THE MONOPOLY MARKET STRUCTER : AN ASSESMENT

3.1 Economics- I

Submitted By-

Ayush Gaur

SM0117012

Faculty in Charge

Ms. Dipakshi Das

Assistant Professor of Economics

NATIONAL LAW UNIVERSITY, ASSAM

GUWAHATI
 TABLE OF CONTENTS

1. Introduction

1.1. Research Problems

1.2. Literature Review

1.3. Scope and Objective

1.4. Research Methodology

2. Monopoly: Definition & Conditions

2.1 Sources and Causes of Monopoly

3. Monopoly’s market Power

3.1 Price Distribution and Exploitation of Consumer in Monopoly

4. Differences between Monopoly and Monopolistic market

5. Conclusion

Bibliography

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 CHAPTER – 1

INTRODUCTION

Monopoly as the abstract word’s meaning defines that powerful market in an economy
where there is just one seller of a particular good or substances and has the total control over the
price determination of that product and only happens when there is no actual substitute of that
product available. Substitute can be further divided into a ‘close substitute’. Even the definition
of the perfect competition is alike to this definition and both are abstract. Now, to start off with
the definition where this monopoly begins is the market so let’s start with defining market in
economic terms, A market is any place where the sellers of a particular good or service can meet
with the buyers of that goods and service where there is a potential for a transaction to take
place. The buyers must have something they can offer in exchange for there to be a potential
transaction. There are two main types of markets- markets for goods and services and markets
for the factors of production. Markets can be classified as perfectly competitive, imperfectly
competitive, monopolies, and so on, depending on their features. Now, the free market economy
A free-market economy is an economy in which the allocation for resources is determined only
by the supply and the demand for them. Put another way, the profit motive combined with
individuals' preferences combine to direct resources in a free-market economy. This stands in
contrast to most other economic systems where the government plays the role of central planner
to varying degrees and organizes the flow of resources to the production of various goods and
services. In most scenarios, capitalism can be thought of as a synonym for free-market economic
system. In practice, a pure free-market economy is mainly a theoretical concept as every country,
even capitalist ones, places some restrictions on the ownership and exchange of commodities.

And, lastly the market failure A situation, usually discussed in a model not in the real world, in
which the behaviour of optimizing agents in a market would not produce a Pareto optimal
allocation. Sources of market failures: Monopoly. Monopoly or oligopoly producers have
incentives to under produce and to price above marginal cost, which then gives consumers
incentives to buy less than the Pareto optimal allocation.

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1.1 Research Questions

 What is the meaning of monopoly and its effects on Indian economy?

 How monopoly markets affect the price rise and exploitation of the consumer?

 What is the difference between monopoly and monopolistic market?

1.2 Literature Review

 Natural Monopoly and Its Regulation By Richard A Posner, Cato Institute, 1999.
This books mainly talks about the topic that natural monopolies exist in those
markets in which demand can be satisfied at lowest cost by the output of only one rather
than several competing firms and further it also discuss under what conditions,
conventional wisdom suggests that government regulation must substitute for
competition to discipline the behavior of firms.

 Modern Monopoly: What It Takes To Dominate The 21st Centuary Economy By

Alex Moazed, Macmillan US.
Modern Monopolies is a quick and lively read that provided me great insight into
how the largest companies of today got started. With a mix of references to
transformational events in both private and public. This book gave great insights on how
the most successful companies today run and how and why it happened. it gives a fresh
new way of how the economy works in real life, rather than just graphs and hypotheses.

 An Introduction To Economics By J.P. Goel, Dr. H. Goswami, Tushar Publishing

House, 2010.
This textbook is carefully designed to provide the reader with a good
understanding of the fundamental concepts of economics. The writing is lucid and very

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 comprehensive. The text is well integrated to show the relationship among the basic
concepts and to offer a comprehensive overview of economics.

1.3 Scope and Objectives

The scope and objective of the research extends to the comprehensive understanding of
monopoly market structure its characteristics, traits, sources of monopoly power, the rice
discrimination and how it affect the existing market.

1.4 Research Methodology

In this project, the researcher has adopted Doctrinal research. Doctrinal research is essentially
a library-based study, which means that the materials needed by a researcher may be available
in libraries, archives, and other data-bases. Various types of books were used to get the
adequate data essential for this project. The researcher also used computer laboratory to get
important data related to this topic. The researcher also found several good websites which
were very useful to better understand this topic.

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 CHAPTER – 2
MONOPOLY: DEFINITIONS AND CONDITIONS

The first question that pops up in our mind is that what is the meaning of Monopoly? The
sole definition of monopoly is that when a product is being sold and produced by a single firm
which has no close substitutes. As stated in the abstract definition of what monopoly is. There
are three valid halves in the definition of monopoly. Firstly there must be a single producer of the
product. This single producer must be in the form of an individual owner or a single partnership
or a joint stock company. If there are many producers of a product in a perfect competition or
monopolistic competition will prevail depending upon whether the product made by that firm is
homogeneous or not or else is differentiated. On the other hand, when there are few production
line of sellers’ oligopoly is the type of market that exists. If then there is to be monopoly, there
must be one firm in the field. In the grammatical sense also the word monopoly says ‘mono’
meaning single and ‘poly’ means seller and thus combining the two the term states an only
producer1. But just to conclude saying that monopoly means a single producer is not enough. The
next essential for a firm to be called monopolist is when no close substitute of that product of
that particular firm is not available in the market. If other firms are producing close substitutes of
that product in question the result would be competition between the two. Just because of this
competition between the two there lies no monopoly2. Monopoly stresses on the presence of the
no competition in the market, taking a practical example of a firm making toothpaste say
‘Colgate’, the firm and the market cannot be called as monopoly as there are many other firms
making close substitutes of that product namely Forhans, Bianca etc. These various brands fight
in the market for occupying the largest market and therefore a single producer of these can’t be
called as monopoly3. Thus the privilege of being the single seller of the product does not by itself
make one a monopolist in the sense of possessing the market but in turn can be called as the king
of the market without a crown.

1
Adam Smith, The wealth of nations (2009)
2
Paul R. Krugman & Robin Wells, Microeconomics (2 ed. 2015).
3
Ibid.

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Now we can further define monopoly in terms of cross elasticity of demand also. Cross elasticity
of demand shows the degree of change in the demand for a good as a result of a change in the
price of another good. Therefore, if there is to be monopoly the cross elasticity of demand
between the product of the monopolist and the product of any other producer must be very small.
The fact that there is one firm under monopoly means that other firms for one reasons or another
are prohibited to enter monopolistic industries. In other words, strong barriers are applied to any
entry in the market having monopoly as it will make competition a basic enmity4. Thus this will
cut through the straight control or the sole ownership in the market. The barriers which hinder
the entrance of new firms should be of economical background or an industrial or institutional
and artificial in nature. In case of monopoly the barriers are strong and rigid that the barriers
don’t give entry to anyone but the firm which is in production process. So, for having a
monopoly there are three essentials that should be applied that are-

1. There is a single producer or seller of a product

2. There are no close substitutes for that product available in the market

3. And lastly, Strong barriers to the entry of new firms in the industry exists

2.1 Sources or causes of monopoly

There are major reasons or sources of monopoly. It is because these reasons that monopoly
enjoys and limits powers of other firms and enjoys autonomy in the market. These sources relate
to the factors which prevent the entry of firms in an industry. Thus, these factors serve as barriers
to the entry of new firms. Just stated above those strong barriers to the entry of new firms is an
essential condition for the existence of monopoly. Thus some major factors that serve as barriers
to the firms are stated below-

1. Patents or Copyright- First important source of the monopoly is that a firm may possess a
patent or a copyright which prevents others to produce others to produce the same product or use
a particular production process which is used by one single firm for the production of the

4
Michael Burgan and J. Pierpont Morgan, Industrialist and Financier. (2001)

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product 5 . Generally, when the firms introduce new products, they get patent rights from the
government so that they can go on with the production of the goods. These rights are provided
over a period of time and may collapse. For example, with the advent of the printing and
photocopy machine which was introduced in the industry only ‘Xerox’ had the monopoly in its
production. Therefore government granted Xerox with the patent right. Likewise when a new
innovation is produced by a company it gets its patent rights for the government so that it retains
monopoly power over its production line. Thus these patents and copyrights create strong
barriers for the new firms to induct into the market and thus hindering their incomings6.

2. Control over the essential raw material- Another source of monopoly is a control by a
particular firm over an essential raw material or input used in the production of a commodity. To
explain in further simpler words, it’s just that basic and essential material without which a firm
cannot produce and which is only available to that law firm and not available to the public at
large. For example diamonds were only accessed by one single company which the government
gave their right to which in turn produced various items, jewelries, etc.

3. Natural monopoly- Another important source of monopoly is significant economies of sale

over a wide range of initial output. When significant economies of scale are present, long run
average cost of production goes on falling over a wide range of output and reaches a minimum at
an output rate that is large enough for a single firm to meet the entire market demand at a price
that is profitable7. In such a situation if more than one firm operate to produce the product each
firm must keep producing the product at a higher than minimum level cost per unit. In such a
situation each firm is inclined to cut price to increase its output and reduce average cost of the
product. This leads to price warfare and one who survies in the economic warfare emerges as a
monopolistic.

5
Binger and Hoffman, Microeconomics with Calculus (2nd Ed. 1998)
6
ibid
7
Anthony I. Negbennebor, Microeconomics The Freedom to Choose, (2001).

8
4. Advertising and Brand Loyalties of the established firms- The next coordinal reason that
prevents the entry of the new firms in the industry is the strong loyalties to the brands of the
established firms and their heavy advertising is the strong loyalties to the brands of the
established firms and their heavy advertising campaigns to promote their brand. For example,
strong locality of the consumers for ‘Dunnon Milk’ makes it difficult for the potential
competitors to enter. Further, for a long time in the USA the firm producing Coca Cola was well
established firm to produce a famous cold drink and no one even took a chance in entering the
industry. Huge advertising campaigns and customer service programs are often undertaken to
enhance the market power of the producer and prevent the entry of the potential competitors.
Besides, if well established firms are expecting new potential competitors they cut prices of their
products so that the potential competitors find it unprofitable to enter the industry.

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 CHAPTER – 3

DEFINING MONOPOLY

As stated in the introduction a monopoly is a type of firm which is the only producer of a
single product which should not have any close substitutes and therefore is the only price
evaluators. Talking about the monopoly, an unregulated monopoly has the ability and the market
power and therefore can influence the prices as being the sole producer of the product. Some
major examples can be Microsoft and Indian railways or your local natural gas agency8. Some of
those individual restaurants and other products that can enjoy their very own brand loyalty in
otherwise competitive markets will chose the prices and the output same as the monopolist do.
There can be some reasons as to why a monopoly takes over the market economy, the prices and
the output produced. Some of which are :-

1. A Unique resource is owned by that firm, For example, Debeers and Diamonds

2. The firm is directly authorized by the government to produce that good, For example,
Patents are given over for the new upcoming of drugs, copyrights on software’s and
books and also on slot machine gambling. Similarly it can be indirectly related to
gambling as only legal betting houses are there in India but as the rules are overthrown by
the Indian government many other illegal betting houses are running on the go which in
turns relates to the opposition of monopoly in this sector. Some of the governmental
monopolies are the products of special interest and corruption while some enhance their
efficiency by encouraging new innovations.

3. A big factor is the cost of production, which makes one producer more efficient than
others of which he has incresing returns to sale. This is also termed as ‘natural monopoly’

Some examples related to the natural monopoly can be seen as American Electric Power
or a bridge across a river. Talking about the bridge there is some pre-determined cost for

8
Monopoly, Economic Times (October 24, 2018 4.00 PM)
https://economictimes.indiatimes.com/definition/monopoly

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 setting up that bridge and the building measures but the marginal cost of allowing one
more car is close to zero as a result Average cost falls as quantity of cars increases but on
the other hand once the bridge is built, the natural monopoly has nothing to fear about the
entrants which will come through the market. The next production of the bridge wills
actually double the average costs and as a result two producers therefore have split the
market. Therefore having one bridge is sufficient.

Profit Maximization for Monopoly

The main difference which lies between a perfectly competitive firm and a monopoly is that the
competitive firm has to face a flat demand curve because it can sell numerous amount of product
as per wish at the market price. In a market consisting of thousands of small firms which can
produce, one firm’s residual demand curve is although very flat even if the market’s demand
curve is not. On the other hand a monopolist must accept that to have a higher or a significantly
more output it has to lower the price of that particular product. As the relation between price and
demand lies that demand is directly proportional to the price of the product. Price increases the
demand decreases therefore a monopoly has to lower its price just to get higher amount of
profit9.
A profit maximization of monopoly chooses an output level where MR=MC
If the MR>MC, production of one more unit will add more revenues than the cost therefore the
profit increases.
If MR<MC, producing one less unit will save more costs than it will sacrifice in revenues so in
turn profits increases.
Given that the profit maximizing Q, the monopolist chooses the price market will pay, which is
the height of the demand curve per se. There are no supply curves for the monopoly. The supply
is related to quantity which cannot be separated from the demand’s side. At the monopoly price,
it will supply monopoly quantity. It would be unsure to ask whether how much it would supply
at the other prices. Next comes is the welfare cost of the monopoly. The question which arises
promptly is that is monopoly efficient? If in turn the profits of the monopoly are provided for the
worthy causes, will there be any problem in letting it choose the profit’s maximizing price? The

9
P. Samuelson & W. Nordhaus, Microeconomics, (17th ed. 2001).

11
efficient quantity that produces the largest total surplus which is directly related to the society at
large occurs where the MC curve intersects the demand curve. The transition where the MC
curve is below the demand curve, i.e. the demand curve is above the MC curve, willingness to
pay for one more unit exceeds the cost of providing one more unit, so it is efficient to keep
producing. When the demand curve is below the MC curve, the willingness to pay for one more
units is less than the cost of providing with one more units. So therefore it is very efficient for
that firm to keep producing with no losses. When the demand curve sticks below the MC curve,
willingness to pay for another additional unit is less than the cost for producing that one unit
therefore it would be efficient to reduce the production so that it does not go into negative
returns.

Monopoly in turn creates a deadweight loss just because of that fact that monopoly restricts the
supply of the goods as per the social efficient quantity required. Another way to look at this
inefficiency is that the monopoly always chooses a transit price which is above the marginal cost
of that product10. As having pros from the monopoly there are some downs for it too, there are
some of the lost gains from the trade which is the result of the buyers whose willingness to pay
the price is above the marginal cost. There are some lost gains from this type of trade, but which
is below the monopoly price.

3.1 Price Distribution and Exploitation of Consumer in Monopoly

The monopolist has control over pricing, demand, and supply decisions, thus, sets prices in a
way, so that maximum profit can be earned.

The monopolist often charges different prices from different consumers for the same product.
This practice of charging different prices for identical product is called price discrimination.

According to Robinson, “Price discrimination is charging different prices for the same product or
same price for the differentiated product.”

There are three types of price discrimination, which are shown in Figure-13:

10
ibid

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The different types of price discrimination (as shown in Figure-13) are explained as follows:

i. Personal:

Refers to price discrimination when different prices are charged from different individuals.
The different prices are charged according to the level of income of consumers as well as their
willingness to purchase a product. For example, a doctor charges different fees from poor and
rich patients.

ii. Geographical:

Refers to price discrimination when the monopolist charges different prices at different places
for the same product. This type of discrimination is also called dumping.

iii. On the basis of use:

Occurs when different prices are charged according to the use of a product. For instance, an
electricity supply board charges lower rates for domestic consumption of electricity and higher
rates for commercial consumption.

Necessary Conditions for Price Discrimination:

Price discrimination implies charging different prices for identical goods. It is possible under the
following conditions:

i. Existence of Monopoly:

Implies that a supplier can discriminate prices only when there is monopoly. The degree of
the price discrimination depends upon the degree of monopoly in the market.

ii. Separate Market:

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 Implies that there must be two or more markets that can be easily separated for
discriminating prices. The buyer of one market cannot move to another market and goods sold in
one market cannot be resold in another market.

iii. No Contact between Buyers:

Refers to one of the most important conditions for price discrimination. A supplier can
discriminate prices if there is no contact between buyers of different markets. If buyers in one
market come to know that prices charged in another market are lower, they will prefer to buy it
in other market and sell in own market. The monopolists should be able to separate markets and
avoid reselling in these markets.

iv. Different Elasticity of Demand:

Implies that the elasticity of demand in the markets should differ from each other. In
markets with high elasticity of demand, low price will be charged, whereas in markets with low
elasticity of demand, high prices will be charged. Price discrimination fails in case of markets
having same elasticity- of demand.

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 CHAPTER-4
DIFFERENCES BETWEEN MONOPOLY AND MONOPOLISTIC
COMPETETION

Definition of Monopolistic Competition

A market setting wherein scores of sellers sell a differentiated product is called
monopolistic competition. Products are differentiated, by their brand name, packaging, shape,
size, design, trademark, etc. Although the product sold by different firms in the industry remain
close substitutes for the rivals, as the products are not identical but similar. Monopolistic
competition is prevalent in the manufacturing industry, such as tea, shoes, refrigerators,
toothpaste, TV sets, etc. The salient features of monopolistic competition are given below: A
large number of sellers. Differentiated products yet close substitutes. Free entry into and exit
from the industry. Perfect factor mobility, Full knowledge of market conditions.

Under this setting, the consumers buy more when the prices of the product are lower than at
higher prices. By equating marginal revenue with marginal cost, the firm’s profit can be
maximised, which can be seen in the given below diagram: monopolistic competition. As you

15
can see in the diagram, the point at which MR (Marginal Revenue) and MC (Marginal Cost)
meet, is the price level, where P1 is the price and Q1 is the output to be produced. 11

Key Differences between Monopoly and Monopolistic Competition

The following points are noteworthy so far as the difference between monopoly and
monopolistic competition is concerned:
A market structure where a single seller produces/sells the product to a large number of buyers is
called a monopoly. A competitive market setting wherein many sellers offer differentiated
products to a large number of buyers, is called monopolistic competition12.
There is a single sellers/producers in a monopoly market whereas there can be two to ten or more
players in the monopolistic competition.
In a monopoly market structure, a single product is offered by the seller and there is extreme
product differentiation. On the contrary, in a monopolistic competition, as the products offered
by different sellers are close substitutes, and so, there is slight product differentiation.
In a monopoly market, the degree of control over price is considerable but regulated. As against
this, in a monopolistic competition, there is some control over price.
No competition exists in a monopoly market while stiff competition due to non-price
competition exists between firms the monopolistically competitive market.
As there are no close substitutes of the product, demand for the product is elastic. As opposed to
monopolistic competition, as the products offered by the different sellers are not identical but
similar, hence its demand is highly elastic.
Under monopoly, there are high entry and exit barriers, due to the economic, legal and
institutional causes. On the other hand, in monopolistic competition, there is an unrestricted entry
into and exit from the industry.

11
Smriti Chand, The Major Similarities and Dissimilarities between Monopoly and Monopolistic Competition
(October 26, 2018 5.00 PM)
http://www.yourarticlelibrary.com/economics/the-major-similarities-and-dissimilarities-between-monopoly-and-
monopolistic-competition/28895/
12
Goel J.P., Dr. Goswami H.,An Introduction To Economics (2010).

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As a single firm regulates the whole market, there is no difference between firm and industry in
the monopoly. So, it is a single-firm industry. Unlike, monopolistic competition, the difference
between firm and industry exists, i.e. a firm is a single entity, and a group of firms is called
industry13.

13
ibid

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 CHAPTER – 5
CONCLUSION

1. Economic Point of View:

From the economic side, it might be argued that selling expenses increase the velocity of
circulation of money and so increase employment. Here, it has been pointed out that there are
cheaper and more dignified ways of increasing employment and this argument breaks down
completely in a time of full employment, and still more in a time of inflation.

2. Sociological Point of View:

On the sociological side, it might be argued that advertising has itself an entertainment and
cultural value, and that it promotes mass communication in the form of cheaper magazines,
newspapers, radio and television. Prof. Boulding has doubted upon the significance of this value
also. Thus, he said, “I am happy to leave this argument to the sociologists.”

3. On the Basis of Monotony:

Much controversy and honest doubt surrounded these issues. Some economists think that the
wastes due to monopolistic competition are, in-fact, small. Others argue that product
differentiation satisfies consumer’s desires for variety and breadth of choice if pure competition
prevails everywhere, homogeneity of products would mean lower costs. If the whole population
were put into uniform clothes and made to live in uniform barracks, vast quantities of resources
would be released, but what for. Thus monopolistic type of market is more compatible for the
consumers as they are free to choose and not imposed upon them.

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 BIBLIOGRAPHY

BOOKS

 Posner A Richard, Natural Monopoly And Its Regulation, Cato Institute, 1999.
 Moazed Alex, Modern Monopoly: What It Takes to Dominate The 21st Centaury Economy
Macmillan US.
 Goel J.P., Dr. Goswami H.,An Introduction To Economics, Tushar Publishing House, 2010.

INTERNET SOURCES

 https://economictimes.indiatimes.com/definition/monopoly
 https://www.bloomberg.com/opinion/articles/2016-04-07/monopolies-are-no-fun-and-games-for-
the-u-s-economy
 http://keydifferences.com/difference-between-monopoly-and-monopolistic-competition.html.
 http://www.yourarticlelibrary.com/economics/the-major-similarities-and-dissimilarities-between-
monopoly-and-monopolistic-competition/28895/.

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