# Monopoly

## Introduction

• A monopoly is a firm that is the sole seller of a product/service without close substitutes and
has the exclusive possession or control of the supply of or trade in a commodity or service.
• Basically, the firm has the market power and controls the market price of the product or service.
• Other firms cannot enter the market due to entry bariers.
• Here, a particular focus on monopoly in a perfect competition.

### Example of Natural Monopoly

Reasons of having natural monopoly are listed as below:
• High fixed or start-up costs of conducting a business in a specific industry.
• Only one firm can produce the needs of a particular market at lower cost than could several firms.
• Unique raw materials and/or technology needed to produce a particular commodity or service

## Demand Curves of Monopoly and Competition

• The demand curve for any firm/s product is horizontal at the market price.
The firm can increase Q without decreasing P, and hence MR = P for the competitive firm.
• In a monopoly where there is only one seller, and in case a larger Q is produced, then the firm needs to
reduce P to sell Q and subsequently MR ≠ P.

### Exercise

Exercise-1 on Monopoly's Revenue

Check your answers here: Solution-1 to the Exercise on Monopoly's Revenue

### MR Curves of Virgin Oil Star Firm

As per the example above, the MR curves are shown in the figure below.

So, whenever the production (Q) is increased the revenues also increase (output effect)
But if price decreases then revenues also decrease (price effect).
The figure shows that MR could even be negative if the price effect exceeds the output effect.

## Profit-Maximization

• As in the case of a competitive firm, a monopolist maximizes profit by producing the Q where MR = MC.
• Once the Q is found, it sets the highest price consumers are willing to pay for that Q.
• The P is identified from the D curve.
 The profit-maximizing Q is where MR = MC. Identify P from the demand curve at this Q.

The monopolist's profit is shown below as with a competitive firm: The monopolist's profit = (P − ATC) × Q

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Date of last modification: 2019