MONOPOLY

BUSHRA NABI, SASHA AAMIR,

ALIZA TARIQ, SANA RIZWAN

BS PSYCHOLOGY 2(C)

INSTITUTE OF PROFESSIONAL PSYCHOLOGY, BAHRIA UNIVERSITY.

1 INTRODUCTION

A market structure characterized by a single seller, selling a unique product in the market. In a
monopoly market, the seller faces no competition, as he is the sole seller of goods with no close
substitute.

In a monopoly market, factors like government license, ownership of resources, copyright and
patent and high starting cost make an entity a single seller of goods. All these factors restrict the
entry of other sellers in the market. Monopolies also possess some information that is not known
to other sellers.

Characteristics associated with a monopoly market make the single seller the market controller as
well as the price maker. He enjoys the power of setting the price for his goods.

1.1 Characteristics of a Monopoly

A monopoly can be recognized by certain characteristics that set it aside from the other market
structures:

 Profit maximizer: A monopoly maximizes profits. Due to the lack of competition a firm
can charge a set price above what would be charged in a competitive market, thereby
maximizing its revenue.
 Price maker: The monopoly decides the price of the good or product being sold. The price
is set by determining the quantity in order to demand the price desired by the firm
(maximizes revenue).
 High barriers to entry: Other sellers are unable to enter the market of the monopoly.
 Single seller: In a monopoly one seller produces all of the output for a good or service. The
entire market is served by a single firm. For practical purposes the firm is the same as the
industry.
  Price discrimination: In a monopoly the firm can change the price and quantity of the good
or service. In an elastic market the firm will sell a high quantity of the good if the price is
less. If the price is high, the firm will sell a reduced quantity in an elastic market.

1.2 TYPES OF MONOPOLY

 Private monopoly:
The monopoly firm owned and operate by private individuals is called the private
monopoly. Their main motive is to make profit.

 Public monopoly:
The monopoly firm owned and operated by public or state government is called public
monopoly. It is also known as social monopoly. The entire operation is controlled either
by central or state government. Their main motive is to provide welfare to the public.

 Absolute monopoly:
It is a type of monopoly, where a single seller controls the entire supply of market
without facing competition. It is also known as pure monopoly. His product does not
have even any remote substitute also.

 Imperfect monopoly:
It is a type of monopoly in which a single seller controls the entire supply of the market
which does not have a close substitute. But there might be remote substitute for the
product available in the market.

 Simple or single monopoly:

It is a type of monopoly in which a single seller controls the entire market, by selling the
commodity at a single price for all the consumer. There is no price discrimination in the
market.
  Discriminative monopoly:
When a monopoly firm changes different prices for the same goods or services to
different consumers it is known as discriminative monopoly.

 Legal monopoly:
When a firms enjoys rights like trade mark, copy right, patent right, etc. then it is known
as legal monopoly. Such monopoly rights are approved by the government.

 Natural monopoly:
When a firms enjoys monopoly right due to natural factors like location reputation earned
etc. It is called as natural monopoly. Natural talent, skill of the producer also makes him
to enjoy this right.

 Technological monopoly:
When a firm enjoys monopoly power due to technical superiority over other products in
the market, then it is called as technological monopoly. For example products produced
by L & T, Godrej etc. are technological monopoly.

2 Literature Review

Monopoly is the hallmark of businesses in the New Order Era which affected disadvantages for business
and economic developments in Indonesia. The word monopoly is derived from Greek word meaning a
single seller. In the United States it is often used with the the term "Antitrust", the word monopoly or
antitrust is meaning that it is a law to protect trade and commerce from unlawful restraints and monopolies
or unfair business practices. ( Merriam-Webster's Learner's Dictionary, “Full Definition of Antitrust”, taken
from http://www.merriam-webster.com/dictionary/antitrust).

Monopoly is a control over production and or marketing of goods and or the use of certain services by a
business actor or a group of business actors. (Indonesia, Law No.5 of 1999 on the Prohibition of Monopoly
and Unfair Competition Article 1)

The notion of a monopoly can mean as a condition in which there is only one seller who offers a product
or service. (Hermansyah, 2008, Pokok-Pokok Persaingan Usaha di Indonesia, Jakarta, Kencana Prenada
media Group, p. 18.)
The term monopoly is often used to describe a market structure, as well as the definition given by Meiners
that "monopoly is a market structure in which the output of an industry is controlled by a single seller or a
group of sellers making joint decisions regarding production and price. ( Arie Siswanto, 2004, Hukum
Persaingan Usaha, Cet.2, Bogor, Ghalia Indonesia, p. 19. 5 Henry Champbell Black, 1990, Black’s Law
Dictionary, St. Paul, Minn, West Publishing Co, p 696.)

Black's Law Dictionary defines a monopoly in terms of juridical namely a privilege or peculiar advantage
is vested in one or more persons or companies, consisting of the exclusive right (or power) to carry on a
particular article, or control the sale of whole supply of a particular commodity. It is a form of market
structure in which one or only a few firms dominate the total sales of a product or service. (Encyclopedia
Britannica Inc, Merriam-Webster’s Dictionary, “Competition”, taken from: http://www.merriam-
webster.com/)

According to Merriam Webster the word monopoly which usually has opposite meaning with the terms of
competition is interpreted as a struggle or contest between two or more persons for the same objects.(
Encyclopedia Britannica Inc, Merriam-Webster’s Dictionary, “Competition”, taken from:
http://www.merriam-webster.com)

There are several classifications of monopoly; one of them can be distinguished between legal monopoly
and illegal monopoly. According to Arie Siswanto, legal monopoly is a monopoly that is not prohibited by
the laws of a country and on the other hand, illegal monopoly is prohibited by law.( Aria SiSwati, op. cit.
p. 13.)

3 Analysis

A monopoly is a market with a single firm, protected by a barrier that prevents other firms from
entering the market and produces a good or service with no close substitutes. There are three
barriers to entry namely: (i) Natural Barrier: A market in which economies of scale enable one
firm to supply the entire market at the lowest possible cost. (ii) Ownership Barrier: This occurs
when one firm owns a significant portion of a key resource and, (iii) Legal Barrier: A market with
legal monopoly in which competition and entry are restricted by the granting of a public franchise,
government license, patent or, copyright.
Monopoly Price-Setting Strategies:

A monopoly must choose an appropriate price to determine the quantity it sells. There are two
monopoly situations that create two pricing strategies:

(i) Single price: A firm where each unit of its output is to sell for the same price for all its
customers.
(ii) Price discrimination: The practice of selling different units of a good or service for
different prices. Many firms price discriminate, but not all of them are monopoly firms.

SINGLE PRICE:

A Single-Price Monopoly’s Output and Price Decision: To understand how a single price
monopoly makes its output and price decision, one must understand the link between price and
marginal revenue.

Price and Marginal Revenue:

A monopoly is a price maker/setter, unlike a firm

in perfect competition that is a price taker and the
reason behind this is that the demand for the
monopoly’s output is the market demand. So, to
sell a larger output, a monopoly must set a lower
price.

Total revenue, TR, is the price, P, multiplied by the

quantity sold, Q. TR = P x Q

Marginal revenue, MR, is the change in total

revenue that results from a one-unit increase in the
quantity sold. For a single-price monopoly, marginal revenue is less than price at each level of
output that is, MR < P, due to two opposing forces 1) lower price results in revenue loss on the
original units sold and 2) A revenue gain on the increased quantity sold.

The following figure illustrates the relationship between the price and marginal revenue and
derives the marginal revenue curve. Suppose the monopoly sets a price of $16 and sells 2 units.
Now suppose the firm cuts the price to $14 to sell 3 units .It loses $4 of total revenue on the 2 units
it was selling at $16 each. And it gains $14 of total revenue on the 3rd unit. Total revenue increases
by $10, which is called the marginal revenue. The marginal revenue curve, MR, passes through the red
dot midway between 2 and 3 units and at $10. For a monopoly, MR < P at each quantity.

Marginal Revenue and Elasticity:

A single-price monopoly’s
marginal revenue is related to the
elasticity of demand for the good.
If demand is elastic, a fall in the
price brings an increase in total
revenue. MR is positive.

The increase in revenue from the greater quantity sold

outweighs the decrease in revenue from the lower price per
unit. As the price falls, demand increases, and so do the total
and marginal revenue. The marginal revenue and total revenue
 A fall in the price brings a decrease in total revenue, if the
demand is inelastic. The rise in revenue from the increase in
quantity sold is outweighed by the fall in revenue from the
lower price per unit. So MR is negative.

As the price falls, total revenue decreases. But if demand is unit elastic, a fall in the
price does not change total revenue. The rise in revenue from the greater quantity
sold equals the fall in revenue from the lower price per unit. MR = 0. Total revenue
is maximized when MR = 0.

However, in Monopoly, Demand is always elastic in a monopoly, 1% decrease in the price always
results in a greater demand of the good.
Price and Output Decision:
A monopoly sets its price and output at levels that will maximize economic profit. The monopoly
produces the profit-maximizing quantity, where MR = MC.

In part (a):
The monopoly produces the quantity that
maximizes total revenue minus total cost

In part (b): the firm produces the quantity at which

MR = MC and sets the price at which it can sell that
quantity. The ATC curve tells us the average
total cost. Economic profit is the profit per unit
multiplied by the quantity produced—the blue
rectangle.
Comparing Price and Output:

Compared to a perfectly competitive market, a single price monopoly produces a smaller output
and charges a higher price, because the market demand curve serves as a constraint on the price at
which it can sell its output, since monopoly is a price maker market, it puts its own price on
products.

Here we compare the price and quantity in perfect

competition and monopoly. The market demand curve,
D, in perfect competition is the demand curve that the
firm in monopoly faces

The market supply curve in perfect competition is the horizontal sum of the individual firms’
marginal cost curves, S = MC.
This curve is the monopoly’s marginal cost curve.

Efficiency Comparison:
Perfect competition with no externalities is efficient. Figure (a)
shows the efficiency of perfect competition. The market demand
curve is the marginal social benefit curve, MSB. The market
supply curve is the marginal social cost curve, MSC. So
competitive equilibrium is efficient: MSB = MSC. Total surplus,
the sum of consumer surplus and producer surplus, is maximized. The
quantity produced in perfect competition is efficient.
 The Figure (b) shows the inefficiency of monopoly. Because price
exceeds marginal social cost, marginal social benefit exceeds
marginal social cost and a deadweight loss arises. Some of the lost
consumer surplus goes to the monopoly as producer surplus because
the redistribution of surpluses is not equal.

Rent Seeking:
Any surplus that is consumer surplus, producer surplus, or economic profit—is called economic
rent. Rent seeking is the pursuit of wealth by capturing economic rent. Rent seekers pursue their
goals in two main ways:
o Buy a monopoly—transfers rent to creator of monopoly.

o Create a monopoly—uses resources in political activity.

Rent-Seeking Equilibrium:
In the graph below the blue area shows the potential producer surplus with no rent seeking. The
resources used in rent seeking can wipe out the monopoly’s producer surplus. Rent-seeking costs
shifts the ATC curve upward, Producer surplus disappears. The deadweight loss increases to the
larger gray area.
Price Discrimination:
Price discrimination is the practice of selling different units of a good or service for different prices.
To be able to price discriminate, a monopoly must:
1. Identify and separate different buyer types.
2. Sell a product that cannot be resold.
Price differences that arise from cost differences are not price discrimination. A monopoly can
discriminate in two ways: Among groups of buyers’ example: discount for students, old people at
restaurants and malls, and, among units of a good example: selling the second pizza for half the
price of first one. In both the examples, incentive is given to the customers to buy more.
Increasing Profit and Producer Surplus
By price discriminating, a monopoly captures consumer surplus and converts it into producer
surplus. More producer surplus means more economic profit. This can be further explained through
following definitions:
Economic profit = Total revenue – Total cost
Producer surplus is total revenue minus the area under the marginal cost curve, which is total
variable cost.
Producer surplus = Total revenue – Total variable cost
Economic profit = Producer surplus – Total fixed cost

Perfect Price Discrimination

Perfect price discrimination occurs when a firm is able to sell
each unit of output for the highest price someone is willing to
pay. Marginal revenue now equals the price, so the demand
curve is also the marginal revenue curve.
4 Conclusion
In conclusion, monopoly is only a seller but many buyers in a market. In conclusion a monopolist
sells a unique product and the design and idea created by his own. The seller is the ‘price maker’,
who decides to maximize the profit by setting the product price. Therefore, monopoly is an absence
of competition, which often results in high prices. Whereas a monopolistic firm is produced at a
lower price but a higher output than a profit or revenue maximizing firm. This is the efficiency in
monopolies. Thus, there is a misallocation of resources because of monopoly power. Since
monopolies aren’t forced to produce at minimum average cost, so there is productive inefficiency.
Besides, a monopolistic also needs to control some company no entry in monopoly market because
some firms are strong to take advantages in your company.
5 CITATIONS
Parkin, M. (2019). Microeconomics (12th ed.). Harlow, England: Pearson.
Haider, M. J. (2010, February 20). Types of Monopoly. Retrieved from
https://www.indiastudychannel.com/resources/106541-Types-Monopoly.aspx.
What is Monopoly? Definition of Monopoly, Monopoly Meaning. (n.d.). Retrieved January 1,
2020, from https://economictimes.indiatimes.com/definition/monopoly.
Antitrust. (n.d.). Retrieved from http://www.merriam-webster.com/dictionary/antitrust).