MONOPOLY

Presented by :Dhiren Haria (A017),

Vishal Shah (A044),
Jay Sangani (A041),
Hiren More (A029),
Priyank Shah (A043),
Harmesh Trivedi (A050).

Contents
Introduction (Meaning /Features Characteristics).
Types of Monopoly.

A Monopolys Output and Price Decision.

Example of Monopoly.

Advantages & Disadvantages.

Introduction
Definition
Amonopoly is a firm that produces a good or
service for which no close substitute exists and
that is protected by a barrier that prevents
other firms from selling that good or service. In
monopoly, the firm is the industry.
Market Power
Market power is the ability to influence the
market, and in particular on the market price,
by influencing the total quantity offered for
sale.

Key Features

No close substitute.
If a good has a close substitute, even though only one firm
produces it, that firm effectively faces competition from
the producers of substitutes.

Barriers to Entry.
Legal or natural constraints that protect a firm from
potential competitors are called barriers to entry.

Legal Barriers to Entry.

A legal monopoly is a market in which competition and
entry are restricted by the granting of a public franchise,
government license, patent or copyright.

Natural Barriers to Entry.

Natural barriers to entry create a natural monopoly. An
industry in which economies of scale enable one firm to
supply the entire market at the lowest possible cost.

Types of Monopoly
Perfect Monopoly

Imperfect Monopoly

Perfect monopoly is a
absolute monopoly.

Imperfect monopoly is
relative or simple monopoly.

No fear of competition

There is a fear of competition

to some extent

No substitute

May have remote substitutes

Examples : Vodafone having

competition with fixed
landline ex : BSNL

Its a very rare type of

monopoly.

Types of Monopoly
Private Monopoly

Production owned by
private individual or
private organization.

Public Monopoly

Production owned by
government.

Welfare or service oriented

Managed and controlled by

government

Example : Railways , BEST

etc.

Profit oriented.
Managed and controlled by
an individual.
Example : Reliance Energy.

Types of Monopoly
Natural Monopoly

A type of monopoly that existsas a result ofthe high fixed or

start-upcosts of operating a business in a particularindustry
or as a result of natural advantages like good location ,
abundant natural resources etc.

It occurs in a industry where Capital cost is very high which

acts as a barrier for entry in the market.

Economically sensible to have governments often regulate

those, ensuring that consumers get a fair deal

Examples: Public utilities such as water services , electricity

etc. Also Gulf countries having monopoly in crude oil.

Types of Monopoly
Geographic Monopoly
Markets that enjoy monopoly due to
geographical boundaries
Only one company that offers a particular good or
service in an area
Example: Nike is the only shoe sold in Denver,
because the mountains around prevent other
shoe companies to ship in quantities of shoes,
while Nike just happens to have a factory in
Denver

Types of Monopoly
Simple Monopoly
Simple
monopoly firm
charges a
uniform price or
single price to all
the customers.

Discriminating
Monopoly
Such a monopoly
firm charges
different price to
different customers
for the same
product.

Examples: Local
Cable Network
Examples: MHADA

Types of Monopoly
Legal Monopoly
When monopoly exists on account of
trade marks, patents, copy rights,
statutory regulation of government etc.,
it is called legal monopoly.
Examples: Music industry

Types of Monopoly
Technological Monopoly
It emerges as a result of economies of
large scale production, use of capital
goods, new production methods, etc.
Examples: Google (Search engine),
Microsoft Windows (OS)

Types of Monopoly
Joint Monopoly
A number of business firms acquire
monopoly position through
amalgamation, cartels, syndicates, etc, it
becomes joint monopoly.
Example: Actually, pizza making firm and
burger making firm are competitors of
each other in fast food industry. But when
they combine their business, that leads
to reduction in competition. So they can
enjoy monopoly power in market.

MonopolysOutput
Output
AAMonopolys
andPrice
PriceDecision
Decision
and
Price
per $ Quantity
Demand
(P)

(Q)

20
18
16
14
12
10

0
1
2
3
4
5

Total
Revenue

Marginal
Revenue

TR=(P x Q)

MR= TR/

0
18
32
42
48
50

0
18
14
10
6
2

Total
Cost

Marginal
cost

TC

MC= TC/ Q

20
21
24
30
40
55

0
1
3
6
10
15

Profit

Average Average
Total Cost Revenue

(TR TC)

(TC/Q)

-20
-3
+8
+12
+8
-5

0
21
12
10
10
11

(TR/Q)

0
18
16
14
12
10

A profit maximizing monopoly chooses an output level where MR = MC.

If MR > MC, producing one more unit will add more revenues than
costs, so profits increase. If MR < MC, producing one less unit will save
more costs than it sacrifices in revenues, so profits increase. Given the
profit maximizing

Maximizing Economic Profit:

The total Cost & Total Revenue both rise as output increases, but
TC rise at an Increasing Rate and TR rise at a decreasing rate.
Economic Proft,which equals TR minus TC, increase at small output
levels, reaches a maximum and then decrease. The maximum
profit ($12) occurs when sells Qty 3 for $ 14 each. If he sells 2 Qty
for $ 16 each or 4 Qty for $ 12 each, his Economic Profit will be
only $ 8.

Economic Profit = $ 12

TC

T
C
O
S
T

50

TR

40

30
&
R
E
V
E
N
U
E

20

10

1 2
Quantity

,MC excess MR by $ 4, so profit decreases by that amount. When MR

exceeds MC, Profit
increase if output increase. When MC exceeds MR, profit increases if
output decrease.
When MC = MR, Profit maximized.
Maximum Price the Market will Bear : Monopoly doesnt set the price
at the maximum
possible price. The firm would be able to sell only one unit of output,
which in general is
less than profit maximizing quantity. Rather, a Monopoly produces the
Profit Maximizing
quantity and sells that quantity for the highest price it can get. Seller
produce 3 qty of
output, his Average total cost is $ 10 and her price is $ 14 (on D curve), so
her profit per
Qty is $4 ($14-$10).His Economic Profit is shown under the rectangle.
Seller decide his Qty
of goods where MC cuts MR, ATC falling & accordingly deciding the price
of Product to
to sell so can earn Economic Profit

20

ATC= TOTAL COST / QUANTITY

MC
AR = TOTAL REVENUE / QUANTITY

MC= Change in T.C. / Change in Qty.

MR=Change in T.R. / Change in Qty.
C
E
14
&
Economic
Profit $ 12
ATC
C
O 10

 Comparing Price and Output - Perfect Competition and

Monopoly

Perfect Competition: Equilibrium occurs where the Supply curve & Demand Curve
Intersect. Firm as take the price P2 & Maximizes its profit by producing the Output
where MC = Price.

Monopoly: If industry taken over by a single firm. Customer do not change, so the
Market Demand curve remain same as in Perfect Competition. The monopoly
maximizes profit by producing the quantity at which MR = MC.
Compares to a Perfectly competitive Industry, a Single price Monopoly Produces a
smaller output and charges a higher price.
P
MC
R
Single Price
I
Monopoly
C
E P1
&

Perfect Competition

C P2
O
S
T

MR

Example of Monopoly Indian Railways

Government Controlled Organization:
- Indian government's Ministry of Railways exercises control over operation
and functioning of Indian Railways.
Monopoly of countrys rail transport:
- Indian railways is clearly a monopoly as it in the only supplier of rail
transport services in India.
High Barriers to Entry:
- High infrastructure and capital costs of machinery and equipment,
locomotives, engines, coaches, tracks, production warehouses leading to high
barriers to entry.
Passenger Centric service:
- Indian Railways operates over 10000 trains with 16 million passengers
daily and around 6 billion passengers annually across India.
- Social benefit to passengers by providing cheapest mode of transport.
Second largest profitable public sector company :
- Lalu Prasad Yadav turned loss making organisation into a profit making
organisation.
- As of 2007, IR was the second most profitable company amongst the
public sector companies as of 2007 with profits of Rs. 20000 crores.

Example of Monopoly Indian Railways

Freight Services:
- Freight services accounts for more than 70% of revenues and majority
profits for Indian Railways.
- IR implemented ideas like revising freight rates, increasing capacity of
freight containers, decreasing loading/unloading time of freight containers,
etc.
Key strategies implemented to minimize costs:
Downsizing Reduce number of employees from 1.6 million to 1.4 million.
Product Innovation Low weight double stack container trains.
Increase in Line capacity.
Technological advancements - Computerization of systems, new signalling
systems, indigenisation of equipments and machinery etc.
Outsourcing - Besides catering and parcel service activity, the IR also
outsourced advertising activity which helped them reduce their cost to some
extent.

Example of Monopoly Indian Railways

Pricing Discrimination:
Block Pricing
- Prices for single ticket
- Prices for monthly pass
- Prices for quarterly pass
- Bulk Booking discount for seasonal trains during summer vacation, Diwali,
etc
Based on Consumers groups
- AC First class, AC Second class, AC Third class, Sleeper, Seating.
- Concession to Students, Discounts to senior citizens
Pricing based on Time
- Tatkal reservation
Why IR is not privatized?
- Government keeps passenger fares controlled.
- Private players might increase fares to generate profits.
Low Cost Airlines/Road transport:
- IR has been able to enjoy good profits until recently but launch of low cost
airlines / trucks has somewhat affected freight revenues.
- Constantly trying to innovate and come up with new strategies so as to
keep their profits growing.

Advantages and
Disadvantages
Advantages

No risk of over production

There is enough capital for research
Reduction in price of good
Efficiently use of resource
Control over entire market
Others are price takers
Only producer of a particular product or
service

Advantages and
Disadvantages

Disadvantages
Exploitation of consumers
Restriction of consumers choice
Absence of competition leads to inefficiency
Increase in price of product
Exploitation of labor

Thank You