Decision Making Under Monopoly

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The Royal Mail Group finally lost its monopoly status in , when the market was opened up to competition. Producers may have patents over designs, or copyright over ideas, characters, images, sounds or names, giving them exclusive rights to sell a good or service, such as a song writer having a monopoly over their own material.

Chapter Monopoly: Decision-Making Without Rivals - Managerial Economics For Dummies [Book]

A monopoly could be created following the merger of two or more firms. Monopolies can maintain super-normal profits in the long run. In general, the level of profit depends upon the degree of competition in the market, which for a pure monopoly is zero. Domestic monopolies can become dominant in their own territory and then penetrate overseas markets, earning a country valuable export revenues.

This is certainly the case with Microsoft. According to Austrian economist Joseph Schumpeter , inefficient firms, including monopolies, would eventually be replaced by more efficient and effective firms through a process called creative destruction. This is because:. Innovation is more likely with large enterprises and this innovation can lead to lower costs than in competitive markets. Firms need to be able to protect their intellectual property by establishing barriers to entry ; otherwise, there will be a free rider problem.


However, monopolies are protected from competition by barriers to entry and this will generate high levels of supernormal profits. If some of these profits are invested in new technology, costs are reduced via process innovation.

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The result is lower price and higher output in the long run. Monopolies can be criticised because of their potential negative effects on the consumer, including:.

Monopoly - Price and Output for a Monopolist

Reducing consumer surplus and economic welfare. The traditional view of monopoly stresses the costs to society associated with higher prices. Because of the lack of competition, the monopolist can charge a higher price P1 than in a more competitive market at P. Innovation can challenge the digital monopolies 25th April The Estate Agent market becomes more contestable despite recent criticism of Purple Bricks 2nd February Could an energy price cap stifle competition? Is the UK too tolerant of monopolies?

Business objectives of discount supermarkets 6th October Alphabet Google profits shrink after EU fine 25th July Is surge pricing heading to UK supermarkets? Record fine for Google in anti-trust case 28th June BT handed biggest ever fine from Ofcom 27th March Is fraud the business model of the prescription drug industry? More Study notes. Advantages and disadvantages of labour market flexibility Study notes. Progress in Reducing Extreme Poverty Study notes. Exam Answer: Predatory Pricing Study notes.

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price and output determination under Monopoly

Teaching Vacancies. Marketing differentiation , where firms try to differentiate their product by distinctive packaging and other promotional techniques. For example, breakfast cereals can easily be differentiated through packaging. Human capital differentiation , where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms, and so on. Differentiation through distribution , including distribution via mail order or through internet shopping, such as Amazon.

Firms are price makers and are faced with a downward sloping demand curve. Because each firm makes a unique product, it can charge a higher or lower price than its rivals. This also means that the demand curve will slope downwards. Firms operating under monopolistic competition usually have to engage in advertising.

Monopoly - Price and Output for a Monopolist

Firms are often in fierce competition with other local firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences. Common methods of advertising for these firms are through local press and radio, local cinema, posters, leaflets and special promotions. Monopolistically competitive firms are assumed to be profit maximisers because firms tend to be small with entrepreneurs actively involved in managing the business.

In the short run supernormal profits are possible, but in the long run new firms are attracted into the industry, because of low barriers to entry , good knowledge and an opportunity to differentiate. Eventually, all super-normal profits are eroded away.

Monopoly Production and Pricing Decisions and Profit Outcome

Super-normal profits attract in new entrants, which shifts the demand curve for existing firm to the left. New entrants continue until only normal profit is available.

Key characteristics

At this point, firms have reached their long run equilibrium. Clearly, the firm benefits most when it is in its short run and will try to stay in the short run by innovating, and further product differentiation. Monopolistically competitive firms are most common in industries where differentiation is possible, such as:.