Monopoly

Monopoly

Meaning:

The word monopoly has been derived from the combination of two words i.e., ‘Mono’ and ‘Poly’. Mono refers to a single and “poly” to seller.

In this way, monopoly refers to a market situation in which there is only one seller of a commodity. Hence, there is no scope for competition. (Still some economists observe that there will always be potential threat to the monopolists).

Definition

Monopoly is a market structure characterized by a single seller, selling the unique product with the restriction for a new firm to enter the market. Monopoly is a form of market where there is a single seller selling a particular commodity for which there are no close substitutes.

1. Features of Monopoly

1.        There is a single producer / seller of a product;

2.        The product of a monopolist is unique and has no close substitute;

3.        There is strict barrier for entry of any new firm;

4.        The monopolist is a price-maker;

5.        The monopolist earns maximum profit/ abnormal profit.

2. Sources of Monopoly Power

1. Natural Monopoly:

Ownership of the natural raw materials [Eg.Gold mines (Africa), Coal mines, Nickel (Canada) etc.]

2. State Monopoly:

Single supplier of some special services (Eg.Railways in India)

3. Legal Monopoly:

A monopoly firm can get its monopoly power by getting patent rights, trade mark from the government.

3. Price & Output Determination Under Monopoly

A monopoly is a one firm-industry. Therefore, a firm under monopoly faces a downward sloping demand curve (or AR curve). Since, under monopoly AR falls, as more units of output are sold, the MR lies below the AR curve (MR<AR).

The monopolist will continue to sell his product as long as his MR>MC.

He attains equilibrium at the level of output when its MC is equal to MR. Beyond this point, the producer will experience loss and hence will stop selling.

Let us take the following hypothetical example of Total Revenue Function and Total cost function.

TR=100Q-4Q2 and

TC=Q3 - 18Q2 + 91Q +12.

Therefore AR= 100 - 4Q;

MR=100 - 8Q;

AC= Q²- 18Q + 91 + 12/Q;

MC= 3Q² - 36Q + 91;

When Q=3,

AR= 100 – 4(3) = 88,

AC= 3²-18(3) +91+12/3= 9-54+91+4=50;

MR=100-8(3) =76;

MC= 3(3)2- 36(3) +91=27-108+ 91 = 10

From this diagram, till he sells 3 units output, MR is greater than MC, and when he exceeds this output level, MR is less than MC. The monopoly firm will be in equilibrium at the level of output where MR is equal to MC. The price is 88.

To checkup how much profit the monopolist is making at the equilibrium output, the average revenue curves and the average cost curves are used. At equilibrium level of output is 3; the average revenue is 88 and the average cost is 50. Therefore (88-50 =38) is the profit per unit.

Total profit = (Average Revenue – Average Cost) X Total output

= (88 – 50) X3

= 38X3=114.

4. Price Discrimination under monopoly

A discriminating monopoly is a single entity that charges different prices for different consumers. Higher price will be charged for price inelastic consumers and vice versa

Types of Price Discrimination

There are three types of price discrimination.

Personal – Different prices are charged for different individuals (for example, the railways give tickets at concessional rate to the ‘senior citizens’ for the same journey).

Geographical - Different prices are charged at different places for the same product (for example, a book sold within India at a price is sold in a foreign country at lower price). On their basis, China drops its goods in Indian market. As a result, watch and toys industries closed down their business.

On the basis of Use - Different prices are charged according to the use of a product (for example, lower rates are charged by Tamil Nadu Electricity Board for domestic uses of electricity and higher rates are charged for commercial and industrial uses).

5. Degrees of Price Discrimination

Price discrimination has become widespread in almost all monopoly markets.

According to A.C.Pigou, there are three degrees of price discrimination.

i. First degree price discrimination

A monopolist charges the maximum price that a buyer is willing to pay. This is called as perfect price discrimination. This price wipes out the entire consumer’s surplus. This is maximum exploitation of consumers. Joan Robinson named it as “Perfect Discriminating Monopoly”

ii. Second degree price discrimination

Under this degree, buyers are charged prices in such a way that a part of their consumer’s surplus is taken away by the sellers. This is called as imperfect price discrimination. Joan Robinson named it as “Imperfect Discriminating Monopoly”. Under this degree, buyers are divided into different groups and a different price is charged for each group. For example, in cinema theatres, prices are charged for same film show from viewers of different classes. In a theatre the difference between the

first row of first class and the last row in the second class is smaller as compared to the differences in charges.

iii. Third degree price discrimination

The monopolist splits the entire market into a few sub-market and charges different price in each sub-market. The groups are divided on the basis of age, sex and location. For example, railways charge lower fares from senior citizens. Students get discounts in museums, and exhibitions.

6. Dumping

Dumping refers to practice of the monopolist charging higher price for his product in the local market and lower price in the foreign market. Through dumping, a country expands its command over other countries for its product. This is also called as ‘International Price Discrimination”.

For example, India’s electronic market is flooded with the China’s products.