Monopoly Price And Output Decision Economics Essay
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Published: Mon, 5 Dec 2016
In a monopoly, there is only one firm, the sole producer of a good, which has no close substitutes, so the total market supply is identical with the single firm’s supply. In other words, a monopoly exists when there is only one firm in the industry. If a monopolist can raise its price and consumers have no alternative firm to turn to within the industry, they either pay a higher price or go without the good altogether. The monopoly firms is a price maker, it can choose what price to charge.
1.1 DEFINITION OF MONOPOLY
Monopoly is a market structure in which there is a single seller and large numbers of buyers and selling products that have no close substitution and have a high entry and exit barrier. Examples of products in monopoly market are electricity water, cable television, local telephone services and may more. If we want to subscribe home telephone services, the only place we can go to is Telekom Malaysia (TM Berhad). So, Telekom Malaysia is a monopoly. But if we want to use mobile telecommunication services, we have various options to choose from, then this industry is not a monopoly market.
There are some characteristics of monopoly market
One seller and large number of buyers: Monopoly exists when there is only one seller of a product. Monopoly firm is the only firm in the industry selling a product which has no close substitution.
No close substitution: Monopoly firm would sell a product which has no close substitute. It means consumers or buyers could not find any substitute for the product. For example, electricity supply from local public utility which has no close substitutes.
Restriction of entry of new firms: In a monopoly market, there are strict barriers to the entry of new firm. Barriers to entry are natural or legal restrictions that restrict the entry of new firms into the industry.
Advertising: Advertising in monopoly market depends on the products sold. If the products are luxury goods such as imported car, then the monopoly needs some advertisement to inform the consumers on the goods.
1.3 TYPES OF MONOPOLIES
As we had discussed earlier, one of the characteristic of a monopoly firm is the barrier to entry of new firms. This barrier to entry falls into two categories: natural monopoly and legal monopoly. Legal monopoly can be also referred to as government- created monopoly. In this section, we will discuss in details on the two types of monopolies.
Natural monopoly: Natural monopoly can arise due to economies of scale. Where larger the firm, lower would be the cost of production. For the example, a bigger plant in the generation of electricity can supply electric power with lower cost compared to a few firms.
Government- Created Monopolies: Government creates monopolies to prevent firms from entering into a market. This can be done through difficulty in obtaining licence to operate in the market or providing patent and copyrights to a monopoly firm. Given below are some of the legal barriers.
Government franchise: In many countries, government grants monopoly rights to private companies to operate public utilities such as railway services, water supply, electricity supply, postal services, cable TV services and others.
Government licences: Basically, a firm needs to obtain licences to operate any kind of business. Government licences control the entry of a firm into a market, which makes the earlier firm as a monopoly firm.
Patent: A patent is an exclusive right to the production of an innovative product. Patents are given to the firms or individuals for their discoveries and invention.
Copyrights: A copyrights is an exclusive right given to the author of a book, composer of a music or producers of a movie or artistic work. For example, the copyrights of this book belongs to Oxford- Fajar Sdn Bhd and no other publisher or individuals can copy this book or print this book without permission from the copyright owner, then Oxford- Fajar Sdn Bhd has right to sue the person.
Control over raw material: A monopoly status can also be maintained through control over the supply of raw material in which a firm can own a bigger portion of natural resources. A good example of this type of monopoly is the DeBeers, a company in South Africa which controls more than 80% of production of raw diamonds in the world.
1.4 MONOPOLY PRICE AND OUTPUT DECISION
As with firms in other market structures, a monopolist will maximize profit where MC=MR. In the short run, the monopolist may make sub-normal profit, normal profit or supernormal profits. However, in the long run, since there are barriers to entry of new firms, the supernormal profits that are made by the monopolist will not be chipped away. As for the monopolist who makes normal profits or abnormal profits in the short run, it will make supernormal profits in the long run.
1.5 PRICE DISCRIMINATION
Discrimination monopoly (price discrimination) is said to exist when a business is able to charge two or more different prices for the same product.
There are three varieties of price discrimination:
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Price discrimination in different markets “separated” by:
Perfect competition is a market in which there are many buyers and seller, the product are homogeneous, and sellers can easily enter and exit from the market. Monopoly is a market structure in which there is a single seller and large number of buyers and selling product that have no close substitution and have a high entry and exit barrier. Monopolistic competition is a market structure in which there are large numbers of small seller selling differentiated product and have easy entry into and exits from the market. Oligopoly is a few firms in the industry producing either identical or differentiated products.
Monopolist is a firm that is the only producer of a good that has no close substitutes. Monopolies raise price above the perfectly competitive price and restrict output. Market power is the ability of a firm to raise prices. To earn monopoly profits, a firm must have barriers to entry ( means of preventing other firms from entering the industry). A natural monopoly exists when economies of scale yield a large cost advantage to having all of an industry output by produced by a single firm. Demand curve for a monopolist is downward sloping.
If we compared with monopoly, monopolistic competition, oligopoly and perfect competition there are some different between a number of producers, type of product, power of firm over price, barriers to entry and non- price competition. The monopoly firm is a price makers, it can choose what price to charge and perfect competition the product are homogeneous. The monopolistic competition is selling differentiated products and oligopoly they producing either identical or differentiated products.
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