Page 168 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 11: Monopoly

a product. If there are many producers producing a product, either perfect competition or 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 fi rm.
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 profi ts.

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.

Example: Examples of monopolies can be public utilities such as gas, electric, water, cable
TV, and local telephone service companies, professional sports teams, DeBeers, and Alcoa.

Microsoft settled anti-trust litigation in the U.S. in 2001; fined by the European Commission in
2004 for 497 million Euros which was upheld for the most part by the Court of First Instance of

the European Communities in 2007. The fine was 1.35 Billion USD in 2008 for noncompliance
with the 2004 rule.
Monsanto has been sued by competitors for anti-trust and monopolistic practices. They hold
between 70% and 100% of the commercial seed market.

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 11.1: Market Condition and Monopoly

Output Sales Price (AR) Total Revenue Marginal Revenue
1 20 20 20
2 18 36 16
3 16 48 12
4 14 56 8

LOVELY PROFESSIONAL UNIVERSITY 163