A monopoly is a market structure where a single seller dominates the market for a product or service.
Monopoly power exists when a firm can influence the market price.
Market Power
Market power is the ability of a firm to increase price by reducing output.
A monopolist can restrict output and charge a higher price to increase profit.
Compared with perfect competition:
where:
- = monopoly quantity
- = competitive quantity
- = monopoly price
- = competitive price
Types of Monopoly
Natural Monopoly
Occurs when very high infrastructure or start-up costs make it inefficient to have many competing firms.
Government Monopoly
A government agency is the sole provider of a particular good or service, sometimes protected by law.
Technological Monopoly
Occurs when a firm controls a technology, manufacturing method, or patent that gives it exclusive production rights.
Geographic Monopoly
Occurs when one firm is the only provider of a good or service in a particular isolated area.
Efficiency of Monopoly
A monopoly restricts output and charges a higher price.
This results in:
- Lower consumer surplus
- Higher producer surplus
- Deadweight loss
Perfect competition maximizes total surplus, while monopoly creates a deadweight loss.
Price Discrimination
Price discrimination is the practice of charging different prices to different buyers for the same or similar product, when the price differences are not based on cost differences.
Conditions for Price Discrimination
- Market power
- Separate groups of buyers
- Different elasticities of demand
- Resale is not possible
Price discrimination can increase the firm’s revenue and profit.
It can also increase total consumption and reduce deadweight loss.
Government Policy Toward Monopoly
Government may respond to monopoly through:
- Government ownership
- Competition policy
- Regulation
- Measures against price fixing and collusion
