Page 167 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes monopolistic competition will prevail depending upon whether the product is homogeneous
or differentiated. On the other hand, when there are few producers, oligopoly is said to exist. A
second condition which is essential for a firm to be called a monopolist is that no close substitutes
for the product of that firm should be available.
From the above discussion it follows that for monopoly to exist, following conditions are
essential:
1. One and only one firm produces and sells a particular commodity or a service.
2. There are no rivals or direct competitors of the firm.
3. No other seller can enter the market for whatever reasons — legal, technical or economic.
4. Monopolist is a price maker. He tries to take the best of whatever demand and cost
conditions exist without the fear of new firms entering to compete away his profits.
In the case of monopoly one firm constitutes the whole industry. Therefore the entire demand of
the consumers for that product faces the monopolist; which slopes downward. Monopolist can
lower the price by increasing his level of sales and output and he can raise the price by reducing
his level of sales. Demand curve facing the monopolist will be his average revenue curve, which
also slopes downward. Since average revenue curve slopes downward, marginal revenue curve
will be below it.
Market Conditions

In perfect competition, there is a difference between the market demand curve and the demand
curve for the output of an individual firm; when the firm acts as a price taker it views its demand
curve as being horizontal with average revenue equal to marginal revenue. However, under
monopoly, there is only one firm in the industry and so there is no difference between the
demand curve for the industry and the firm. Since a normal demand curve is assumed, it is
necessary for the monopolist to reduce price in order to increase the quantity sold. In other
words, in order to increase sales the monopolist must reduce the price of all goods sold and
therefore marginal revenue will always be less than average revenue under monopoly.
Table 10.1: Market Condition and Monopoly

Notes Sources of Monopoly

1. Legal Restrictions: Some public sector services are statutory monopolies, which
means their position is protected by law.
A monopoly position might also be protected by a patent which prevents other
firms from producing an identical good during the life of the patent. However,
similar products can often be produced and it is easy to exaggerate the protection
afforded by patents.
Contd...

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