NATURE AND CHARACTERISTIC OF

MONOPOLY

MONOPOLY

comes from the Greek word monos

means single and polein means to
sell.
A market structure in which only one
producer or seller exists for a product
that has no close substitutes.

DUOPOLY

A Market structure in which two firms

control the market.

CHARACTERISTICS OF MONOPOLY
1.Single seller:
The producer or seller of the
commodity is a single person, firm or an
individual and that firm has complete
control on the output of the commodity.
2.No Close Substitutes:
All the units of a commodity are
similar and there are no substitutes to
that commodity.

CHARACTERISTICS OF MONOPOLY
3.No Entry for New Firms:
Monopoly situation in a market can continue only
when other firms do not enter the industry. If new
firms enter the industry, there will not be complete
control of a firm on the supply. As such, whenever a
firm enters the industry, monopoly situation comes to
an end. There/art, monopoly industry is essentially
one-firm industry. This signifies that under monopoly
there is no difference between a firm and an industry.
4.Profit in the Long Run:
A monopolist can earn abnormal profit even in the
long run because he has no fear of a competitive
seller. In other words, if a monopolist gets abnormal
profits in the long run, he cannot be dislodged from
this position. However, this is not possible under
perfect competition. If abnormal profits are available
to a competitive firm, other firms will enter the

CHARACTERISTICS OF MONOPOLY
5.Losses in the Short Period:
Generally, a common man thinks that a
monopoly firm cannot incur loss because it can fix
any price it wants. However, this understanding is
not correct. A monopoly firm can sustain losses
equal to fixed cost in the short period. A
monopolist means that there is only a single
person or a firm to sell the commodity.
6.Nature of Demand Curve:
Under monopoly the demand for the commodity
of the firm is less than being perfectly elastic and,
therefore, it slopes downwards to the right. The
main reason of the demand curve sloping
downwards to the right is the complete control of

CHARACTERISTICS OF MONOPOLY
7.Price-discrimination:
From the point of view of profit a monopolist can change
different prices from different consumers of his commodity.
This policy is known as price discrimination. He adopts the
policy of price discrimination on various bases such as
charging different prices from different consumers or fixing
different prices at different places etc.
8.Firm is a Price-Maker:
A competitive firm is a price-taker whereas a monopoly
firm is a price-maker. This is because a competitive firm is
small compared to market and therefore, it does not have
market power. This is not true in the case of a monopoly
firm because it has market power. Hence, it is a price maker
9.Average and Marginal Revenue Curves:
Under monopoly, average revenue is greater than
marginal revenue. Under monopoly, if the firm wants to
increase the sale it can do so only when it reduces its price.
This means AR would decline when sale increases. In that

COMPETITION VS MONOPOLY:
Monopoly

Is the sole producer

Faces a downward sloping demand curve
Is a price maker
Reduces price to increase sales

Competition

Many producers
Faces a horizontal demand curve
Is a price taker
Sales cannot affect price

COMPETITION V. MONOPOLY

PROFIT MAXIMIZATION FOR A MONOPOLIST:

NATURAL MONOPOLY

A monopoly that exist because it is

produced by legitimate economic
conditions. Natural monopolies are
usually found in industries with high
fixed costs compared to variable cost.

PROFIT MAXIMIZATING NATURAL MONOPOLY

PRICE DISCRIMINATION

Charging different customers different

prices for the same good for the same
good for which there is no difference in
cost.

TYPES OF PRICE DISCRIMINATION

First-degree price discrimination

Second-degree price discrimination
Third-degree price discrimination

1ST. DEGREE PRICE DISCRIMINATION

For each consumer
price charged=price
willing to pay

Price

Monopolist
appropriates all
consumer surplus

P1
P2
P3
P4
.
.

PL

Demand

Quantity

fig

PROFIT-MAXIMISING OUTPUT UNDER

THIRD DEGREE PRICE DISCRIMINATION

MC
9

DY
DX

O 1000

MRY
O

MRX

(a) Market X

2000

(b) Market Y

MRT
O

3000

(c) Total
(markets X + Y)

(a)

$3.00

LRAC, MC $1.50
1.00

1.00
MR
0

(b)

Dollars per unit

Dollars
per unit

Price Discrimination with Two Groups of Consumers

400 Quantity per period

LRAC, MC
MR

500 Quantity per period

A monopolist facing two groups of consumers with different demand

elasticities may be able to practice price discrimination to increase profit
or reduce loss. With marginal cost the same in both markets, the firm
charges a higher price to the group in panel (a), which has a less elastic
demand than group in panel (b).