THE MONOPOLY MARKET STRUCTER : AN

ASSESMENT

Submitted by

Pranjal Darekar

( SF01106031)

Faculty in Charge
Mr. Nayan Jyoti Pathak

Assistant Professor of Economics

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY, ASSAM

GUWAHATI

DATE: NOVEMBER 7, 2017

1
 TABLE OF CONTENTS

1. Introduction……………………………………………………………….3
1.1. Research Problems…………………………………………….4
1.2. Literature Review……………………………………………...4
1.3. Scope and Objective…………………………………………...5
1.4. Research Methodology………….……………………………..5

2. Monopoly: Definition & Conditions…………………………………….6

2.1 Sources And Causes Of Monopoly………………………………….8

3. Monopoly’s market Power……………………………………………..11

3.1 Price Distribution And Exploitation Of Consumer In Monopoly.13

4. Differences between Monopoly and Monopolistic market…………...16

Conclusion……………………………………………………………….19

Bibliography…………………………………………………………….21

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 CHAPTER - 1

INTRODUCTION

Monopoly as the abstract word’s meaning defines that powerfull market in an

economy where there is just one seller of a particular good or substances and has
the total control over the price determination of that product and only happens when
there is no actual substitute of that product available. Substitute can be further
divided into a ‘close substitute’. Even the defination of the perfect compitition is
alike to this defination and both are abstract.Now, to startoff with the defination
where this monopoly begins is the market so lets start with defining market in
economic terms, A market is any place where the sellers of a particular good or
service can meet with the buyers of that goods and service where there is a
potential for a transaction to take place. The buyers must have something they can
offer in exchange for there to be a potential transaction. There are two main types of
markets- markets for goods and services and markets for the factors of production.
Markets can be classified as perfectly competitive, imperfectly competitive,
monopolies, and so on, depending on their features. Now, the free market economy
A free-market economy is an economy in which the allocation for resources is
determined only by the supply and the demand for them. Put another way, the profit
motive combined with individuals' preferences combine to direct resources in a free-
market economy. This stands in contrast to most other economic systems where the
government plays the role of central planner to varying degrees and organizes the
flow of resources to the production of various goods and services. In most scenarios,
capitalism can be thought of as a synonym for free-market economic system. In
practice, a pure free-market economy is mainly a theoretical concept as every country,
even capitalist ones, places some restrictions on the ownership and exchange of
commodities.

And, lastly the market failure A situation, usually discussed in a model not in the
real world, in which the behavior of optimizing agents in a market would not produce
a Pareto optimal allocation. Sources of market failures: Monopoly. Monopoly or
oligopoly producers have incentives to under produce and to price above marginal
cost, which then gives consumers incentives to buy less than the Pareto optimal
allocation.

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1.1 Research Problems
1. What is the meaning of monopoly and its effects on Indian economy?
2. How a monopoly market affect the price rise and exploitation of the
consumer?
3. What is the difference between monopoly and monopolistic market?

1.2 Literature Review

 Natural Monopoly And Its Regulation By Richard A Posner,

Cato Institute, 1999.
This books mainly talks about the topic that natural monopolies
exist in those markets in which demand can be satisfied at lowest
cost by the output of only one rather than several competing firms
and further it also discuss under what conditions, conventional
wisdom suggests that government regulation must substitute for
competition to discipline the behaviour of firms.

 Modern Monopoly: What It Takes To Dominate The 21 st

Centuary Economy By Alex Moazed, Macmillan US
Modern Monopolies is a quick and lively read that provided me
great insight into how the largest companies of today got started.
With a mix of references to transformational events in both private
and public. This book gave great insights on how the most
successful companies today run and how and why it happened. it
gives a fresh new way of how the economy works in real life,
rather than just graphs and hypotheses.

 An Introduction To Economics By J.P. Goel, Dr. H. Goswami,

Tushar Publishing House, 2010.

This textbook is carefully designed to provide the reader with a

good understanding of the fundamental concepts of economics.
The writing is lucid and very comprehensive. The text is well
integrated to show the relationship among the basic concepts and to
offer a comprehensive overview of economics.

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1.3 Scope and Objective
The scope and objective of the research extends to the comprehensive
understanding of monopoly market structure its characteristics, traits,
sources of monopoly power, the rice discrimination and how it affect the
existing market.

1.4 Research Methodology

1. Approach to research

In this project, the researcher has adopted Doctrinal type of research.

Doctrinal research is essentially a library-based study, which means that
the materials needed by a researcher may be available in libraries, archives
and other data-bases. This research is totally based on online resources.
Various types of articles were used to get the adequate data essential for
this project. Help from various websites were also taken.

2. Sources of data collection

Data has been collected from secondary sources like articles, web sources
etc. No primary sources like survey data or field data were collected by the
researchers.

3. System of Citation and Footnoting:

The researchers have followed the Oxford System of citation and footing
throughout the project to maintain the uniformity.

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 CHAPTER-2

MONOPOLY: DEFINITION & CONDITIONS

The first question that pops up in our mind is that what is the meaning of Monopoly?
The sole defination of monopoly is that when a product is being sold and produced
by a single firm which has no close substitues. As stated in the abstract defination
of what monopoly is. There are three valid halfs in the defination of monopoly. Firstly
there must be a single producer of the product. This single producer must be in
the form of an individual owner or a single partnership or a joint stock company.
If there are many producers of a product in a perfect competetion or monopolistic
competeion will prevail dependind upon whether the product made by that firm is
homogeneous or not or else is diffrentiated. On the other hand, when there are few
production line of sellers oligopoly is the type of market that exists. If then there is to
be monopoly, there must be one firm in the field. In the grammatical sense also the
word monopoly says ‘mono’ meaning single and ‘poly’ means seller and thus
combinig the two the term states an only producer 1. But just to conclude saying that
monopoly means a single producer is not enough. The next essential for a firm to be
called monopolist is when no close substitute of that product of that particular firm is
not availale in the market. If other firms are producing close substitutes of that
product in question the result would be competetion between the two. Just
because of this competetion between the two there lies no monopoly 2. Monopoly
stresses on the presense of the no competetion in the market, taking a practical
example of a firm making toothpaste say ‘colgate’, the firm and the market can not be
called as monopoly as there are many other firms making close substitues of that
product namely Forhans,Bianca etc. These various brands fight in the market for
occupying the larget market and therefore a single producer of these can’t be called as
monopoly3. Thus the priviledge of being the single seller of the product does not by
itself make one a monopolist in the sense of possesing the market but in turn can be
called as the king of the market without a crown.

1
 Smith, Adam (1776), Wealth of Nations, Penn State Electronic Classics edition.
2
Krugman, Paul; Wells, Robin (2009). Microeconomics (2nd ed.). Worth.
3
Ibid.

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Now we can further define monopoly in terms of cross elasticity of demand also.
Cross elasticity of demand shows the degree of change in the deamnd for a good as a
result of a change in the price of another good. Therefore, if there is to be monopoly
the cross elasticity of demand between the product of the monopolist and the product
of any other producer must be very small. The fact that there is one firm under
monopoly means that other firms for one reasons or another are prohibited to enter
monopolistic industries. In other words, strong barries are applied to any entry in the
market havimg monopoly as it will make competetion a basic emnity 4. Thus this will
cut through the straight control or the sole ownership in the market. The barriers
which hinder the entrnce of new firms should be of economical backgroud or an
industrial or institutional and artificial in nature. In case of monopoly the barriers are
strong and rigid that the barriers don’t give entry to anyone but the firm which is in
production process. So, for having a monopoly there are three essentials that should
be applied that are-

1. There is a single producer or seller of a product

2. There are no close subtitues for that product available in the market

3. And lastly, Strong barries to the entry of new firms in the industry exists

2.1 Sources or causes of monopoly

There are major reasons or sources of monopoly. It is because these reasons

that monopoly enjoys and limits powers of other firms and enjoys an
autonomy in the market. These sources relate to the factors which prevent the
entry of firms in an industry. Thus, these factors serve as barriers to the entry
of new firms. Just stated above that strong barries to the entry of new firms is
an essential condition for the existance of monopoly. Thus some major factors
that serve as a barriers to the firms are stated below-

1.Patents or Copyright- First important source of the monopoly is that a firm

may posses a patent or a copyright which prevents others to produce others
to produce the same product or use a particular production process which is

4
 Michael Burgan (2007). J. Pierpont Morgan: Industrialist and Financier. 

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 used by one sigle firm for the production of the product5. Generally, when the
firms introduce new products, they get patent rights from the government
so that they can go on with the production of the goods. These rights are
provided over a period of time and may collapse. For example, with the advent
of the printing and photocopy machine which was introduced in the industry
only ‘Xerox’ had the monopoly in it’s production. Therefore government
granted xerox with the patent right. Likewise when a new innovation is
produced by a company it gets it’s patent rights for the grovernment so that it
retains monopoly power over it’s production line. Thus these patents and
copyrights create a strong barriers for the new firms to induct into the market
and thus hindering their incomings6.

2.Control over the essential raw material- Another source of monopoly is a

control by a particular firm over an essential raw material or input used
in the production of a commodity. To explain in further simpler words, it’s
just that basic and essential material without which a firm can not
produce and which is only available to that law firm and not available to the
public at large. For example diamonds were only acessed by one single
company which the government gave their right to which in turn produced
various items, jwelleries etc.

3.Natural monopoly- Another important source of monopoly is significant

economies of sale over a wide range of initial output. When significant
economies of scale are present, long run average cost of production goes on
falling over a wide range of output and reaches a minimum at an output rate
that is large enough for a single firm to meet the entire market demand at a
price that is profitable 7. In such a situtaion if more than one firm operate to
produce the product each firm must keep producing the product at a higher
than minimum level cost per unit. In such a situation each firm is inclied to cut
price to increase its output and redeuse average cost of the product.This leads
to price warfare and one who survies in the economic warfare emerges as a

5
Binger and Hoffman (1998).
6
IBID.
7
Anthony, Negbennebor, , Microeconomics, The Freedom to Choose. CAT Publishing, 2001.

8
 monopolist.

4. Advertising and Brand Loyalities of the established firms- The next cordinal
reason that prevents the entry of the new firms in the industry is the strong loyalities
to the brands of the established firms and their heavy advertising is the strong
loyalities to the brands of the established firms and their heavy advertising campaigns
to promote their brand. For example, strong loyality of the consumers for ‘Dunnon
Milk’ makes it difficult for the potential competitors to enter. Further, foa a long time
in the USA the firm producing Coca Cola was well established firm to produce a
famous cold drink and no one even took a chance in entering the industry. Huge
advertising campaigns and customer service programs are often undertaken to
enhance the market power of the producer and prevent the entry of the potential
competitors. Besides, if wellestablished firms are expecting new potential comprtitors
they cut prices of their products so that the potential cpmepertitors find it unprofitable
to enter thr industry.

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 CHAPTER-3

DEFINING MONOPOLY

As stated in the introduction a monopoly is a type of firm which is the only producer
of a single product which should not have any close substitutes and therefore is the
only price evaluators. Talking about the monopoly, an unregulated monopoly has the
ability and the market power and therefore can influence the prices as being the sole
producer of the product. Some major exaples can be Microsoft and Indian railways
or your local natural gas agency8. Some of those individual restaurants and other
products that can enjoy their very own brand loyalty in otherwise copetetive markets
will chose the prices and the output same as the monopolits do. There can be some
reasons as to why a monopoly takes over the market economy, the prices and the
output produced. Some of which are

1. A Unique resorce is owned by that firm, For example, Debeers and

Diamonds

2. The firm is directly authorised by the government to produce that good, For
example, Patents are given over for the new upcoming of drugs, copyrights on
softwares and books and also proposition 3 on slot machine gambling.
Similarily it can be indirectly related to gambling as only legal betting houses
are there in India but as the rules are overthrown by the Indian government
many other illegal betting houses are running on the go which in turns relates
to the opposition of monopoly in this sector. Some of the governmental
monopolies are the products of special interest and corruption while some
enhance there efficiency by encouraging new innovations.
8
Monopoly - Featured Articles From Economic Times.

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 3. A big factor is the cost of production, which makes one producer more
efficient than others of which he has incresing returns to sale. This is also
termed as ‘natural monopoly’

Some examples related to the natural monopoly can be seen as American

Electric Power or a bridge across a river. Talking about the bridge there is
some pre-determined cost for setting up that bridge and the building measures
but the marginal cost of allowing one more car is close to zero as a result
Average cost falls as quantity of cars increases but on the other hand once the
bridge is built, the natural monopoly has nothing to fear about the entrants
which will come through the market. The next production of the bridge will
actually double the average costs and as a result two producers therefore have
split the market. Therefore having one bridge is sufficient.

Profit Maximization For A Monopoly

The main diffence which lies between a perfectly competetive firm and a
monopoly is that the competetive firm has to face a flat demand curve
because it can sell numerous amount of product as per wish at the market
price. In a market consisting of thousands of small firms which can produce,
one firm’s residual demand curve is although very flat even if the market’s
demand curve is not. On the other hand a monopolist must accept that to have
a higher or a significantly more output it has to lower the price of that
particular product. As the relation between price and demand lies that demand
is direclty proportional to the price of the product. Price increses the demand
decreases therefore a monopoly has to lower it’s price just to get higher
amount of profit9.

A profit maximization of monopoly chooses an output level where MR=MC

If the MR>MC, prodution of one more unit will add more revenues than the
cost therefore the profit increases.

9
P. Samuelson & W. Nordhaus, Microeconomics, 17th ed. McGraw-Hill 2001.

11
 If MR<MC, producing one less unit will save more costs than it will sacrifice
in revenues so in turn profits increases.

Given that the profit maximizing Q, the monopolist chooses the price market
will pay, which is the hieght of the demand curve per se. There are no supply
curves for the monopoly The supply is related to quatity which can not be
seperated from the demand’s side. At the monopoly price, it will supply
monopoly quantity. It would be unsure to ask whether how much it would
supply at the other prices. Next comes is the welfare cost of the monopoly.The
question which arises promptly is that is monopoly efficient? If in turn the
profits of the monopoly are provided for the worthy causes, will there be any
problem in letting it choose the profit’s maximizing price? The efficient
quantity that produces the largest total surplus which is directly related to the
society at large occors where the MC curve intersects the demand curve. The
transition where the MC curve is below the deman curve, i.e the demand curve
is above the MC curve, willingness to pay for one more unit exceeds the cost
of providing one more unit, so it is efficient to keep producing. When the
demand curve is below the MC curve, the willingness to pay for one more unit
is less than the cost of providing with one more unit. So therefore it is very
efficient for that firm to keep producing with no losses. When the demand
curve sticks below the MC curve, willingnesss to pay for another additional
unit is less than the cost for producing that one unit therefore It would be
efficient to reduce the production so that it does not go into negative returns.

Monopoly in turn creates a deadweight loss just because of that fact that monopoly
restricts the supply of the goods as per the social efficient quantity required. Another
way to look at this inefficiency is that the monopoly always chooses a transit price
which is above the marginal cost of that product10. As having pros from the monopoly
there are some downs for it too, there are some of the lost gains from the trade which
is the result of the buyers whose willingness to pay the price is above the marginal
cost. There are some lost gains from this type of trade, but which is below the
monopoly price.

3.1 Price Distribution and Exploitation of Consumer in Monopoly

10
Supra.

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The monopolist has control over pricing, demand, and supply decisions, thus, sets
prices in a way, so that maximum profit can be earned.

The monopolist often charges different prices from different consumers for the
same product. This practice of charging different prices for identical product is
called price discrimination.

According to Robinson, “Price discrimination is charging different prices for the same
product or same price for the differentiated product.”

There are three types of price discrimination, which are shown in Figure-13:

The different types of price discrimination (as shown in Figure-13) are explained as
follows:

i. Personal:

Refers to price discrimination when different prices are charged from

different individuals. The different prices are charged according to the level
of income of consumers as well as their willingness to purchase a product. For
example, a doctor charges different fees from poor and rich patients.

ii. Geographical:

Refers to price discrimination when the monopolist charges different

prices at different places for the same product. This type of discrimination
is also called dumping.

iii. On the basis of use:

Occurs when different prices are charged according to the use of a

product. For instance, an electricity supply board charges lower rates for

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 domestic consumption of electricity and higher rates for commercial
consumption.

Necessary Conditions for Price Discrimination:

Price discrimination implies charging different prices for identical goods.

It is possible under the following conditions:

i. Existence of Monopoly:

Implies that a supplier can discriminate prices only when there is monopoly.
The degree of the price discrimination depends upon the degree of monopoly
in the market.

ii. Separate Market:

Implies that there must be two or more markets that can be easily separated for
discriminating prices. The buyer of one market cannot move to another market
and goods sold in one market cannot be resold in another market.

iii. No Contact between Buyers:

Refers to one of the most important conditions for price discrimination. A

supplier can discriminate prices if there is no contact between buyers of
different markets. If buyers in one market come to know that prices charged in
another market are lower, they will prefer to buy it in other market and sell in
own market. The monopolists should be able to separate markets and
avoid reselling in these markets.

iv. Different Elasticity of Demand:

Implies that the elasticity of demand in the markets should differ from each
other. In markets with high elasticity of demand, low price will be charged,
whereas in markets with low elasticity of demand, high prices will be charged.
Price discrimination fails in case of markets having same elasticity- of
demand.

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 CHAPTER-4

DIFFERENCES BETWEEN MONOPOLY AND MONOPOLISTIC

COMPETETION

Definition of Monopolistic Competition

A market setting wherein scores of sellers sell a differentiated product is called

monopolistic competition. Products are differentiated, by their brand name,
packaging, shape, size, design, trademark, etc. Although the product sold by
different firms in the industry remain close substitutes for the rivals, as the
products are not identical but similar. Monopolistic competition is prevalent in
the manufacturing industry, such as tea, shoes, refrigerators, toothpaste, TV
sets, etc. The salient features of monopolistic competition are given below: A
large number of sellers. Differentiated products, yet close substitutes. Free
entry into and exit from the industry. Perfect factor mobility, Full knowledge
of market conditions.

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 Under this setting, the consumers buy more when the prices of the product are
lower than at higher prices. By equating marginal revenue with marginal cost,
the firm’s profit can be maximised, which can be seen in the given below
diagram: monopolistic competition. As you can see in the diagram, the point at
which MR (Marginal Revenue) and MC (Marginal Cost) meet, is the price
level, where P1 is the price and Q1 is the output to be produced.

Key Differences Between Monopoly and Monopolistic Competition

The following points are noteworthy so far as the difference between

monopoly and monopolistic competition is concerned:

A market structure where a single seller produces/sells the product to a large

number of buyers is called a monopoly. A competitive market setting wherein
many sellers offer differentiated products to a large number of buyers, is
called monopolistic competition11.

11
Goel J.P., Dr. Goswami H.,An Introduction To Economics, Tushar Publishing House, 2010.

16
 There is a single sellers/producers in a monopoly market whereas there can be
two to ten or more players in the monopolistic competition.

In a monopoly market structure, a single product is offered by the seller and

there is extreme product differentiation. On the contrary, in a monopolistic
competition, as the product offered by different sellers are close substitutes,
and so, there is slight product differentiation.

In a monopoly market, the degree of control over price is considerable but

regulated. As against this, in a monopolistic competition, there is some control
over price.

No competition exist in a monopoly market while stiff competition due to non-

price competition exists between firms the monopolistically competitive
market.

As there are no close substitutes of the product, demand for the product is
elastic. As opposed to monopolistic competition, as the products offered by
the different sellers are not identical but similar, hence its demand is highly
elastic.

Under monopoly, there are high entry and exit barriers, due to the economic,
legal and institutional causes. On the other hand, in monopolistic competition,
there is an unrestricted entry into and exit from the industry.

As a single firm regulates the whole market, there is no difference between

firm and industry in the monopoly. So, it is a single-firm industry. Unlike,
monopolistic competition, the difference between firm and industry exists, i.e.
a firm is a single entity, and a group of firms is called industry12.

12
Goel J.P., Dr. Goswami H.,An Introduction To Economics, Tushar Publishing House, 2010.

17
 CHAPTER – 5

CONCLUSION

1. Economic Point of View:

From the economic side, it might be argued that selling expenses increase the
velocity of circulation of money and so increase employment. Here, it has
been pointed out that there are cheaper and more dignified ways of increasing
employment and this argument breaks down completely in a time of full
employment, and still more in a time of inflation.

2. Sociological Point of View:

On the sociological side, it might be argued that advertising has itself an

entertainment and cultural value, and that it promotes mass communication in
the form of cheaper magazines, news papers, radio and television. Prof.
Boulding has doubted upon the significance of this value also. Thus, he said,
“I am happy to leave this argument to the sociologists.”

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3. On the Basis of Monotony:

Much controversy and honest doubt surrounded these issues. Some economists
think that the wastes due to monopolistic competition are, in-fact, small.
Others argue that product differentiation satisfies consumer’s desires for
variety and breadth of choice if pure competition prevails everywhere,
homogeneity of products would mean lower costs. If the whole population
were put into uniform clothes and made to live in uniform barracks, vast
quantities of resources would be released, but what for. Thus monopolistic
type of market is more compatible for the consumers as they are free to choose
and not imposed upon them.

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 BIBLIOGRAPHY

 BOOKS

 Posner A Richard, Natural Monopoly And Its Regulation, Cato Institute, 1999.
 Moazed Alex, Modern Monopoly: What It Takes to Dominate The 21 st

Centaury Economy Macmillan US.

 Goel J.P., Dr. Goswami H.,An Introduction To Economics, Tushar Publishing
House, 2010.

 Monopoly - Featured Articles From Economic Times.

 Monopoly Is Not a Game - Bloomberg View.

 http://keydifferences.com/difference-between-monopoly-and-monopolistic-
competition.html.

 http://www.yourarticlelibrary.com/economics/the-major-similarities-and-
dissimilarities-between-monopoly-and-monopolistic-competition/28895/.

 http://www.differencebetween.com/difference-between-monopolistic-
competition-and-vs-monopoly/.

 http://www.economicsdiscussion.net/monopolistic-competition/monopoly-vs-
monopolistic-competition-with-diagram/7326.

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