Monopoly

Characteristics
A monopoly is a market in which there is only one seller of a good or service that has no
close substitute, and the seller is protected by some barriers to entry such as natural,
ownership and legal barrier. When a single firm produces a good with no close substitutes,
firm can influence price which is called price maker.
Monopolist is the sole producer of a product or service and thus the firms demand curve
is also the industrys demand curve. When a single firm produce a good with no close
substitute, the firm can influence the price. It can set a high price by limiting the quantity it
produces, or it can set a low price and sell a larger quantity.
Barriers to entry
Monopoly arises for two key reasons: no close substitute and high barriers to entry.
There are three types of barrier that protect monopoly from competition such as natural
barrier to entry, ownership barrier to entry and legal barrier to entry.
Natural barrier to entry exists when economies of scale enable one firm to serve
the entire market at a lower cost than two or more firms can. Large-scale firms are
more efficient and have lower costs. This represents a barrier to entry because such
dominant firms can protect their market share by lowering prices if new firms try to enter
the industry. At the low price a new firm with higher costs would be making a loss and
would be forced to leave the industry. Power station is an example. It costs millions of
dollars a year to operate a power station, regardless of how much electricity produces. It
can produce one more kilowatt hour of electricity at a very low cost.

Ownership barrier to entry is the firm own a significant portion of resources. For example,
De Beers owned 80% of the worlds diamond.
Legal barrier to entry is a legal restriction of ownership for resources. There are two types of
legal barriers. Those are patent and copyright. Patent and copyright are exclusive right
granted for the invention.
The monopolists demand curve
Because a monopoly is the only seller in a market, the demand curve that it faces is the
market demand curve. Moreover, a monopoly sells a good or service that has no close
substitute, the demand curve for the firms good or service slopes downward. The lower
the price the monopoly charge, the greater is the quantity the monopoly sells. Monopoly
faces a tradeoff between the price it sets and the quantity sold. To sell a larger quantity
the monopolist must set a lower price.

Short run and long run profit
Short run is a period of time in which at least one
factor of production is fixed. In the short run, firm is
able to earn super normal profit because there are
no close substitutes. Firm will maximise profit by
producing at the level of output where MC = MR.
Firm sets price for Q at D curve which equals to AR
curve. At the price P, Firms economic profit equals
to ABCP.




However, being a monopoly does not
guarantee profits. It is possible for monopolist to
experience a loss in the short sun. The reason
may be because of the low demand or high
cost of production. Monopolist may minimise
loss by producing where MC=MR. At Q2, price is
at P2 which is lower than AC. Firms loss equals
to HGFP2



Long run is a period of time in which all FOP are
flexible. Even though, long run is a period of time
that is enough for other firms to entry this industry
but monopolist is protected by high barriers to
entry such as legal barriers, natural barriers and
ownership barriers. Therefore, the monopolist
can maintain its economics profit. SNP can be
obtained by maximising the level of output at Q
by producing at where MC equals to MR and
price is at E which is greater than ATC. Firms
economic profits equals to ABCD.



Why monopolist does not charge the highest price?
Monopolist choose not to charge the highest price and because at any price which is
higher than P, firm will not earn maximum profit as MR > MC. Even though monopolist is a
price market, monopolies are still influenced by market forces. Moreover, it does not
benefit the monopolist to raise the price so high that no one can purchase it or to
produce a product that is not in demand. In addition, high price may lead to government
price regulation or competition from substitutes.
Price discrimination
Price discrimination is a pricing technique that a monopolist can use to maintain an
economic profit. Price discrimination is the practice of a seller charging different
customers different prices for the same product not justified by cost differences.
A firm can engage in price discrimination if the seller is a price marker. They can separate
consumers into market segments and Producer must be able to prevent buyers who face
the lower price from reselling to buyers who face the higher price. Firms with a downward-
sloping demand curve (not just monopolists) can practise price discrimination
Price discrimination allows sellers to charge what buyers are willing to pay.
Many buyers benefit from the discrimination by not being excluded from purchasing a
product they could not otherwise afford
Comparing Monopoly and Perfect Competition
Firstly, under perfect competition, firms produce at where P = MC. In the long run,
production operates at minimum of ATC in order to survive which means that firm only
earn normal profit. Hence consumers can purchase product at low price. Meanwhile,
monopolist often restricts output and charge a higher price which is greater than the MC.
Secondly, firm under perfect competition also attain allocative efficiency which can be
achieved when resources are used to produce a particular mix of goods most wanted by
society. Competitive firms maximize profit by producing the level of quantity at where MR
= MC. However, under perfect competition, AR (P) equals to MR and thus P equals MC.
however, monopolistic firms do not have to maximise output by producing at where
P=MC. Monopolists production operate at where MR = MC in which P is higher than MC.
Therefore, in the long run, monopolist meets the optimal outcome from societys
perspective and resources are misallocated.
Nevertheless, PC does not achieve dynamic efficiency while Monopolists do. Perfectly
competitive firms do not obtain dynamic efficiency because there is no restriction of
barriers to entry, firm only make normal profit in the long run which means that firm does
not have sufficient funds to spend on R & D and rival may copy new production
techniques. Meanwhile, thanks to the high barriers to entry that prevent other firms enter
the industry, monopolists can earn supernormal profit in the long run which means that
firms have sufficient funds to undertaker R & D in order to improve their products