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220, , , , , , , , , , , , , , 14.1 Features of Monopoly, 14.2 Sources of Monopoly Power, (14.3 Equilibrium of a Monopoly Firm, 14.4 Comparison Between Perfect Competition and Monopoly, , ———=___—— |, , Monopoly is another form of market where there is only one seller. Ina |, pure or absolute monopoly a monopolist controls the entire supply of, commodity for which there is no substitute at all. The case of a pure |, monopoly, however is as rare as perfect competition. Examples which may, be very near to this situation may be found ina fully centralised economy, where all the means of production are totally under the control of the, Government. The usual monopolies are those where the seller has a very, substantial share of the market, and the commodity sold does not have, close substitutes. Public utilities which are controlled by the government, or sole private supplier under the regulation of the government may be., cited as an example for a monopoly market. A monopolist can control both, the supply and price, however, a rational monopolist who wants to, maximise profit, would not control both at the same time. In a monopoly, market a monopolist is a price maker and not a price taker like the perfectly, , competitive firm., , , , There are no competitors. He is the sole seller. A, t threatened by any competitor., , (i) Single Seller :, monopolist is no

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Monopoly, , ii), , (iii), , , , 221, , onopolist has no, , No close substitutes : The commodity sold by the ™ e or private, , close substitutes. For example electricity sold by the Stat, supplier has no close substitutes. : :, , No entry : In perfect competition as discussed earlier, there is ace, entry and exit. In other forms of markets like monopolistic SE oly, or oligopoly there is no restriction on entry and exit. cae aaewyody, market entry is completely restricted. If entry is allowed or any "i, succeeds to enter the market and produce a close substitute the, monopolist will be no more a monopolist., , Downward sloping and less elastic demand curve : A monopolist as, pointed out earlier can increase his sales by lowering the price. If he, controls the price then the quantity sold depends on the market i.e., the demand. The demand is also less elastic due to the absence of, close substitutes which makes the cross elasticity of demand almost, zero. Fig. 14.1 explains the nature of demand curve. ., , Y, D, , Price, , D, , Oo x, Quantity Demanded, , Fig. 14.1, , The steeper demand curve explains that a change in price affects the, sale only marginally. It indicates low elasticity of demand., , No Distinction Between Firm and Industry: A monopolist being the, sole seller constitutes the firm as well as the industry. Therefore there, is no need for a separate discussion of equilibrium of industry.

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Mm, , 22, . Business Economics - I (BMS, BAF, BFM, BBI.: SEM -/, , -OWER, , i, , , , , , seamen, There are ny ‘, of them foes ™erous factors which give rise to monopoly power. Important, 1., tial monopoly : Natural monopoly occurs when a company takes, a antage of an industry's high barriers to entry due to high, rastructure Cost or start up cost. The utility industries like power, ot and supply, water supply, transport services (Indian, Tallways) are some of the examples. In these cases, a single producer, , fanihiavee advantage of large scale production and other economies of, scale., , Natural resources like crude oil, gold or other mineral resources, require huge investment for their production and supply, thus, providing scope for the government or individual firm (usually with, the permission of the government) to acquire natural monopoly., , 2. Geographic monopoly : Some monopolies are due to nature. Supply, of natural resources like gold or crude oil are confined to certain, geographical area. Government of these countries acquire monopoly, over the supply of these natural resources as these resources are, available only in those countries and hardly available elsewhere., , 3. Technology: Technology developed by the business firms or nations, give them a monopoly right over sucha good or service. As long as, the technology is not diffused and thus not made available to others |, the original firm retains the monopoly. Technology may be such that, it may require only a single plant to have a substantial economies of, scale. For example, intransport, communication, electricity etc. only, a very large firm may reap the advantages of large scale production., , 4. Legal Protection : Legal Protection granted by the government in the, form of patent rights, trade marks, copy rights, licence etc. gives, monopoly power to the persons and firms who have introduced such, , commodities., , ‘5. Cartel Formation : If a product is produced by few producers and the, market is an oligopoly one it is possible for these few producers !°, come together and form a cartel to establish a monopoly. Organisatio", of Petroleum producing and Exporting Countries (OPEC), is a goo4, example of cartel formation. OPEC could increase the price and eat, , i, a larger amount of revenue.

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nvrws, , , , 223, Monopoly, , 6. Barriers to New Competition : A firm may fol, policy, that is, a price which does not attract the, be combined with aggressive or heavy adve, continuous product differentiation. Such practices Pp:, and give a monopoly power to the existing firm., , low a limiting-price, new firms. This may, rtising and/or a, revent new entries, , MONOPOLY FIRM, , , , e of the product, , A monopolist bei i ine the pric, Pp eing a price maker can determine P ntrol the supply, , he sells and adjust the supply as per demand or he can co ist’, and allow the price to be determined by demand and supply. Monapet :, demand curve as seen earlier is a downward sloping one. It eee! ‘f, the monopolist can sell more by reducing the price. His sales —, he increases the price., , MC is, , Monopoly output is decided by the same rules i.e. MC = MR and ard, , increasing at the point of equilibrium. It is a point where the downw, sloping marginal revenue (MR) is cut by the MC curve from below (as, seen in Fig. 14.2). It is the point where the monopolist decides his output., The equilibrium output (supply) and demand (AR) for his product help, the monopolist to decide the price. For the present analysis we accept the, Ushape cost curves. Let us now proceed to explain the determination of, output (supply) and price with the help of a given demand curve. This will, enable us to understand equilibrium of a monopoly firm., , A. SHORT-RUN EQUILIBRIUM, , A monopolist, as discussed earlier can control both price and output., However, being a rational producer, who aims at maximisation of profit,, will not control both at the same time. He will decide his output by applying, the equilibrium conditions, that is, at point E, where MC cuts MR from, , below., Excess Profit, , In the short run a monopolist due to his monopoly power earns excess, profit but need not necessarily so always. Since the demand depends on, the market it is likely, that a monopolist may even incur loss. Figure 14.2, explains the-case of excess profit in the short run.

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224 Business Economics - I (BMS, BAF, BEM, BBI.: SEM - 1), va, 2 \ SMC, 3 ‘ SAC, 3 p T, %, S 2, a N > S, § HE, % /, y AR, MR, Oo —> X, Output, Fig. 14.2, In Fig. 14.2, , Output = OQ (decided by the equilibrium E where MC = MR and MC is, increasing at that point) ., , Price = OP., , TR = OQTP (Output x Price = OQ x OP = OQTP), , TC = OQSN (Output x Average cost = OQ x QS = OQSN), TR>TC, , m=NSTP The firm earns excess profit., , LOSS, , A monopolist inspite of his monopoly power is not guaranteed excess profit, in the short-run. It is likely he may even function with loss. As in perfect, competition the cost of the monopoly firm is also divided into fixed and, variable cost. It is essential to cover the variable cost to enable the firm to, function. Fig. 14.3 explains the case of loss:, , C0 2M trem om