Professional Documents
Culture Documents
Presented By
Imran Banat Nitisha Shah Sandip Patil
Manpreet Kaur Matharu
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Monopoly
Monopoly is a term used by economists to refer to the situation in which there is a single seller of a product (i.e., a good or service) for which there are no close substitutes.
Governmental policy with regard to monopolies (e.g., permitting, prohibiting or regulating them) can have major effects not only on specific businesses and industries but also on the economy and society as a whole.
Types of Monopoly
There are four basic types of Monopolies
Natural Monopoly A market that runs most efficiently when one large firm supplies all the output
Geographic Monopoly A monopoly caused by geographic factors. Government Monopoly It is similar to natural Monopoly except that the monopoly is held by the Government itself
Technological Monopoly A firm who acquired monopoly rights because of a new invention or scientific discovery.
Monopoly Resources
Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason.
Example: The DeBeers Diamond Monopoly
Government-Created Monopolies
Governments may restrict entry by giving one firm the exclusive right to sell a particular good in certain markets.
Example: Patent and copyright laws are two important examples of how governments create monopoly to serve the public interest.
Natural Monopolies
An industry is a natural monopoly when one firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
Example: delivery of electricity, phone service, tap water, etc.
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Natural Monopolies
Cost
A natural monopoly arises when there are economies of scale over the relevant range of output.
Average total cost
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Quantity of Output
Competitive Firm
Is one of many producers Faces a horizontal demand curve
Is a price taker Sells as much or as little as it wants at market price
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Demand
Demand
Quantity of Output
Quantity of Output
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No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits.
Legal barriers: Legal rights can provide opportunity to monopolise the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.
Characteristics of Monopoly
Profit Maximiser: Maximizes profits.
Price Maker: Decides the price of the good or product to be sold. High Barriers to Entry: Other sellers are unable to enter the market of the monopoly. Single seller: In a monopoly there is one seller of the good that produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry.
Advantages of Monopoly
Avoid Duplication The avoidance of wasteful duplication of scarce resources - if the monopolist is a natural monopoly it can be argued that competitive supply would be wasteful. Natural monopolies include gas, rail and electricity supply. A natural monopoly occurs when all or most of the available economies of scale have been derived by one firm this prevents other firms from entering the market. But having more than one firm will mean a wasteful duplication of scarce resources. Enjoys Economies of scale In spite of the undesirable economic effect of a monopoly in general, a monopoly may in certain circumstances generate substantial economies of scale, which can be passed on to society in a lower price. The small firms of perfect competition are not large enough to bring about the economies of scale. Such economies of scale are to be found primarily in natural monopolies. Some economists have questioned the existence of this beneficial economic effect.
Advantages of Monopoly
Research & Development Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly Price Discrimination Monopolists can also be dynamically efficient - once protected from competition monopolies may undertake product or process innovation to derive higher profits, and in so doing become dynamically efficient. It can be argued that only firms with monopoly power will be in the position to be able to innovate effectively. Because of barriers to entry, a monopolist can protect its inventions and innovations from theft or copying. Technological Progress Another potential benefit to society from monopoly type firms is that profits are often the motivation for technological progress and investment in new technology is made possible by the presence of these profits. However, monopolies well protected by entry barriers will not need to seek new technology, and if they do, their goal may be to lower costs for additional profits and new entry barriers
Advantages of Monopoly
Dynamic efficiency Monopolists can also be dynamically efficient - once protected from competition monopolies may undertake product or process innovation to derive higher profits, and in so doing become dynamically efficient. It can be argued that only firms with monopoly power will be in the position to be able to innovate effectively. Because of barriers to entry, a monopolist can protect its inventions and innovations from theft or copying. Revenue Monopolists can also generate export revenue for a national economy. A single firm may gain from economies of scale in its own domestic economy and develop a cost advantage which it can exploit and sell relatively cheaply abroad.
Price Discrimination
Price discrimination is the business practice of selling the same good at different prices to different customers, even though the cost of production is the same for all customers.
What do you think of this practice?
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Quantity sold
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Quantity
Quantity sold
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Quantity
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