Market Structure: Monopoly
Muhammad Shahadat Hossain Siddiquee, PhD
Professor of Economics
University of Dhaka
Email: [Link]@[Link]
Market structure
• Market structure: The particular environment of a firm, the
characteristics of which influence the firms pricing and
output decisions.
• Four major categories of market structure:
• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
Monopoly
Assumptions:
1. Only one seller
2. No close substitutes of the product
3. High barriers to entry
Barriers to entry
• Cost barriers: Cost setting up a firm to compete with
existing operator is too high. Example: Railway
• Legal barriers: One legal barrier is to obtain patent. A
patent prevents other firms to copying the design of a
new product or technology.
• The patent holder therefore can enjoy monopoly power
for specified years.
Barriers to entry
• Economies of scale: An established might have a low
average cost because it is grown. A new firm would
struggle to keep cost down to that level.
• Exclusive ownership of a necessary product: De beers
company of South Africa controls a large percentage of
diamond production.
Monopoly pricing and output decisions
and demand curve
• The monopolist has the ability to control to
some degree the price of the product.
• Monopolist can raise its price and still sell
its product.
• A monopolist is a price maker.
• The monopolist faces a downward sloping
demand curve.
Price and output for a profit-maximizing
monopolist
Quantity
To maximize profit , monopolist produces the quantity of
output at which MR=MC.
If MR>MC, monopolist gets more than the cost for each unit.
So it increases output as long as MR>MC.
IF MR<MC, monopolist gets less than the cost of that unit.
Monopolist will not produce that unit.
Therefore, monopolist produces where MR=MC.
Price and output for a profit-maximizing
monopolist
Price
After setting the quantity, monopolist charges the
highest price per unit at which the quantity of
output can be sold.
Therefore, the monopolist sets its price from the
demand curve.
Advantages of monopoly
Advantages of monopoly:
• More research and development: Monopolists often
earn higher profits and can invest in research and
development.
• Natural monopolies: Markets where it is more efficient if
just one firm supplies.
• Markets with very high fixed costs such as utilities and
rail travel are the markets where it is better for a single
firm to operate.
• A monopolist can compete more effectively in
international markets.
Disadvantages of monopoly
Disadvantages of monopoly
• Higher price: A disadvantage for customers.
• Inefficiency: Produces less than the efficient amount.
• Restricted choice: Consumers have less choice.
PRICE DISCRIMINATING MONOPOLIST
• A price discriminating monopolist is a single-seller
company that charges different prices for the same
product to different customers to maximize profits.
• This practice is possible because the monopolist
has market power and can prevent customers who
are charged lower prices from reselling the product
to those who are charged higher prices.
• They achieve this by segmenting the market and
leveraging their control over supply.