MONOPOLY
Monopoly: Why?
Ownership of strategic raw material
Patent right for product
Government licensing
Size of the market may not support more
than one plant
Exclusive Knowledge of production
technique
Monopoly: Characteristics
Many buyers
Only one seller i.e. Product produced has no competition
Barriers of entry of new firm
Firm has to determine the price
Firm has to determine the level of output it would produce
Monopolist can sell two different levels of output at one price
Monopolist can sell a particular level of output at two different
price.
There is no unique supply curve for the monopolist
Monopoly: Features
The monopolist’s demand curve
(market demand curve) is the
downward sloping demand curve.
Monopolist can reduce the price and sell more or can
raise the price and still retain the customers.
MR curve lies below the AR curve and
the slope of MR is twice that of AR.
Monopoly: Market Behaviour
p(y)
Higher output y causes a
lower market price, p(y).
y=Q
Monopoly: Market Behaviour
At the profit-maximizing output level, the
slopes of the revenue and total cost curves
are equal, i.e.
MR(y*) = MC(y*)
Marginal Revenue: Example
p = a – bq (inverse demand curve)
TR = pq (total revenue)
TR = aq - bq2
Therefore,
MR(q) = a - 2bq < a - bq = p for q > 0
Marginal Revenue: Example
MR= a - 2bq < a - bq = p
P for q > 0
P = a - bq
a
a/2b a/b q
MR = a - 2bq
Monopoly: Equilibrium
MR AR Q
Monopoly: Equilibrium
MC
P
MR Demand y
Monopoly: Equilibrium
MC
P AC
MR Demand y
Monopoly: Equilibrium
MC Output
Decision
P AC
MC = MR
ym Demand y
MR
Monopoly: Equilibrium
MC Pm = the
price
P AC
Pm
ym Demand y
MR
Monopoly: Equilibrium
MC The
shaded
P AC area is
the
excess
Pm profit
ym Demand y
MR
Long Run Equilibrium under
Monopoly
Price Discrimination
Charging different price from different
customers for the same product is know as
price discrimination.
Reason of PD – to obtain increase in total
revenue by taking away part of consumer’s
surplus
Necessary conditions for
Price discrimination to be
possible
Different markets must be separable for a
seller
Elasticity of demand must be different in
different markets.
There must be effective separation of sub
markets so that no reselling can take place
from a lower price market to a higher price
market.
Degrees of Price Discrimination
Third degree Price Discrimination
Second Degree Price Discrimination
First Degree Price Discrimination
Monopolistic Competition
Large number of sellers
Free entry and free exit
Perfect factor mobility
Complete dissemination of market information
Differentiated product, yet close substitutes of
one another
The prices of factor and technology are given
Product Differentiation`
Product differentiation is intended to
differentiate the product of one producer from
that of another producer in the industry.
Can be real- when inherent characteristics of
the product are different
Or fancied - when products are basically the
same ,yet consumer is persuaded via
advertising and selling techniques that the
products are different.
Effect of product differentiation
Producer has some discretion in
determination of price (monopoly
power)
However faces competition of close
substitutes
Monopoly + Competition
Product Differentiation creates brand
loyalty of consumers. This gives the
seller an opportunity to increase the
price and still retain the customers.
This results in downward sloping
demand curve.
Monopolistic competition –
Short Run
Monopolistic Competition – Long
Run
Model 1 : equilibrium with new firms entering the industry
Model 2: Equilibrium with
price competition
Model 3: Equilibrium with Non
Price Competition
Critical Appraisal of Monopolistic
Model
Assumption that monopolistic competitors act
independently and their price changes are
unnoticed by rival firm is questionable
In monopolistic competition firms are naïve, they do
not learn from their past experiences.
Heroic assumption of identical cost and revenue
curves are questionable.
Chamberlin’s assumption of free entry is
considered to be incompatible with product
differentiation. Product differentiation and brand
loyalty act as a barriers to entry.
