Monopoly is at the opposite end of the spectrum of market models from perfect competition. A
monopoly firm has no rivals. It is the only firm in its industry. There are no close substitutes for
the good or service a monopoly produces. Not only does a monopoly firm have the market to
itself, but it also need not worry about other firms entering. In the case of monopoly, entry by
potential rivals is prohibitively difficult.
A monopoly does not take the market price as given; it determines its own price. It selects from
its demand curve the price that corresponds to the quantity the firm has chosen to produce in
order to earn the maximum profit possible. The entry of new firms, which eliminates profit in
the long run in a competitive market, cannot occur in the monopoly model.
A firm that sets or picks price based on its output decision is called a price setter. A firm that
acts as a price setter possesses monopoly power.
Formation of monopolies
Monopolies can form for a variety of reasons, including the following:
If a firm has exclusive ownership of a scarce resource, such as Microsoft owning
the Windows operating system brand, it has monopoly power over this resource and is the only
firm that can exploit it.
Governments may grant a firm monopoly status, such as with the Post Office and other
Utilities.
Producers may have patents over designs, or copyright over ideas, characters, images, sounds
or names, giving them exclusive rights to sell a good or service, such as a song writer having a
monopoly over their own material.
A monopoly could be created following the merger of two or more firms.
Equilibrium Price and Output
Since there is, by definition, only one firm in the industry, the firm’s demand curve is also the
industry demand curve. Compared with other market structures, demand under monopoly will
be relatively inelastic at each price. The monopolist can raise its price and consumers have no
alternative firm in the industry to turn to. They either pay the higher price or go without the
good altogether.
, Unlike the firm under perfect competition, the monopoly firm is a ‘price maker’. It can choose
what price to charge. Nevertheless, it is still constrained by its demand curve. A rise in price will
lower the quantity demanded.
Monopolies can maintain super-normal profits in the long run. As with all firms, profits are
maximised when MC = MR. In general, the level of profit depends upon the degree
of competition in the market, which for a pure monopoly is zero. At profit maximisation, MC =
MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are
possible (area PABP1). With no close substitutes, the monopolist can derive super-normal
profits.
In monopoly, there is no distinction between the short run and long run because of the barriers
that prevent the entry of competitors. There is no economic incentive for the monopolist to
move away from the profit maximizing output Q.
A monopolist with no substitutes would be able to derive the greatest monopoly power. There
may be a situation where the monopolist is unable to make supernormal profits despite having
market power as in the case of where the fixed costs are so high that the necessary price would
outside range that consumer can afford.
Evaluation of monopolies
The advantages of monopolies
Despite these arguments, monopolies can have some advantages.
1. Economies of scale: The monopoly may be able to achieve substantial economies of scale
due to larger plant, centralized administration and the avoidance of unnecessary duplication. If
this results in MC curve substantially below that of the same industry under perfect
competition, the monopoly will produce a higher output at a lower price. In the diagram, the
monopoly produces at price P2 and quantity Q2, where MC = MR, whereas perfectly
competitive industry produces at higher price P1 and lower quantity Q1 due to higher cost.
2. Possibility of Lower cost curves due to more research and development and more
investment: Although the monopolist’s sheer survival does not depend on its finding
ever more efficient methods of production, it can use part of its supernormal profits for
monopoly firm has no rivals. It is the only firm in its industry. There are no close substitutes for
the good or service a monopoly produces. Not only does a monopoly firm have the market to
itself, but it also need not worry about other firms entering. In the case of monopoly, entry by
potential rivals is prohibitively difficult.
A monopoly does not take the market price as given; it determines its own price. It selects from
its demand curve the price that corresponds to the quantity the firm has chosen to produce in
order to earn the maximum profit possible. The entry of new firms, which eliminates profit in
the long run in a competitive market, cannot occur in the monopoly model.
A firm that sets or picks price based on its output decision is called a price setter. A firm that
acts as a price setter possesses monopoly power.
Formation of monopolies
Monopolies can form for a variety of reasons, including the following:
If a firm has exclusive ownership of a scarce resource, such as Microsoft owning
the Windows operating system brand, it has monopoly power over this resource and is the only
firm that can exploit it.
Governments may grant a firm monopoly status, such as with the Post Office and other
Utilities.
Producers may have patents over designs, or copyright over ideas, characters, images, sounds
or names, giving them exclusive rights to sell a good or service, such as a song writer having a
monopoly over their own material.
A monopoly could be created following the merger of two or more firms.
Equilibrium Price and Output
Since there is, by definition, only one firm in the industry, the firm’s demand curve is also the
industry demand curve. Compared with other market structures, demand under monopoly will
be relatively inelastic at each price. The monopolist can raise its price and consumers have no
alternative firm in the industry to turn to. They either pay the higher price or go without the
good altogether.
, Unlike the firm under perfect competition, the monopoly firm is a ‘price maker’. It can choose
what price to charge. Nevertheless, it is still constrained by its demand curve. A rise in price will
lower the quantity demanded.
Monopolies can maintain super-normal profits in the long run. As with all firms, profits are
maximised when MC = MR. In general, the level of profit depends upon the degree
of competition in the market, which for a pure monopoly is zero. At profit maximisation, MC =
MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are
possible (area PABP1). With no close substitutes, the monopolist can derive super-normal
profits.
In monopoly, there is no distinction between the short run and long run because of the barriers
that prevent the entry of competitors. There is no economic incentive for the monopolist to
move away from the profit maximizing output Q.
A monopolist with no substitutes would be able to derive the greatest monopoly power. There
may be a situation where the monopolist is unable to make supernormal profits despite having
market power as in the case of where the fixed costs are so high that the necessary price would
outside range that consumer can afford.
Evaluation of monopolies
The advantages of monopolies
Despite these arguments, monopolies can have some advantages.
1. Economies of scale: The monopoly may be able to achieve substantial economies of scale
due to larger plant, centralized administration and the avoidance of unnecessary duplication. If
this results in MC curve substantially below that of the same industry under perfect
competition, the monopoly will produce a higher output at a lower price. In the diagram, the
monopoly produces at price P2 and quantity Q2, where MC = MR, whereas perfectly
competitive industry produces at higher price P1 and lower quantity Q1 due to higher cost.
2. Possibility of Lower cost curves due to more research and development and more
investment: Although the monopolist’s sheer survival does not depend on its finding
ever more efficient methods of production, it can use part of its supernormal profits for
