Monopoly Gail (Gas Authority of India), which has had a monopoly in the gas transmission sector, is set to see some tough competition in the coming days. The new competitors are Reliance and British Gas.

Example of Monopoly Railways in India are a public transport monopoly in transportation which does not really has any other private railway transport as competitors. But, when road transport and air transport is taken it has competition.

PURE MONOPOLY MAIN FEATURES: One and only one firm produces and sells a particular commodity or a service There are no rivals or direct competitors of the firm Indirect rivalry may exist No other seller can enter the market Monopolist is a price-maker

Monopoly In Monopoly, the firm and industry coincide – the single firm producing the product is itself both the firm and the industry.

Monopoly The monopolist is the supply-side of the market and has complete control over the amount offered for sale Monopolist controls price but must consider consumer demand Profits will be maximized at the level of output where marginal revenue equals marginal cost

Average and Marginal Revenue The monopolist’s average revenue, price received per unit sold, is the market demand curve Monopolist also needs to find marginal revenue, change in revenue resulting from a unit change in output

Total, Marginal, and Average Revenue Price (P)Quantity (Q) Total Revenue (R) Marginal Revenu e (MR) Average Revenue (AR)

Total, Marginal, and Average Revenue Revenue is zero when price is 6 Nothing is sold At lower prices, revenue increases as quantity sold increases When demand is downward sloping, the price (average revenue) is greater than marginal revenue For sales to increase, price must fall

Total, Marginal, and Average Revenue Since there is a single firm in the industry, the firm’s demand curve is identical with the industry’s demand curve. This curve has a downward slope implying that in order to sell more the firm would have to lower its price. MR curve is twice the slope of AR curve.

Average and Marginal Revenue Output per unit of output Average Revenue (Demand) Marginal Revenue

Monopoly Observations 1. To increase sales the price must fall 2. MR < P 3. Compared to perfect competition No change in price to change sales MR = P

Sources of Monopoly Power Why do some firms have considerable monopoly power, and others have little or none? Monopoly power is determined by ability to set price higher than marginal cost A firm’s monopoly power, therefore, is determined by the firm’s elasticity of demand

Monopoly Short-Run Equilibrium Q* = 500 P* = 11

Elasticity of Demand and Price Markup P* MR D Rs/Q Quantity MC Q* P*-MC The more elastic is demand, the less the markup. D MR Rs/Q Quantity MC Q* P* P*-MC

Sources of Monopoly Power The less elastic the demand curve, the more monopoly power a firm has The firm’s elasticity of demand is determined by: 1) Elasticity of market demand 2) Number of firms in market 3) The interaction among firms

Elasticity of Market Demand With one firm, their demand curve is market demand curve Degree of monopoly power is high as the demand curve is less elastic With more firms, individual demand may differ from market demand Demand for a firm’s product is more elastic when the number of firms are more as substitutes are available and the monopoly power is less

Number of Firms The monopoly power of a firm falls as the number of firms increases; all else equal More important are the number of firms with significant market share Market is highly concentrated if only a few firms account for most of the sales Firms would like to create barriers to entry to keep new firms out of market Patent, copyrights, licenses, economies of scale

Interaction Among Firms If firms are aggressive in gaining market share by, for example, undercutting the other firms, prices may reach close to competitive levels If firms collude (violation of antitrust rules), could generate substantial monopoly power Markets are dynamic and therefore, so is the concept of monopoly power

Monopoly Long-Run Equilibrium Q* = 700 P* = 9

DISCRIMINATING MONOPOLY (OR) PRICE DISCRIMINATION Price discrimination is said to exist when the same product is sold at different prices to different buyers. Conditions when price discrimination is possible: Difference in price elasticities Market segmentation Effective separation of sub-markets.

Difference in Price Elasticities Depending on the preference of buyers, their income, their location and the ease of availability of substitutes, the product has different elasticity with different customers.

Market segmentation It must be possible to divide the market into sub-markets with different price- elasticities of the customers. A different price can then be fixed for each market segment, e.g., doctors charging different fees from the rich and poor of the same locality.

Degrees of Price Discrimination First Degree Price Discrimination Second Degree Price Discrimination Third Degree Price Discrimination

First Degree Price Discrimination This is said to occur when the monopolist is able to sell each separate unit of the output at a different price at the same buyer. This is known as perfect price discrimination. In negotiating with each buyer the monopolist charges him the maximum price he is willing to pay under threat of denying the sale of any quantity to him. The buyer is offered a ‘take it or leave it’ choice.

Second Degree Price Discrimination In this, the goods are divided into different blocks of units and for each block a different price is charged. Example: quantity discounts.

Third Degree Price Discrimination This is based on location, types of uses of the product, time of the purchase, size of product, age of the customers.

MONOPSONY A resource market situation in which there is a single buyer for a particular resource is called a monopsony situation.