Monopoly

The term monopoly comes from a Greek word ‘monos’ which means ‘one’ and ‘polein’ means to sell.
Under this situation, there is only one seller of goods and services. Monopoly is characterized by only
one producer in the industry, hence, there is lack of economic competition and viable substitute goods
for the goods and services that they provide. The monopolist can influence and has considerable control
over the price. (monopolist is considered as a price maker).

A monopoly should be distinguished from a cartel. Cartel refers to a market situation in which firms
agree to cooperate with one another to behave as if they were a single firm and thus eliminate
competitive behavior among them. These firms agree among themselves to restrict their total output to
the level that maximizes their joint profit. The most common example is the Organization of Petroleum
Exporting Countries (OPEC).

The following are sources of monopoly:

 There is only one producer or seller of goods and only one provider of services in the market.
 New firms find extreme difficulty in entering the market. The existing monopolist is considered
giant in its field on industry.
 There are no available substitute goods and services so that it is considered unique.
 It controls the total supply of raw materials in the industry and has control over price.
 It owns a patent or copyright.
 Its operations are under economies of scale.

Classification of monopoly

Monopolies are classified according to circumstances they arise from, that is, cost structure of the
industry, possibly the result of law, or by other means.

Natural monopoly – it is a market situation where a single firm can supply the entire market due to the
fundamental cost structure of the industry. It arises whenever capital cost is large enough as compared
to variable cost, and they have cost advantage over competitors.

Legal monopoly – this is sometimes called as de jure monopoly, a form of monopoly which the
government grants to a private individual or firm over the product or services. Most of the utilities
granted with an exclusive franchise by the government such as water and electricity services enjoy legal
monopolies.

Coercive Monopoly – it is a form of monopoly whose existence as the sole producer and distributor of
goods and services is by means of coercion (legal or illegal), so that most of the time it violates the
principle of free market just to avoid competition.
Short-run Analysis of Monopoly

There is a sharp distinction between perfect competition and monopoly in terms of price and output
determination. A monopolist is considered a price maker, since he is the sole seller of a product that has
no close substitute in the market. Because of this, a monopolist faces the entire demand curve for the
product; meaning, if he wants to increase the price of the product, he will reduce the supply, and to
lower the price, he will increase the supply. The effect of this is the marginal revenue will always be
lower than the price of the product. Graphically, the marginal revenue curve is below the demand curve.

In this figure, the best level of output in the short run is 1000 units given by point a where MR=MC. If
output is below 1000 units where MR<MC, it will pay for the firm to expand output because additional
production will increase total profit. On the other hand, if output is produced above 1000 units where
MC>MR, total profit will increase for the firm reduces its output.

Although in the short-run a monopolist can earn profits, it does not mean that he is incapable of
incurring losses or to break-even. The height of the average total cost tells us the best level of output. If
the ATC=P at the best level of output, the firm breaks even; if ATC>P, at the best level of output, the firm
incurs losses.

Long-run Analysis of Monopoly

In the long-run, all inputs and cost are variable, and the monopolist can make his optimal scale of plant
to make the best level of output.

In this figure, the best level of output is given at point a where Q=1500 and price is equal to 10 pesos;
notice that at this point P=LMC and it is also at this point that the optimal scale of plant is given by the
condition where short-run average total cost is tangent to long-run average cost (SATC=LAC). In the long
run, the monopolist is earning a profit equal to 2 pesos (ab) per unit. As long as all factors are
unchanged, the monopolist will earn the same amount per unit in the long-run.