MONOPOLY

The word "monopoly" comes from the Greek words monospolein, which mean "alone to
sell". This single seller is called monopolist. The term is also sometimes used for a single
group of sellers that acts as a price setter, although often a group is called a cartel.
The monopoly is a market structure in which there is only one seller of a product, there are no
close substitutes for the commodity it produces and there are barriers to entry. In the words of
Salvatore, "Monopoly is the form of market organization in which there is a single firm
selling a commodity for which there are no close substitutes". We should also note that
monopoly does not imply that there is a single producer, because monopolists need not
produce their own product. There can be many producers that supply the product to the
monopolist. The essence of monopoly is that there is a single seller (or group of sellers) that
sets the price. The number of producers is not relevant. The monopolists are called price
setters because they select their own price and supply the entire quantity demanded. A
monopolist setting prices may set a single price for all customers or may practice price
discrimination, that is, set different prices for different customers. To have effective control
over the pricing of a product, the monopolized product should have no close substitutes,
otherwise, if the monopolist raises the product's price, consumers can switch to other
products. The pricing policies of a profitable monopolist may be constrained by the threat of
potential competition if market entry is at all possible. Thus, in order that such a monopoly
persists in an industry, there must be barriers to entry.
SOURCES OF MONOPOLY
Monopoly may arise from a number of sources and is of various types: First, grant of a patent
right to a firm by the government for a product or for a production process. Second,
ownership of strategic raw materials for an exclusive production process. Third, government
licensing or the imposition of foreign trade barriers to exclude foreign competitors. Fourth, a
natural monopoly enjoyed by a firm when it supplies the entire market at a lower unit cost
due to increasing economies of scale, just as in the supply of electricity, gas, etc. Fifth,
government may grant exclusive right to a private firm to operate under its regulation. Such
privately owned and government regulated monopolies are mostly in public utilities and are
called legal monopolies such as in transport, communications etc. Sixth, there may be
government owned and regulated monopolies such as postal services, water and sewer
systems of municipal corporations, etc. Seventh, the sole manufacturer of a product may
adopt a limit pricing policy in order to prevent the entry of new firms.
Characteristics of Monopolistic Markets
In a competitive market, numerous companies are present in the market and supply identical
products. Its demand curve is flat, whereas, in a monopolistic market, the demand curve is
downward sloping. Companies that are operating in a competitive market can sell any desired
quantity at the market price.

The following are the characteristics of a monopolistic market:

1. Single supplier
A monopolistic market is regulated by a single supplier. Hence, the market demand for a
product or service is the demand for the product or service provided by the firm.

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 2. Barriers to entry and exit
Government licenses, patents, and copyrights, resource ownership, decreasing total average
costs, and significant startup costs are some of the barriers to entry in a monopolistic market.

When one supplier controls the production and supply of a certain product or service, other
companies are unable to enter the monopolistic market. If the government believes that the
product or service provided by the monopoly is necessary for the welfare of the public, the
company may not be allowed to exit the market.

Generally, public utility companies – such as electricity companies and telephone companies
– may be prevented from exiting the respective market.

3. Profit maximizer
In a monopolistic market, the company maximizes profits. It can set prices higher than they
would’ve been in a competitive market and earn higher profits. Due to the absence of
competition, the prices set by the monopoly will be the market price.

4. Unique product
In a monopolistic market, the product or service provided by the company is unique. There
are no close substitutes available in the market.

5. Price discrimination
A company that is operating in a monopolistic market can change the price and quantity of
the product or service. Price discrimination occurs when the company sells the same product
to different buyers at different prices.

6. Downward Sloping Curve

The demand curve in a monopolistic market is downward sloping. It means that a company
may make more money by increasing sales, which can be accomplished by lowering the
product's price.
 
7. Stability of Product Elements 
The non-movable character of all parts of production is one of the key grounds for
monopolists' control over resources. No one can duplicate the production mix, therefore
eliminating any prospect of a monopolist being deposed.

Considering that the market is elastic, the company will sell a higher quantity of the product
if the price is low and will sell a lesser quantity if the price is high.

Price and Output Determination Under Monopoly

The demand curve for the company is identical to the demand curve for market services
under the monopoly. Market demand curves tend to slope downwards as monopolists
confront downward-sloping demand curves. To maximize profits, firms must operate at a
maximum output level at which margin revenue and marginal cost are equal. Price makers
are firms in monopoly, and setting market prices influence the production decisions of the
companies.
In a trust, the price and output determination under monopoly never surpasses marginal
revenue, as illustrated by a downward-sloping demand curve. The price here is the average
revenue since the downward slope of a demand curve’s requirements is that MR is lower than
AR. The following are the criteria helpful to calculate the price-output of monopoly:
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 Conditions for Price and Output Determination Under Monopoly and
Equilibrium
The following are the two conditions for price and output determination under monopoly and
achieve the equilibrium of a monopoly market which form the basis of price-output decision-
making:
1. MC=MR
2. The MC curve must cut the MR curve from below.

The above diagram illustrates how when you get to E. The MC curve cuts the MR curve.
That means the equilibrium price is OQ, and the equilibrium output equals OQ in E.

Super-Normal Profit
In the short-run, SAC and SMC are the marginal and short-run average revenue curves, while
AVC represents the mean variable cost curve for the company. For a variety of reasons, it is
the case the AVC curve is not available in figure 6.14. The price and output determination
under monopoly. The curve of demand D=AR whose marginal revenue curve can describe as
MR. At the point the point. The short-run equilibrium at which the SMC curve cuts into the
MR curve below. The Monopolist can sell OM output at the MP Price. This price is MP. is
higher than the cost of short-run MA. The Monopolist makes AP Profit per Unit of Output.
So total profits from monopolies include:

APXCA= The area CAPB.

Normal Profit 
When monopolists earn just average profits, it can be in their short-run equilibrium shown in
figure below. OM output determines by equalization between the SMC curve and MR curve

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at point E. Its sale is at the MP Price. At this point in production, the company’s owner makes
average profits as there is no loss as the SAC curve is tangent with the AR curve. The
Monopolist knows that any output beyond OM could result in losses as the SAC curve is
greater than the AR curve.

Price and Output Determination Under Monopoly During Long-Run

At that point in production, the marginal cost is more significant than the marginal revenue,
and the long-term equilibrium of the firm in the monopoly model is achievable. To determine
price and output determination under monopoly, you have to use it. Due to the inability of
new companies into markets, the income of the monopoly company is not as high in the long
term. Despite this the fact that there is no loss for the monopoly firm since, over time,
everything is reversible and is recoupable. Supposing that, in the end, the monopoly firm
can’t cover the variable cost, the firm should cease production and exit the market.

In the above diagram, M is the point at which the firm is at equilibrium when LMC for the
company merges with MR. OQ output generates the firm in the price of equilibrium OK that
is acceptable. The profit PR per unit reaches the production level, OQ, when the company’s
average revenue is more significant than its cost of production, and the shading area KLRP is
the same as the profit total.