MONOPOLY

EQUILIBRIUM, PRICE
DISCRIMINATION, AND
CONTROL MECHANISM

FEATURES OF MONOPOLY
1. Single seller and large no. of

buyers.
2. No close substitutes.
3. Closed entry
4. Price maker
5. Price discrimination

KINDS OF MONOPOLY
1. Public and private monopoly
2. Simple and discriminating

monopoly
3. Natural and artificial monopoly
4. Technological monopoly
5. Fiscal and legal monopoly

MONOPOLY EQUILIBRIUM

C/R
MC

B
A
O

OUTPUT

MR
Q

AC

AR

EXPLANATION OF THE DIAGRAM

In the diagram AC and MC are average cost

and marginal cost curves; AR and MR are the

average and marginal revenue curves.
Equilibrium of the monopolist takes place at
MR=MC, i.e. at the point A.
At the point, average cost is P; and average
revenue is R.
There are abnormal profits of PRBC.

Price
Discrimination

Monopoly

Characteristics of Price Discrimination

Definition

Monopoly

Selling a good or service at a number of different

prices where the price differences do not reflect
differences in cost but instead reflect differences
in consumers price elasticities of demand.

Successful price discrimination requires

Market segmentationthe seller is able to identify
different types of buyers based on differences in
their demand elasticities.
Costly arbitrageit is costly for one consumer to
buy the good at a lower price and resell to another
consumer at a higher price
7

Two types of price discrimination

Discriminating among groups of consumers
Discriminating among units of a good

Monopoly

The seller charges the same prices to all consumers

but offers each consumer a lower price for a larger
number of units boughtvolume discounts, for
example.

PRICE DISCRIMINATION

R/C

P1

P2

MC

E MR
O
OUTPUT

AR1

AC

AR

EXPLANATION OF THE
DIAGRAM
In the diagram AC, MC, AR, MR

are cost and revenue functions.

Equilibrium is arrived at a point
E, where MR=MC
AR1 is the demand function in a
different market, which is more
elastic.
The monopolist will charge P1 in
a AR market and P2 in the AR1
market.

Effects of Price Discrimination

Price discrimination may

Monopoly

Increase sellers profit, at least

in the short run

Enhance economic inefficiency

Conserve on scarce resources.

11

Effects of Price Discrimination

Increases sellers profits
Reducing

price to buyers with elastic

demands increases revenues.

Raising

price to buyers with inelastic

demands also increases revenues.

If

total quantity is unchanged, then costs

are unchanged but revenues and profits are
higher.

Monopoly

12

Effects of Price Discrimination

Enhances

economic inefficiency

Monopoly

is inefficient because of underproduction. Too little of the

goodless than the efficient quantityis supplied by the monopolist.

price-discriminating monopolist is able to sell a larger quantity than

a single-price monopolist by reducing price only on the additional

units sold, not on all units sold.

Because

the problem with monopoly is underproduction, increasing

quantity enhances efficiency. The sum of producer and consumer

surplus is higher in a monopoly market with price discrimination than
in a market with a single-price monopolist.
Monopoly

13

Effects of Price Discrimination

Conserves on scarce resources
In

many markets, demand fluctuates systematically, often

by time of day or day of the week or seasonally.

Demand

fluctuations result in crowding of facilities during

peak periods and excess capacity during off-peak periods.

Price

discrimination reallocates demand from peak times

to off-peak times. With lower demand during peak times,
the capacity of a facility needed to serve the market is
smaller and fewer resources are required to satisfy
consumer demand.

Monopoly

14

MONOPOLY
CONTROL
POLICIES FOR REGULATING MONOPOLY

Governments Regulatory
Influence on Business
Reasons for
Controls Regulation
natural monopolies
Controls negative externalities
Achieves social goals
Other reasons
Controls excess profits
Controls excessive protection and
Controls unethical behaviour.

Governments Regulatory Influence

on Business
Comparison of Economic and Social
Regulation
Economic
Social
Regulations
Regulations
Market conditions; People in roles as
Focus
economic variables employees,
consumers and
citizens
Selected (railroads, Virtually all
Affected
industries
Industrie aeronautics,
communications)
s
Current
Trend

From regulation to Stable

deregulation
10-21

Governments Regulatory Influence on Business

Benefits of Regulation

Fair treatment of

employees
Safer working conditions
Safer products
Cleaner air and water

Governments Regulatory Influence

on Business
Costs of Regulation
Direct costs--Reduced innovation
Indirect costs--Reduced investment in

plant and equipment

Induced costs--Increased pressure on

small business

THE
COMPETITION ACT,
2002

The Competition
(Amendment) Act, 2007

BROAD AIMS OF
COMPETITION ACT,2002
An Act to provide, keeping in view of the economic

development of the country, for the establishment of a

Commission:
to prevent practices having adverse effect on
competition,
to promote and sustain competition in markets,
to protect the interests of consumers and
to ensure freedom of trade carried on by other
participants in markets, in India, and for matters
connected therewith or incidental thereto. It was
enacted by Parliament in the Fifty-third Year of the
Republic of India .

PILLARS OF COMPETITION ACT,

2002
Competition Act, 2002 has essentially five

compartments:
1. Anti - Competitive Agreements[Section 5]
2. Abuse of a Dominant position[Section 6]
3. Combinations Regulation[Section 7]
4. Competition Advocacy [Section 8]
5. Enforcement [Section 9]