Economics Project

Market Monopoly

Name: Tanmay Mishra

Class: XI C
Roll No.: 1134 C
Academic Year: 2023-24
 Table of contents

i. Introduction …………………………………………….

ii. Characteristics of monopoly……………………..

iii. Reasons for existence of monopoly…………..

iv. Advantages of monopoly…………………………..

v. Disadvantages of monopoly………………………

vi. Types of monopoly……………………………………

vii. Case study…………………………………………………

viii. Conclusion…………………………………………………
 INTRODUCTION

Monopoly is derived from two Greek words: Monos

means single and "polus means a seller Monopoly is
a market situation where one producer controls
supply of a good or service and where the entry of
new producers is prevented or highly restricted. It is a
market structure characterised by a single seller,
selling a unique product (i.e, a good or service) in the
market. In a monopoly market, the seller faces no
competition as he is the sole seller of goods with no
close substitute.

Governmental policy with regard to monopolies (eg.

permitting, prohibiting or regulating them) can have
major effects not only on specific businesses and
industries but also on the economy and society as a
whole
 CHARACTERISTICS OF MONOPOLY

1. Single Seller: Under monopoly, there is a single seller

selling the product. As a result, the monopoly firm and
industry are one and the same thing and monopolist has
full control over the supply and price of the product.
However, there are large number of buyers of monopoly
product and no single buyer can influence the market
price.
2. No Close Substitutes: The product produced by a
monopolist has no close substitutes. So, the monopoly
firm has no fear of competition from new or existing
products. For instance, there is no close substitute of
electricity services provided by TPDDL in some parts of
Delhi. However, the product may have distant substitutes
like inverter and generator.

3. Restrictions on Entry and Exit: Monopoly situation in a

market can continue only when other firms do not enter
the industry. If new firms enter the industry, there will not
be complete control of a firm on the supply. As such,
whenever a firm enters the industry, monopoly situation
comes to an end. There exist strong barriers to entry of
new firms and exit of existing firms. As a result, a
monopoly firm can earn abnormal profits and losses in the
long run. These barriers may be due to legal restrictions
like licensing or patent rights or due to restrictions created
by firms in the form of cartel.

4. Price Discrimination: A monopolist may charge

different prices for his product from different sets of
consumers at the same time. It is known as Price
Discrimination. Price Discrimination refers to the practice
of charging different prices from different buyers at the
same time for the same product. It is of 3 types:

(a) Personal Price discrimination. In this, same product

is sold at different prices to different kinds of buyers.
For instance, Railway ticket is cheaper for senior
citizens as compared to young citizens

(b) Place Price discrimination: Under this, same product

is sold at different prices at different places. For
instance, electricity charges are lower for rural areas
as compared to urban areas.

(c) Use Price discrimination: In this type, same product

is sold at different prices on the basis of different
uses. For instance, electricity charges are lower for
residential use as compared to commercial use.

5. Price Maker: In case of monopoly, firm and industry are

one and the same thing. So, firm has complete control
over the industry output. As a result, monopolist is a
price-maker and fixes its own price. It can influence the
market price by changing the supply of the product

The Market Power of Monopolies

Monopolies can potentially earn high profits because they

have a power other industries do not have the ability to
determine the price at which they sell their product. In
other types of industries, firms find that competition often
takes over price setting and these firms have little choice
but to sell their product for a price that follows far below
what they would like to Monopoly sellers, however, have
no competition and, so, competition does not set the
price. The monopoly seller sets the price instead

Demand Curve under Monopoly

A monopoly firm is like an industry as the single seller

constitutes the entire market for the product, which has
no close substitutes. So, a monopolist has full freedom
and power to fix price for the product. However, demand
of the product is not in the control of monopoly firm. In
order to increase the output to be sold, monopolist will
have to reduce the price. Therefore, monopoly firm faces
a downward sloping demand curve
 REASONS FOR EXISTENCE OF MONOPOLY

A firm enjoys monopoly when it is the sole seller of its

product and the product has no close substitutes. The
fundamental cause of monopoly is the barrier to entry.
The various reasons for emergence of Monopoly are:

1. Patent Rights and Copyrights: Extending intellectual

property protection to a company in the form of patents
and copyrights is one way in which monopolies are
created. Certain big private companies are engaged in
research and development activities. At times, they come
up with new products or new technologies. As a reward
for their risk and investment in research, government
grants them patent right.
When a government does this, it is in fact giving a single
company an exclusive right to provide a particular
product/service to the market. Patents & copyrights work
in providing owners of intellectual property with the right
to act as an exclusive provider of a new product for a
specific length of time. This creates a temporary
monopoly in the market with regards to new products &
services.

2. Ownership of a Key Resource: When one company

exerts sole control over a resource that is necessary for
the production of a specific product, the market may
become a monopoly. For instance, suppose the only
medication deemed acceptable to treat a disease comes
from a particular ingredient (say, X) and knowledge of this
ingredient is owned by a single family owned company.
Now, such company can be said to have a monopoly over
ingredient X that is needed to cure the disease because it
is the only company that can produce a product deemed
acceptable.

3. Government Licensing or Franchise: In certain

instances, a monopoly may be explicitly created by the
government if it grants a single company, whether private
or government- owned, the right to conduct business in a
particular market. Licensing is used to ensure minimum
standards of competency. By not granting licenses to new
firms, government aims to assure that only one firm
operates in the market.

4. Cartel: Under cartel, some firms retain their individual

identities but coordinate their output and pricing policies
in order to act as a monopoly. The firms agree among
themselves to restrict their total output to the level that
maximizes their joint profits. The most famous example of
Cartel is 'Organisation of Petroleum Exporting Countries
(OPEC) formed in 1960, that led to virtual monopoly in the
world market for oil.

Cartel created by OPEC

 OPEC was created at the Baghdad Conference on

September 10-14, 1960, by five Founding Members
(Iran, Iraq, Kuwait, Saudi Arabia and Venezuela).

 OPEC was basically formed to coordinate and unify

petroleum policies among Member Countries, in order
to secure fair and stable prices for petroleum
producers.

 OPEC countries accounted for more than half of the

world's supply of crude oil and an even bigger
proportion of world oil exports. Although it was not a
 complete monopoly, still the cartel had substantial
market power.

 As a result of the output restrictions, the world price

of oil nearly quadrupled within a year, from about $3
to nearly $12 a barrel (oil prices are customarily stated
in US dollars).

OPEC's policy succeeded due to the following reasons:

1. The member countries provided a significant part of the

total world supply of oil;

2. Other producing countries could not quickly increase

their outputs in response to increase in price;

3. The demand for oil proved to be highly inelastic in the

short run.

Higher prices were maintained for the remainder of the

decade. As a result. OPEC countries suddenly found
themselves enjoying vast wealth.

ADVANTAGES OF MONOPOLY
Monopolies are generally considered to have
disadvantages. However, in certain circumstances
monopolies can have various advantages for consumers
and social welfare.

1. Economies of Scale: The first and foremost advantage

of monopoly is that since there is one single seller in the
market, it leads to economics of scale. It happens because
all supply is concentrated at one place and it leads to big
scale production. It results in lower cost per unit for the
seller and if the seller passes it to the consumer, than
consumer will also benefit from the lower price of product
being available for consumption.

2. No Unfair Promotional Tactics: As there is no

competition, sellers do not resort to unfair promotional
tactics like their product is better than others or claiming
incorrect features in their product or giving discounts after
increasing the price of product and so on.

3. Research and Development: Monopolies can make

supernormal profits. Seller can invest that amount in
research and development of product so that customers
can get better a quality product at reduced price leading
to enhanced consumer surplus and satisfaction. This is
important for industries like telecommunications, airplane
manufacturers and pharmaceuticals. Without monopoly
power that a patent gives, there may be less development
of medical drugs. Monopolies can also afford to invest in
latest technology and machinery in order to be efficient

4. Stability of Prices: In a monopoly market, the prices are

most of the times stable. This happens because there is
only one firm involved in the market that sets the prices.
In other types of market structures, prices are not stable
and tend to be elastic as a result of the competition that
exists. However, this isn't the case in a monopoly market
as there is little or no competition at all.

5. Source of Government Revenue: The government gets

revenue in the form of taxation from monopoly firms

DISADVANTAGES OF MONOPOLY

1. Higher Prices: The biggest disadvantage of monopoly is

that seller is the price maker which gives seller an undue
advantage of charging exorbitant or unfair price for the
product. It leads to exploitation of consumers as they have
no option but to buy it from seller as there is no
competitor of the seller in monopoly market.

2. Exploitation of Consumers: A monopoly market is best

known for consumers' exploitation There are indeed no
competing products and as a result the consumer gets a
raw deal in terms of quantity, quality and pricing. The firm
may find it easy to produce inferior or substandard goods
as they know that the items will be purchased as there are
no competing products for the already available market.

3. Price Discrimination: Monopoly firms are also

sometimes known for practicing price discrimination
where they charge different prices for the same product
from different consumers. It leads to dissatisfaction
among consumers as same product is priced differently for
different markets or consumers and hence there is no
transparency in case of monopoly.

4. Poor Level of Service: In the absence of any

competition, there is tendency of the seller to be
complacent, which in turn, leads to seller selling low
quality products and providing poor customer service.
Customer has no choice because there are no substitutes
due to lack of competition.

KINDS OR TYPES OF MONOPOLY

1. Perfect Monopoly: It is also termed as Absolute
Monopoly. In this case, there is only a single seller of
product having no close substitute, not even remote one.
There is absolutely zero level of competition. Such
monopoly is practically very rare.
2. Imperfect Monopoly: It is also termed as Relative
Monopoly or Limited Monopoly. It refers to a single seller
market having no close substitute. It means in this market,
a product may have a remote substitute. So, there is fear
of competition to some extent.

3.Private Monopoly: When production is owned,

controlled and managed by private body or private
organisation, it is called private monopoly. For example,
Tata, Reliance, Bajaj etc. Such type of monopoly is profit
oriented.

4. Public Monopoly: When production is owned,

controlled and managed by government, it is called public
monopoly. It is welfare and service oriented. So, it is also
called as "Welfare Monopoly. For example, Railways,
Defence, etc.

5. Simple Monopoly: It refers to a market structure in

which firm charges a uniform price or single price to all
the customers. It operates in a single market.

6. Discriminating Monopoly: It refers to a market

structure in which a monopoly firm charges different price
to different customers for the same product. It prevails in
more than one market.
7. Legal Monopoly: It refers to a market structure which
exists on account of trademarks, patents, copyrights,
statutory regulation of government, etc. Music industry is
an example of legal monopoly.

8. Natural Monopoly: It emerges as a result of natural

advantages like good location, abundant mineral
resources, etc. For example, Gulf countries are having
monopoly in crude oil exploration activities because of
plenty of natural oil resources.

9. Technological Monopoly: It emerges as a result of

economies of large scale production, use of capital goods,
new production methods, etc. For example, Engineering
Goods Industry, Automobile Industry, Software Industry,
etc.

10. Joint Monopoly: When a number of business firms

acquire monopoly position through amalgamation, cartels,
syndicates, etc., it becomes joint monopoly. For example,
pizza making firm and burger making firm are competitors
of each other in fast food industry. But when they
combine their business, that leads to reduction in
competition. So, they can enjoy monopoly power in
market.

CASE STUDY
AT&T and Microsoft

AT&T was a Government supported monopoly a public

utility that would have to be considered a coercive
monopoly. Like standard oil, the AT&T monopoly made the
industry more efficient and wasn't guilty of fixing prices,
but rather the potential to fix prices. The breakup of AT&T
by Reagan in the 1980s gave birth to the baby bells. Since
that time, many of the baby bells have begun to merge
and increase in size to provide better service to a wider
area.
Microsoft:
Microsoft, on the other hand, was never actually broken
up even though it lost its case. The case against it was
centered on whether Microsoft was essentially a non-
coercive monopoly. Microsoft has been challenged by
many companies, including Google over its Operating
System's continuing hostility to competitive software,
even now, the Microsoft Monopoly is looking chipped at
the edges as a rival operating system are gaining grounds.

CONCLUSION

Despite their reputation for evil, monopolies can actually

generate a net benefit for society under certain
circumstances. These are usually situations in which the
power and duration of the monopoly are carefully limited.
Natural monopolies can be particularly beneficial. This is
because of their ability to attain lower costs of production,
often far lower, than would be possible with competitive
firms producing the same product in the same region.
However, it is almost always necessary for such
monopolies to be regulated by a relatively uncorrupted
government in order for society to obtain the potential
benefits. This is because such monopolies by themselves,
as is the case with all monopolies, have little incentive to
charge prices close to cost and, rather, tend to charge
profit-maximizing prices and restrict output. Likewise,
there is often little incentive to pay much attention to
quality. It has long been recognised that government-
granted monopolies (Le, patents, copyrights. trademarks
and franchises) can benefit society as a whole by providing
financial incentives to inventors, artists, composers,
writers, entrepreneurs and others to innovate and
produce creative works. In addition to being for limited
periods of time, such monopolies are also generally
restricted in other ways, including that there are often
fairly good substitutes for their products

Submitted to: Mrs. Sangeeta shekhatkar