Monopoly

Malik Qamar Hayat

BEM – 1050
Managerial Economics
Biztek
 Market Structure

The
Thefirm
firminincompetitive
competitivemarkets
markets Non-perfect
Non-perfectcompetition
competition

Perfect
Perfectcompetition
competition Monopoly
Monopoly

Oligopoly
Oligopoly

Monopolistic
Monopolisticcompetition
competition
Introduction
• Economists assume that there are a number of different buyers and
sellers in the marketplace. This means that we have competition in
the market, which allows price to change in response to changes
in supply and demand. Furthermore, for almost every product there
are substitutes, so if one product becomes too expensive, a buyer
can choose a cheaper substitute instead. In a market with many
buyers and sellers, both the consumer and the supplier have equal
ability to influence price.

• In some industries, there are no substitutes and here is no

competition. In a market that has only one or few suppliers of a
good or service, the producer's) can control price, meaning that a
consumer does not have choice, cannot maximize his or her total
utility and has have very little influence over the price of goods.
Monopoly
• In economics, situation in which only a single seller or producer
supplies a commodity or a service. For a monopoly to be effective
there must be no practical substitutes for the product or service
sold, and no serious threat of the entry of a competitor into the
market. This enables the seller to control the price.
• Examples of Monopoly
– Electricity utilities, Gas, Water,Telecommunications
• A monopoly must be distinguished from monopsony, in which there
is only one buyer of a product or service; a monopoly may also have
monopsony control of a sector of a market. Likewise, a monopoly
should be distinguished from a cartel (a form of oligopoly), in which
several providers act together to coordinate services, prices or sale
of goods. Monopolies can form naturally or through vertical or
horizontal mergers
Characteristics
• There is only one firm which supply the entire market and many
buyers & consumers

• The firm sells a unique product, which has no close substitutes.

• The firm has market power (that is it can control its price)

• Profit-maximiser

• Entry into the market is restricted, e.g. due to high costs and some
special barriers to entry. A social, political or economic impediment
that prevent firms from entering a market.
Kinds of Monopolies
• A Natural Monopoly
Pure monopolies—only a single firm in an industry—is rare in most
economies, except among the public utilities. These industries
produce goods and provide services vital to the public well-being,
including such essentials as water, power, transport, and
communications. Although such monopolies often seem to be the
most effective way to supply vital public services, they must be
regulated when privately owned or else be owned and operated by a
public body.
• B Trusts
This is a device by which the real control of a company is transferred
to an individual or small group by an exchange of shares of stock for
trust certificates, which are issued by the individuals seeking control.
A similar device is the holding company, which issues its own stock
shares for sale to the public and “holds” or controls other companies
by owning their shares. Such an arrangement is not necessarily
illegal, unless created specifically to monopolize commerce in trade.
Kinds of Monopolies Cont…
• C Cartels
Perhaps the best known form of combination is the cartel, due to the
high profile of OPEC. A cartel is an organization formed by
producers whose purpose is to allocate market shares, control
production, and regulate prices. OPEC has done all these things in
the petroleum industry, but its most highly publicized acts have been
to set petroleum’s world price.
• D Mergers
Efforts to organize an industry in order to achieve practical
monopoly control take different forms. Any combination of firms that
reduces competition may be of a vertical, horizontal, or
conglomerate character. A vertical combination involves merging
firms at different stages of the production process into a single unit.
Some of the petroleum companies, for example, own oil fields,
refineries, transport systems, and retail outlets. All mergers and
combinations have the potential for eliminating competition and
creating monopoly.
 Profit Maximization in Monopoly Markets

• Price/Output Decisions
• A monopoly firm is the
market.
• Market and firm demand
curve slopes downward.
• Monopoly demand curve
is always above the
marginal revenue curve,
P = AR > MR.
• Monopoly position allows
above-normal profits.
P > AC in long-run
equilibrium.
• Set Mπ = MR - MC = 0 to
maximize profits.
• MR=MC at optimal
output.
 Monopoly versus Perfect Competition

• The monopoly will have greater

control over the price it charges
for its product, although this
control is never absolute.
• The monopoly firm thus has
more freedom than the
competitive firm to adjust price
as well as production as it strives
to achieve a maximum profit. .
• Assuming that the monopolist
seeks to maximize profits and
that they take the whole of the
market demand curve, then the
price under monopoly will be
higher and the output lower than
the competitive market
equilibrium. This leads to a
deadweight loss of consumer
surplus and therefore a loss of
static economic efficiency.
Conclusion
• Market Structure with one producer.
• Entry of Firm is ban
• Unique product or No close substitute
• Firm is price maker
• The monopolist can take the market demand
curve as its own demand curve. A monopolist
therefore faces a downward sloping AR curve
with a MR curve with twice the gradient of AR