Micro Economics: Chapter Summaries Microeconomics Chapter Summaries

Summary 'Chapter 7: Monopoly'

Market power refers to the ability of one of more firms in an industry to impact the pricing and supply of products and services for general consumers (Hall & Lieberman, 2010). A firm holding market power experiences a downward slopping demand curve. Monopoly is one of the four major types of market structures (Boyes & Melvin, 2009). It refers to the dominance of only one supplier (or producer) over the entire market (McEachern, 2012). Since a monopolist firm does not have any direct competitor in its industry, it sets prices and supply options itself. Unlike other market structures, monopoly has only one market demand curve, i.e. The demand curve for the monopolist firm and for its industry are same (Shiller, 2009).

Being the only supplier in the industry, this firm can impact the prices of products or services by changing its output. By lowering the prices, it can increase its sales. This phenomenon is called as Marginal Revenue (MR). It is calculated by dividing the change in total revenues with the change in output quantity. Due to a downward slopping curve, price is always higher than marginal revenue. Therefore, its curve is also above the marginal revenue curve (Arnold, 2010).

A monopolist firm also strives to make attractive profits. However, its profit maximization practice is totally different from that of competitive firms in other types of market structures. It equates the marginal revenues with marginal cost (MR=MC) in order to determine the best rate of output. This rate allows it to set a price that can maximize its profits (Besanko, Braeutigam, & Gibbs, 2011). The demand curve also limits the ability of a monopolist firm to charge a high price for its products or services (Shiller, 2009). It also determines the maximum amount which consumers can pay for these products or services (Arnold, 2010).

If the firm further increases the price, the consumers decrease their spending -- leaving the remaining supply unsold. A Monopolist firm also creates strong barriers to entry for other...

(Boyes & Melvin, 2009). In this way, it restricts them from being its direct competitors (Hall & Lieberman, 2010). Another benefit which a monopolist firm realizes from these barriers to entry is the freedom to set quality of its products (Shiller, 2009).
In monopoly, the firm does not have to make great efforts to protect its market power. However, there are certain abilities which it must possess and continue to exert in order to maintain its monopolist market power. For example, it must do extensive research and development in a view to keep its products and services innovative (McEachern, 2012). It helps the monopolist firm in satisfying the needs of general consumers in the most effective and efficient way (Boyes & Melvin, 2009). When monopolist firms are not efficient in their operations or fail to fulfill the demand in the country, the government allows large scale private firms from local and international markets to offer substitute products and services (Hall & Lieberman, 2010). For example, there are various independent power producers in some countries in addition to their federal electric supply companies (Arnold, 2010; Shiller, 2009).

Besides monopoly, there are some other market structures; like duopoly, oligopoly, monopolistic competition, etc. Duopoly refers to the dominance of two firms in an industry while oligopoly represents the market power possessed by several firms (Hall & Lieberman, 2010). In contrast, monopolistic competition refers to the presence of a large number of firms in a single industry. These firms offer identical products with varying quality, price, and after-sale services which affect their brand image in the industry (Boyes & Melvin, 2009). Among all these market structures, it is the easiest for a monopolist firm to achieve economies of scale due to massive production at the national level (Besanko, Braeutigam, & Gibbs, 2011; Shiller, 2009).

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