Monopoly

Pure monopoly is an extreme market type in which there is only a single seller. No acceptable substitutes are available, and entry into the market is barred. The pure monopolist and the industry are one and the same. 

Actual monopoly is a real-world form of monopoly. An actual monopolist is the only seller in its market, yet it competes with rivals in other markets, recognizes potential competition, and may be subject to more or less government regulation. 

Actual monopolies may or may not be " government- enforced. " Government- enforced monopolies may be firms that have received an exclusive franchise from the government or that have been granted a government patent. Actual monopolies may or may not be "natural monopolies. " Natural monopolies are those that owe their monopoly status to the particular cost conditions in their industries. Economies of scale are so important in relation to demand in such markets that only a single firm can take full advantage of them.

Monopoly control refers to the degree of control or power that a firm possesses over the price of the product that it sells. All firms except those that are in purely competitive industries possess some degree of monopoly control.

A pure monopolist is expected to face a negatively sloped demand curve. Its marginal - revenue curve slopes beneath its demand curve because price must be lowered in order to sell more and because the new lower price must be charged for all units of output to all of the monopolist's customers.

When demand is elastic, marginal revenue is positive, and total revenue is rising. When demand is unitary elastic, marginal revenue is zero, and total revenue is at its maximum. When demand is inelastic, marginal revenue is negative, and total revenue is falling.

A pure monopolist will maximize its profit at the level of output at which its total revenue exceeds its total cost by the maximum amount, which is also where its marginal cost and marginal revenue are equated. The price it will charge is determined by the demand curve that it faces. 

In the short run, a pure monopolist may experience an economic profit, just a normal profit, or an economic loss. If its revenue is not enough to cover its variable cost, it will shut down. In the long run, a pure monopolist may experience an economic profit or just a normal profit.

Given a certain market demand for a product and a certain cost to produce it, pure monopoly as compared with pure competition offers its consumers less output and higher prices. Purely competitive firms offer consumers greater welfare than does pure monopoly since the purely competitive firm charges a price that is equal to marginal cost, whereas the monopolist charges a price in excess of marginal cost.

More efficient resource allocation is provided by purely competitive firms as compared with pure monopoly. This fact is demonstrated by forcing a transfer of resources from a purely competitive industry in long-run equilibrium to a pure monopoly market also in long-run equilibrium. Because price is equal to marginal cost in pure competition and price is higher than marginal cost in pure monopoly, a given dollar value of resource transfer will increase the combined value of output produced by the two industries.

Pure monopolists may operate on higher average-total- cost curves than do their counterparts in pure competition because they are not pushed by competitors to produce at the lowest cost possible. However, a monopolist may produce at lower average total cost than its counterparts in pure competition because it is large enough to capture economies of scale not available to smaller pure competitors.

Through effective research and development, the average-total-cost curve may be shifted downward in the very long run. There is no clear answer as to whether or not monopoly will foster such progressive actions. On the one hand, a monopolist is not pushed by competitors and may simply not bother, but on the other hand, monopolists have the incentive of long-run economic profit and probably the money to carry out research. 

Pure monopoly may or may not be consistent with equity. Monopolies owned largely by a few individuals or families promote an unequal distribution of income and wealth. But when the stock of monopolies is widely held and includes large numbers of widows and orphans, they cannot be condemned on the basis of equity. 

When a firm sells the same product at the same time to different customers at different prices, there is a price differential. Price discrimination takes place when a price differential is not justified by a difference in cost to the seller. In order to practice price discrimination, the seller must possess monopoly control, must be able to separate buyers into different markets with different price elasticities of demand, and must be able to prevent low-price buyers from reselling the product to high-price buyers.

By practicing price discrimination, a monopolist may be able to improve its profit position. It may be able to earn more profit than it would if it were simply equating its marginal cost and marginal revenue and charging a single price deter mined by its demand curve.

The practice of price discrimination some times is detrimental to society's welfare and at other times is quite beneficial. Price discrimination may serve as a vehicle for an already powerful firm to gain even greater monopoly control and may also be used as a way to eliminate price competition in markets where such competition is socially desirable. On the other hand, price discrimination may be used to provide greater equity and also to lessen monopoly control.