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Monopoly

Monopoly is the polar opposite of perfect competition. Economists define a monopolist as the supplier to a particular market. This should not be confused with the everyday use of term to describe a supplier with a relatively large share or market.

The monopoly model allows us to make predictions about the kind of behavior we would tend to find in markets where competition is severely restricted. Since the monopoly firm is the sole supplier, its supply is the market supply. The demand sloping implies that more can be sold at a lower price.

Important examples are the following:

(i) Government regulation, licenses and nationalization statutes (e.g., the monopoly right over certain letter deliveries held by national post offices).

(ii) Tariff and non-tariff barriers against imports.

(iii) Lower costs of production than competitors because of know-how (experience economies).

(iv) The need for high capital investment to match the size and costs of monopolist, the cost which cannot be recouped in the firm leaves the industry (so-called ‘sunk costs’).

(v) Higher prices, higher profits and lower outputs than under perfect competition: in a highly competitive market, price is set equal to marginal cost. The monopolist, however, prices above marginal cost leading to a higher price and a smaller output. This is illustrated in figure on the next page where, for simplicity, constant cost production is assumed (MC-AC).

(vi) A loss of consumer welfare: A consumer has no choice in the market-place the area the price he paid for the product).

(vii) Higher costs: Where costs are not constant as output changes (the usual case) the profit-maximising monopolist does not produce at technically optimum scale. The minimum point on the AC curve (say, point k in finger) involves an output which is different from that at which profits are maximized. Also, the lack of competition may lead to waste or x-inefficiency which means higher costs of production at all outputs. Monopolies tend to be sleepy giants.