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M. Jamshed Khan, Dept.

of Economics, Edwardes College Peshawar 1


MONOPOLY

CHARACTERISTICS

(1) Single Seller

It is a one firm industry. A single seller controls


the whole of the supply of a product.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 2


MONOPOLY
(2) No close substitute

The product of the firm is such that it has no


good or close substitute in the market. The
demand for monopolists product is,
therefore, inelastic.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 3


MONOPOLY
(3) Control over price

The monopolist, being the sole producer of


the product has a considerable control over
the price of the commodity.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 4


MONOPOLY
(4) Exclusion of Competitors

In monopoly, there is exclusion of


competitors which may be due to legal
restrictions on production or on account of
economies of scale or technological
advancement of the firm.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 5


MONOPOLY
(5) Publicity for sale promotion

The monopolist being the sole producer of a


product sparingly advertises for the sale of
the products.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 6


MONOPOLY
BASES OF MONOPOLY POWER

The main conditions which give rise to


monopoly are called collectively, “Barriers to
Entry”. These barriers block the entry of
new firms into industry and thus create
monopoly. The main bases of monopoly are
given….

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 7


MONOPOLY
(1) Ownership of essential raw material
If a firm owns or controls the entire supply
of an essential raw material used in the
production of a commodity, it then creates
a monopoly by keeping away the
competitors out of the industry
Example: “De Beers Company” of South
Africa has a monopoly over the supply of
diamonds

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 8


MONOPOLY
(2) Patents and research
In order to encourage research for the
creation of a new product, the government
gives patent and copy rights to the
inventors. The exclusive rights to an
inventor to produce and control a product
blocks the entry of new firms producing the
same commodity. The inventor thus enjoys
the monopoly position for the life of the
patent
M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 9
MONOPOLY
(3) State Ownership
If a government owns and operates a
business, a monopoly is then established.
For instance, Railways, Electricity, Postal
service are controlled and operated by the
Government of Pakistan. No potential firm is
allowed entry in the above services. State
has thus monopoly in these services.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 10


MONOPOLY
(4) Economies of scale
If a firm using modern technology and heavy
investment enjoys the increasing returns to
scale, it will produce goods at low unit costs.
The new firms being unable to reap the
economies enjoyed by the existing firm will
not enter the industry. The big firm will
continue controlling the entire supply of a
commodity in the market.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 11


MONOPOLY
(5) Unfair competition
If a firm or a few firms form a unified
business organization, then they posses
sufficient economic power to eliminate the
entry of “would be” firms in the industry.
The firm or some firms joining together
adopts price cutting tactics, put pressure on
resource suppliers, pay higher wages to

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 12


MONOPOLY

skilled workers etc. and thus try to bankrupt


the competitors. If they are successful in
their mission, unfair competition then give
rise to monopoly.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 13


M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 14
MONOPOLISTIC COMPETITION

In between the two extreme market


situations of perfect competition and
monopoly there is a most common type of
market model called monopolistic
competition.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 15


MONOPOLISTIC COMPETITION
CHARACTERISTICS

(1) Multiplicity of buyers and sellers


Just like perfect competition there is
multiplicity of sellers in a market. The firm
act independently and produce a small
share of the total output.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 16


MONOPOLISTIC COMPETITION
(2) Product differentiation
One of the important feature of monopolistic
competition is that the firm produce
differentiated products. The difference in the
product is created by physical difference or
by competitive advertisement or by show
appeal, or by location or package or by
service facilities, et. The firm tries to create
a small island of monopoly in a sea of
competition
M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 17
MONOPOLISTIC COMPETITION
(3) Control over price
A firm has only a limited control over the
price of its product. If the number of firms
producing a similar commodity are many,
the demand for the product of the firm is
elastic. The firm will not be in a position to
raise the price of the product even
modestly.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 18


MONOPOLISTIC COMPETITION

If the degree of product differentiation is in


favour of the particular firm, then it can
slightly raise the price and the loyal
customers will continue purchasing the
product of the particular firm.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 19


MONOPOLISTIC COMPETITION
(4) Entry of new firms
The entry of new firms is easy in the market.
The new firm can secure its share in the
market by popularising its product through
radio, television, newspaper etc.. The more
the consumers are convinced of the
superiority of the product , the higher will be
its outlay.

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 20


MONOPOLISTIC COMPETITION
(5) Stiff competition

There is stiff competition among the firms for


the sale of a particular brand not only in
price, but also in the quality of the product.
The firms lay great emphasis on “brand
names” and “trade marks”.

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M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 22
OLIGOPOLY
The fourth market model, oligopoly, is a
compromise between monopoly and
monopolistic competition. The basic
characteristics of oligopoly are given...

M. Jamshed Khan, Dept. of Economics, Edwardes College Peshawar 23


OLIGOPOLY
CHARACTERISTICS
(1) A few sellers
One of the important assumptions of
oligopoly is the fewness. The firms which
control the market are few in number. As
each firm produces a large share of the
market, it is therefore in a position to affect
the market price on its own

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OLIGOPOLY
(2)Quality of the product

The oligopolist may be producing identical


products or differentiated product. In case
the products are close substitute of one
another, then the price cut by one firm will
be followed by the rival firms. The oligopolist
in order to avoid mutual cut throat
competition often decide to divide the
market. They increase or decrease the
prices of the product as a group
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OLIGOPOLY
(3) Entry to the market
Though there are obstacles to the entry of
new firms in the market, yet the entry is not
completely blocked. If a firm is financially
sound and can start production on a large
scale, the new firm can creep into the
oligopolistic industry.

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OLIGOPOLY
(4) Expenses of advertisement

In case, the oligopolist produces


differentiated product, then heavy amount
has to be channelised into advertising and
other sale promotion activities.

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