Saturday Brain Storming Thought (190) 30/09/2023
MONOPOLY
A monopoly is defined as a single seller or producer that excludes competition from providing the same product
A monopoly can dictate price changes and creates barriers for competitors to enter the market place
Who defined Monopoly
*Irving Fisher (1923)*, once defined monopoly simply as an absence of competition
Monopoly are connected with the particular version of competition that each writer has in mind
Monopoly Money
Monopoly Dollar, shortened to Dollar, is the main currency used in monopoly
Monopoly Profit
The profit maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost
MR = MC
Marginal Revenue
Marginal revenue is a financial and economic calculation that determines how much revenue a company earns in revenue for each additional unit
Marginal Cost
In economics, the marginal cost is the change in total production cost that comes from making or producing one additional unit
Pure Monopoly
Pure Monopoly are market structures where the production or sale of a particular is controlled by only one company
Monopoly
Mono means single
Poly means seller
There is no close substitute for the commodity sold by the seller
Example – Indian Railway
Features or Assumptions of Monopoly
1) One seller and large number of buyers
2) Monopoly is also an industry
3) Restrictions on the entry of new firms
4) No close substitutes
5) Price Maker
6) Price Discrimination
7) Downward Sloping Demand Curve
Causes and Sources of Monopoly Power
1) Control over Raw materials or ownership of natural resources
2) Patents
3) Technical barriers
4) Government policy
5) Historical and entry lag
6) Limit-Pricing policy or unfair competition
7) Capital size
8) Business mergers
Types of Monopoly
1) Natural Monopoly
2) Geographic Monopoly
3) Technological Monopoly
4) Government Monopoly
Types of Barriers to entry in Monopoly
1) Institutional barriers to entry
Exclusive franchising
Licences
Patent protection
2) Technical barriers to entry
Unique resources
Economies of scale and scope
Economy of experiences
3) Strategic barriers to entry
Limit pricing
Excess capacity
Product differentiation (brand proliferation)
Demand and Revenue under Monopoly
1) There is no difference between firm and industry
2) Firms demand curve also constitutes industry’s demand curve
3) Demand Curve of the Monopolist is also average revenue curve
4) Monopolist decision
High price low demand
Low price high demand
5) Average revenue and marginal revenue curves are seperate from one another and both slope downwards
Price determination under short run in Monopoly
A Monopolist in Equilibrium may face any of three situations in the short period
1) Super Normal Profit
2) Normal Profit
3) Minimum Loss
Monopoly Profit
Monopoly Profit is the excess profit or supernormal profit that a firm can earn by being the sole provider of a good or service in a market
Monopoly Loss
A monopoly will always produce a lower output and charge a higher price which creates a deadweight loss to society
Characteristics of Monopoly Market
1) Single seller
2) Unique product
3) Firm is price maker
4) Entry or Exit is blocked
5) No distinction between firm and industry
Monopoly regulations by Government
1) Price camping – limiting price increase
2) Regulation of mergers
3) Breaking up monopolies
4) Investigations into cartels and unfair practice
5) Nationalisation – Government ownership
Advantages of Monopolies
1) Economies of scale – lower average cost from increased scale
2) High Profit can be used for research and development – dynamic efficiency
3) The reward of getting patent (a monopoly power) can encourage investment
4) Firms who become monopolies may just be very efficient, successful and innovative
5) Government can regulate to get best of both worlds – economies of scale and fair practice
Disadvantages of Monopolies
1) Higher prices for consumers
2) Less incentive to cut costs
3) Less inventive to innovate and invest
4) Allocative inefficiency
5) Decline in consumer surplus
6) Productive inefficiency
7) Potential diseconomies of scale
8) May also have monopsony power
9) Monopolies can gain political power to protect their vested interests
10) Less choice for consumers
COMPILED BY:-
Er. Avinash Kulkarni
9822011051
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer
