Imperfect Competition - Monopoly

• The term “monopoly” comes from Greek: “mono” = single and “poly” = seller.
• A monopoly is a market situation where there is only one seller or producer of a product, and there is no close substitute for that product.
• Because there is only one seller and no close substitutes, the monopolist controls the entire market supply and can influence the price.

• "A pure monopoly exists when there is only one producer in a market, there are no direct competitors." – Ferguson
• "Monopoly is a market situation in which there is a single seller, there is no close substitute for commodity it produces, there are barriers to entry." – Koutsoyiannis

1] Single seller

• Only one firm sells the product in the market, so the firm and the industry are the same.
• Buyers are many and individually too small to affect the price.

2] No close substitutes

• The monopolist’s product has no close substitute in the market.
• If buyers do not want to pay the price, they may have to go without the product, because no similar alternative is available.

3] Barriers to entry

• New firms cannot easily enter the market because of obstacles such as:
  (i) Legal barriers: patents, licences, and copyrights.
  (ii) Natural barriers: control over key resources or special location.
  (iii) Technological barriers: very high fixed costs, advanced technology.
• These barriers protect the monopolist from competition and allow long‑run abnormal profit.

4] Complete control over market supply

• The monopolist decides how much to produce and sell.
• By changing output, the monopolist can influence the market price.

5] Price maker

• A monopolist is a price maker, not a price taker.
• Still, the monopolist cannot fix both price and quantity independently; the chosen price–quantity combination must lie on the market demand curve.

6] Possibility of price discrimination

• A monopolist can sometimes charge different prices to different customers or in different markets for the same product.
• The difference in price is not due to cost but due to differences in demand, place, time, or use (explained later).

7] No distinction between firm and industry

• Since only one firm produces the whole market output, the monopoly firm itself is called the industry.

Introduction:

• It means selling the same product at different prices to different buyers, not because of differences in cost, but due to differences in demand, place, time, use, or buyer category.

Key idea: Under monopoly, the firm faces the entire market demand curve.

1. Average Revenue (AR) and demand

• AR = price per unit received from selling the product.
• Under monopoly, the AR curve of the firm is the same as the market demand curve.
• AR (demand) curve slopes downward from left to right: to sell more units, the monopolist must reduce the price.

2. Marginal Revenue (MR)

• MR is the extra revenue earned by selling one more unit of output.
• Because the monopolist must lower the price on all units to sell an extra unit, MR falls faster than AR.
• Therefore, the MR curve also slopes downward and lies below the AR curve.

Cost curves:

The shapes of cost curves under monopoly are the same as in perfect competition.

• Fixed Cost (FC) curve is horizontal (parallel to X‑axis).
• Average Fixed Cost (AFC) curve slopes downwards and is a rectangular hyperbola.
• Average Variable Cost (AVC) and Average Cost (AC) curves are U‑shaped.
• Marginal Cost (MC) curve is also U-shaped and cuts both AVC and AC at their lowest points.

Important difference from perfect competition:

• Under perfect competition, the portion of MC above AVC can be treated as the supply curve.
• Under monopoly, the MC curve is not the supply curve because the monopolist does not take price as given.
• The monopolist chooses the output where MC=MR, and then charges the price from the AR (demand) curve at that output.
• Generally, monopoly price is higher than MC; this gap reflects monopoly power and leads to higher profit and possible loss of efficiency.

• Monopoly is a market structure with one seller, no close substitutes, and barriers to entry.
• Main features: single seller, no close substitutes, barriers to entry, price maker, firm = industry, and possible price discrimination.
• Types include private, public, legal, natural, simple, discriminating, and voluntary (cartel) monopolies.
• Under monopoly, AR is the market demand curve; MR lies below AR because price must fall to sell more.
• Equilibrium output is found where MC=MR; price is taken from the AR curve at that output and is usually above MC.
• Cost curves (FC, AFC, AVC, AC, MC) have the usual shapes, but MC is not the supply curve in a monopoly.
• Price discrimination allows a monopolist to charge different prices by person, place, time, or use.