Summary

Monopolistic markets exist when there is a single supplier for a good or service.

The absence of competition in a monopolistic market allows the firm to determine the price and
quantity of a product or service.

A monopolistic market arises when a company controls a crucial resource, experiences increasing returns
to scale, low elasticity of demand, and has technological superiority.

Characteristics of Monopolistic Markets

In a competitive market, numerous companies are present in the market and supply identical products.
Its demand curve is flat, whereas, in a monopolistic market, the demand curve is downward sloping.
Companies that are operating in a competitive market can sell any desired quantity at the market price.

The following are the characteristics of a monopolistic market:

1. Single supplier

A monopolistic market is regulated by a single supplier. Hence, the market demand for a product or
service is the demand for the product or service provided by the firm.

2. Barriers to entry and exit

Government licenses, patents, and copyrights, resource ownership, decreasing total average costs, and
significant startup costs are some of the barriers to entry in a monopolistic market.

When one supplier controls the production and supply of a certain product or service, other companies
are unable to enter the monopolistic market. If the government believes that the product or service
provided by the monopoly is necessary for the welfare of the public, the company may not be allowed to
exit the market.

Generally, public utility companies – such as electricity companies and telephone companies – may be
prevented from exiting the respective market.

3. Profit maximizer

In a monopolistic market, the company maximizes profits. It can set prices higher than they would’ve
been in a competitive market and earn higher profits. Due to the absence of competition, the prices set
by the monopoly will be the market price.

4. Unique product

In a monopolistic market, the product or service provided by the company is unique. There are no close
substitutes available in the market.

5. Price discrimination

A company that is operating in a monopolistic market can change the price and quantity of the product
or service. Price discrimination occurs when the company sells the same product to different buyers at
different prices.

Considering that the market is elastic, the company will sell a higher quantity of the product if the price
is low and will sell a lesser quantity if the price is high.

Causes of the Emergence of Monopolistic Markets

A monopolistic market comes into existence because of the following reasons:

A company controls a key natural resource and may restrict the resource supply to other companies.
Thus, it controls the final price in the market.

The company is given the right by the government for the exclusive production of a product or service.

The increasing returns to scale may lead to one supplier becoming more efficient than the others. This
results in a natural monopoly.

The absence of a substitute product or service; hence low demand elasticity allows a company to charge
prices higher than the marginal cost

Technological advantages and innovation may sometimes result in monopolistic markets.

Legal barriers comprising copyrights, licenses, patents

Government Regulation

As difficult as it is to replicate a perfectly competitive market in reality, it is equally impossible to

replicate a monopolistic market model.

Usually, the government grants monopolies to public utility companies – telephone, natural gas supply,
and power generation. However, the government may regulate the monopolistic market to prevent
monopolies from setting excess prices.

Also, in a monopolistic market, the company may not maintain quality service. Hence, government
regulation ensures that the company follows the minimum service standard required.

The government can regulate a monopolistic market through the following:

Limiting price increases

Merger regulation

Separating monopolies

Investigating unfair practices and cartels

Ownership by the government – nationalization of the firm

Chapter 3 Conditional Probability andIndependence

Conditional ProbabilityIConditional ProbabilityConsider an experiment with samplespaceS. LetEandFbe

two events, then the conditionalprobability ofEgivenFis denoted byP(E|F) and satisfies ifP(F)>0P(E|F)
=P(E∩F)P(F).IIntuitionIfFhas occured, then, in order forEto occur, it isnecessary that the occurence be
both inEandF, hence itmust be inE∩F. OnceFhas occured,Fis the new samplespace.

ExamplesIExample 1Mr. and Mrs. Smith have 2 children, boys orgirls, the 4 configurations being equally
likely. What is theprobability that the two children are two girls if (i) you are notgiven any additional
information, (ii) the elder child is a girl,(iii) one of the two children is a girl.IExample 2A math teacher
gave her class two tests. 25% ofthe class passed both tests and 42% of the class passed thefirst test.
What percent of those who passed the first test alsopassed the second test?IExample 3Toss a coin 10
times. If you know (a) that exactly7 Heads are tossed, (b) that at least 7 Heads are tossed, whatis the
probability that your first toss is Heads?

Solution for Example 1ISuppose thatAis the event that the first child is a girl andBthe event that the
second one is a girl.(i)A∩Bis the event that both are girls.P(A∩B) =14.(ii)P(B|A) =P(A∩B)P(A)=1412=12.
OrP(A∩B|A) =P(A∩B)P(A)=12.(iii) one of the two children is a girl isA∪B.P(A∪B) =P(A) +P(B)-P(A∩B)
=12+12-14=34.The conditional probability isP(A∩B|A∪B) =P(A∩B)P(A∪B)=1434=13.

Solution for Example 2ISuppose thatAis the event that a student passes the first testandBa student
passes the second test. By the assumption inquestion, we haveP(A∩B) = 0.25,P(A) = 0.42.P(B|A)
=P(A∩B)P(A)=0.250.42.

Solution for Example 3I(a) Suppose thatAis the event that your first toss is HeadsandBis the event that
exactly 7 Heads are tossed. We needto findP(A|B). Notice thatP(A∩B) =(96)210andP(B)
=(107)210.Therefore,P(A|B) =P(A∩B)P(B)=710.(b) Denote the event that at least 7 Heads are tossed
byC.P(A∩C) =(96)+(98)+(99)210P(B) =(107)+(108)+(109)+(1010)210.P(A|C) =P(A∩C)P(C)=6588.

The Multiplication RuleIThe Multiplication RuleP(A1∩A2) =P(A1)P(A2|A1).IIn general, we

haveP(A1∩A2∩. . .∩An)=P(A1)P(A2|A1)P(A3|A1∩A2). . .P(An|A1∩. . .∩An-1).IExample 4You have a box
with 3 blue marbles, 2 redmarbles, and 4 yellow marbles. You are going to pull out onemarble, record its
color, put it back in the box and drawanother marble. What is the probability of pulling out a redfollowed
by a blue?