Tag: Monopoly

Monopoly; Introduction, Meaning, Concept, and Features
Understanding Monopoly: Explore the concept of monopoly and its impact on markets. Learn how a single seller dominates an industry and affects prices. Introduction; Monopoly is defined as a single seller or credit in the market. The monopoly refers to a market situation in which there is only one seller of a particular product. This means that the firm itself is the industry and the firm’s product has no close substitute. The monopolist is not bothered about the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve.

Here are economics explain Monopoly; Introduction, Meaning, Concept, and Features.

Three features characterize a monopoly — a market in which there is only one supplier. First, the firm is in it’s in motivated by profits. Secondly, it stands alone and barriers prevent new firms from entering the industry; and thirdly, the actions of the monopolist itself affect the market price of its output—it is not a price-taker.

Can there be a complete monopoly in the real commercial world? Some economists feel that by maintaining some barriers to entry a firm can act as the single seller of a product in a particular industry. Others feel that all products compete for the limited budget of the consumer. Therefore, no firm, even if it is the only seller of a particular product, is free from competition from the sellers of other products. Thus complete monopoly does not exist in reality.

The monopolist is the sole seller of a particular product. Therefore, if the monopolist is to enjoy excess profit in the long run that must exist certain barriers to the entry of new firms into the industry. Such barriers may refer to any force which prevents rival firms (competing producers) from entering the industry.

What is the Meaning of the term Monopoly?

Monopoly is said to exist when one firm is the sole producer or seller of a product which has no close substitutes. Three points are worth noting in this definition. First, there must be a single producer or seller of a product if there is to be a monopoly. This single producer may be in the form of an individual owner or a single partnership or a joint-stock company.

If many producers are producing a product, either perfect competition or monopolistic competition will prevail depending upon whether the product is homogeneous or differential. On the other hand, when there are few producers or sellers of a product, oligopoly is said to exist. If then there is to be a monopoly, there must be one firm in the industry. Even literally monopoly means one seller.

“Mono” means one and “Poly” means the seller. Thus monopoly means one seller or one producer. But to say that monopoly means one seller or producer is not enough. A second condition which is essential for a firm to be called monopolistic is that no close substitutes for the product of that monopolistic firm should be available in the market.

Meaning of Monopoly:

The word monopoly has been deriving from the combination of two words i.e., “Mono” and “Poly”. Mono refers to a single and poly to control. In this way, the monopoly refers to a market situation in which there is only one seller of a commodity. There are no close substitutes for the commodity it produces and there are barriers to entry. The single producer may be in the form of an individual owner or a single partnership or a joint-stock company.

In other words, under a monopoly, there is no difference between firm and industry. The monopolist has full control over the supply of the commodity. Having control over the supply of the commodity he possesses the market power to set the price. Thus, as a single seller, the monopolist may be a king without a crown. If there is to be a monopoly, the cross elasticity of demand between the product of the monopolist and the product of any other seller must be very small.

Definition of Monopoly:

The following definitions are below;
1. According to Bilas as;
“Pure monopoly is represented by a market situation in which there is a single seller of a product for which there are no substitutes; this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy.”

2. According to Koutsoyiannis as;

“Monopoly is a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry.”

3. According to A. J. Braff as;

“Under pure monopoly, there is a single seller in the market. The monopolist demand is market demand. The monopolist is a price-maker. Pure monopoly suggests no substitute situation.”

Concept of Monopoly:

Analysis of the working of a competitive system was the main task done by classical economists such as Adam Smith, David Ricardo, and J.S. Mill. Considering the earlier views, later economists of the 19th century developed the “ideal” system of perfect competition. Many economists, since the time of Adam Smith, were more interested in theoretical perfections than in the actual development of the capitalist system. They tried to explain the meaning of an economic system based on the model of perfect competition.

According to them, perfect competition would mean;
- Production at the minimum possible cost, and.
- Consumer satisfaction at its maximum.
But in real words, we hardly come across such a system of perfect competition. The exception to perfect competition which attracted serious attention during the 19th century was the concept of monopoly. This is in fact, the antithesis of perfect competition.

Monopoly market is one in which there is only one seller of the product having no close substitutes. The cross elasticity of demand for a monopolized product is either zero or negative. There being only one firm, producing that product, there is no difference between the firm and industry in case of monopoly. Monopoly is a price maker, not the price taker.

In the words of Koutsoyiannis, “Monopoly is a market situation in which there is a single seller, there are no close substitutes for the commodity it produced there are barriers to entry of other firms”.

Features of Monopoly:

The following are the features of a monopoly;

One seller of the product.

In the case of a monopoly, there is only one seller of the product. He may be a sole proprietor or a partnership firm or a joint stock company or a state enterprise. There is no difference between firm and industry. The firm is a price maker and not a price taker.

No close substitute.

The commodity which the monopolist produces has no close substitutes. Lack of substitutes means no other firm in the market is producing the same type of commodity.

Restriction no entry of the new firm.

There are powerful restrictions to the entry of new firms in the industry, under the Monopoly. There are either natural or artificial restrictions on the entry of firms into the industry, even when the firm is making abnormal profits.

Monopoly is also an Industry.

Under monopoly, there is only one firm which constitutes the industry. Difference between firm and industry comes to an end.

Price Maker.

Under monopoly, the monopolist has full control over the supply of the commodity. But due to a large number of buyers, the demand of any one buyer constitutes an infinitely small part of the total demand. Therefore, buyers have to pay the price fixed by the monopolist.

Monopoly explain – For instance;

There is one firm in India which produces “Binaca” toothpaste but this firm cannot be called monopolist since there are many other firms which produce close substitutes of Binaca toothpaste such as Colgate, Promise, Forhans, Meclean, etc. These various brands of toothpaste compete with each other in the market and the producer of any one of them cannot say to have a monopoly.

Prof. Bober rightly remarks,

“The privilege of being the only seller of a product does not by itself make one a monopolist in the sense of possessing the power to set the price. As one seller, he may be a king without a crown.”

We can express the second condition of monopoly in terms of cross elasticity of demand also. Cross elasticity of demand shows a change in the demand for a good as a result of the 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 reason or other are prohibiting to enter the monopolistic industry.

In other words, strong barriers to the entry of firms exist wherever there is one firm having sole control over the production of a commodity. The barriers which prevent the firms to enter the industry may be economic in nature or else of institutional and artificial nature. In the case of monopoly, barriers are so strong that prevent the entry of all firms except the one which is already in the field.
July 14, 2019
Know the Characteristics of Monopolistic Competition And understand how to Determine the Price and output in their Competition

Monopolistic Competition; Know the Characteristics of Monopolistic Competition, before knowing their definition – Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes. “It has been more fully realized that every case of exchange is a case of what may be called partial monopoly and partial monopoly is looked at from the other said a case of imperfect competition. There is a blending of both competition element and monopoly element in each situation.” by According to Prof. J. K. Mehta.

Know and Understand the Characteristics of Monopolistic Competition.

Concept of Monopolistic Competition: Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices.

However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term. Monopolistic Competition refers to the market situation in which there is a keen competition, but neither perfect nor pure, among a group of a large number of small producers or suppliers having some degree of monopoly because of the differentiation of their products.

Thus, we can say that monopolistic competition (or imperfect competition) is a mixture of competition and a certain degree of monopoly, on the basis of a correct appraisal of the market situation. Chamberlin has asserted that monopoly and competition are not mutually exclusive rather both are frequently blended together. In short, we can say that a market with a blending of Monopoly (What do you think of Monopoly?) and competition is called monopolistic competition or imperfect competition.

Characteristics of Monopolistic Competition:

Important characteristics of monopolistic competition are as follows:

Minimum Number of Buyers and Sellers:

In this market, neither buyers nor sellers are too many as under perfect competition nor there is only one seller as under monopoly. Mostly, it is a situation in between. Every producer for his produced commodity has some special buyers. Every consumer and seller can influence demand and supply in the market.

Maximum Number of Buyers and Sellers:

There are a large number of firms but not as large as under perfect competition. That means each firm can control its price-output policy to some extent. It is assumed that any price-output policy of a firm will not get a reaction from other firms that means each firm follows the independent price policy. If a firm reduces its price, the gains in sales will be slightly spread over many of its rivals so that the extent to which each of the rival firms suffers will be very small. Thus these rival firms will have no reason to react.

Ignorance of the Buyers:

There are some people who think that high priced goods will be better and of higher quality. So, they avoid buying low priced goods.

The difference in the Quality and Shape of the Goods:

Although the commodities produced by different producers can serve as perfect substitutes to those produced by others, yet they are different in color, form, packing, design, name, etc. So there is product differentiation in the market.

Differentiated Products:

Sellers sell differentiated products, but they are close— but not perfect—substitutes. Buyers may not mind if they do not get Lux soap rather than Rexona. Different varieties of soap that are available in the Indian market are slightly differentiated products and, hence, close substitutes. It is the degree of differentiation that creates both monopoly and competitive elements. Every product is unique to the buyers. So every seller enjoys some degree of monopoly of his own product over other sellers. But since these goods are close substitutes, sellers face competition.

Because of the brand loyalty of buyers, sellers exercise some monopoly power. And sales of closely related goods create a competitive environment. Thus monopolists compete among themselves. It is product differentiation that enables Monopolistically competitive firms to possess market power with competition amongst the firms. In this market, monopoly power is, therefore, small.

Product Differentiation:

Another feature of the monopolistic competition is product differentiation. Product differentiation refers to a situation when the buyers of the product differentiate the product with others. Basically, the products of different firms are not altogether different; they are slightly different from others. Although each firm producing differentiated product has the monopoly of its own product, yet he has to face the competition. This product differentiation may be real or imaginary. Real differences are like design, the material used, skill, etc. whereas imaginary differences are through advertising, trademark and so on.

Lack of Knowledge on the Part of Consumers:

Neither consumers nor sellers have full knowledge of market conditions, so there is an international difference in the price of goods from those of others.

High Transportation Cost:

In this high transportation cost play an important role in order to create discrimination among commodities. Similar goods because of different transport costs are bought and sold at different prices.

Advertisement:

Here, advertisement plays an important role because buyers are influenced to prefer by advertisement, which plays upon their mind and makes them the product of one firm to those of another. Through advertisement, they are brought to his notice through radio, television and other audio-visual aids in a more pleasing and more forceful manner. Thus, rival firms compete against each other in quantity, in facilities as well as in price.

Differences in the Establishment of Industry:

In the imperfectly competitive market, there is neither freedom of entry or exit as is under perfect competition nor there is perfect control as in monopoly but there are some restrictions on the entry of industry only.

Elastic Demand Curve:

Since the product of each seller is slightly different from his rivals he enjoys some degree of monopoly power and, hence, can raise the price of his product without losing most customers. But as other rival firms produce closely related goods, every firm faces competition and its influence over the price of the product is rather limited.

Thus, each firm has a downward sloping demand curve implying that it behaves as a price-maker. Since a seller faces a large number of competitors to whom buyers may turn, the demand curve is more elastic.

Non-Price Competition:

Besides price competition, Chamberlin suggested cases of non-price competition that arise due to product variation and selling activities. Seller always tries to establish the fact that his product is superior to others by improving the quality of his product. And in doing so, he incurs selling costs or makes advertisement to attract more customers in his fold.

It is the product differentiation that causes selling costs to emerge, in addition to production costs. In Chamberlin’s model, demand for any commodity is not only affected by the price of a commodity but also by non-price competition (i.e., product variation and selling activities). Selling costs or advertising outlays are peculiar to this market.

Know the Characteristics of Monopolistic Competition And understand how to Determine the Price and output in their Competition. #Pixabay.

Now, Understand basically how to Determine the Price and output in their Competition?

You’ll understand the Characteristics of Monopolistic Competition upstairs, now study Determine the Price and output in their Competition. Under monopolistic competition, organizations need to make optimum adjustments in the prices and output sold to attain equilibrium. Apart from this, under monopolistic competition, organizations also need to pay attention to the design of the product and the way the product is promoted in the market.

Moreover, an organization under monopolistic competition is not only required to study its individual equilibrium but group equilibrium of all organizations existing in the market. Let us first understand the individual equilibrium of an organization under monopolistic competition. As we know every seller, irrespective of the market structure, is willing to maximize his/her profits. In monopolistic competition, profits are maximized at a point where marginal revenue is equal to marginal cost.

The price determined at this point is known as equilibrium price and the output produced at this point is called equilibrium output. If the marginal revenue of a seller is greater than marginal cost, he/she may plan to expand his/her output. On the other hand, if marginal revenue is lesser than marginal cost, it would be profitable for the seller to reduce his/her output to the level where marginal revenue is equal to marginal cost.

Equilibrium in Long-term Run:

In the preceding sections, we have discussed that in the short run, organizations can earn supernormal profits. However, in the long run, there is a gradual decrease in the profits of organizations. This is because, in the long run, several new organizations enter the market due to freedom of entry and exit under monopolistic competition. When these new organizations start production the supply would increase and the prices would fall. This would automatically increase the level of competition in the market.

Consequently, the AR curve shifts from right to left and supernormal profits are replaced with normal profits. In the long run, the AR curve is more elastic than that of in the short run. This is because of an increase in the number of substitute products in the long- run. The long-run equilibrium of Monopolistically competitive organizations is achieved when average revenue is equal to average cost. In such a case, organizations receive normal profits.

Equilibrium in Short-term Run:

The short-run equilibrium of a monopolistic competitive organization is the same as that of an organization under monopoly. In the short run, an organization under monopolistic competition attains its equilibrium where marginal revenue equals marginal cost and sets its price according to its demand curve. This implies that in the short run, profits are maximized when MR=MC.

April 19, 2019
What do you think of Monopoly? Understand the Monopoly on the Characteristics, Purpose, and Strength.
What is a Monopoly? The word Monopoly is made of two words; MONO + POLY. Here “Mono” means one and “Poly” implies the seller, thereby the literal meaning of the word Monopoly is one seller or one producer. Thus, pure monopoly refers to that form of market organization wherein there is a single firm (or producer) producing a commodity for which there are no good or close substitutes. The monopolist is not bothered by the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve. So, what is the topic of the question we are going to discuss; What do you think of Monopoly? Understand the Monopoly on the Characteristics, Purpose, and Strength. Read in Hindi.

Here are explained about Monopoly: Understand the Monopoly on the Characteristics, Purpose, and Strength.

The market, form of monopoly is the opposite extreme from that perfect competition. It exists whenever an industry is in the hands of the single producer. In the case of perfect competition, there are so many individual producers that no one of them has any power over the market and an; one firm can increase or diminish its production without affecting the market price. A monopoly, on the other hand, has the power to influence the market price. By reducing its output, it can force the price up, and by increasing its output it can force the price down.

According to Watson, “A monopolist is the only producer of a product that has no close substitutes.” Changes in prices and outputs of other goods sold in the economy must leave the monopolist unaffected. Conversely, changes in the monopolist’s price and output must leave the other producers of the economy unaffected.

In the words of Salvatore, “Monopoly is the form of market organization in which there is a single firm selling a commodity for which there are no close substitutes.” The cross elasticity of demand with every other product is very low. This means that no other firms produce a similar product. Thus, the monopoly firm is itself an industry and the monopolist faces the industry demand curve. The demand curve for his product is, therefore, relatively stable and slopes downward to the right, given the tastes and incomes of his customers.

The Characteristics of Monopoly:

We may state the features or characteristics of monopoly as:

One Seller and a Large Number of Buyers:

The monopolist’s firm is the only firm; it is an industry. But the number of buyers is assumed to be large.

The difficulty of Entry of New Firms and Industry:

Firms – There are either natural or artificial restrictions on the entry of firms into the industry, even when the firm is making abnormal profits. Industry – Under monopoly, there is only one firm which constitutes the industry. Difference between firm and industry comes to an end. Since in monopoly there is a single firm producing the commodity, hence the difference between firm and industry vanishes automatically.

Barriers to the Entry:

The entry into the industry is completely barred or made impossible. If new firms are admitted into the industry, monopoly itself breaks down. This ban on entry may be legal, natural or institutional but it must essentially be there.

Price Maker:

Under monopoly, the monopolist has full control over the supply of the commodity. But due to a large number of buyers, the demand of any one buyer constitutes an infinitely small part of the total demand. Therefore, buyers have to pay the price fixed by the monopolist.

Price-Discrimination is Possible:

Under the conditions of monopoly, price-discrimination is possible. It implies that a monopolist can sell its product at different prices to different customers.

In short, monopoly depends basically on two factors:
- Absences of close substitutes, and.
- Restriction on the competition.
No Close Substitutes:

For the monopoly to exist single producer is the necessary condition but not a sufficient one. It is also essential that there should be no close substitute of the commodity in the market. This second condition would be even more difficult to fulfill than the first since there are few things for which there is no substitute. For instance, Usha is produced by a single firm alone but there are close substitutes of Usha fans that are available in the market in the form of Railfans, Khaitan Ashoka, Crompton, etc. Hence, though the firm producing Usha fans is single yet it cannot be termed a monopoly firm.

It is, therefore, essential for a monopoly to exist that there should be no close substitutes available in the market. This condition can be stated in other words as that the cross elasticity of demand for the output of the firm with respect to the price of every firm’s product is zero. There shall not be any close substitutes for the product sold by the monopolist. The cross elasticity of demand between the product of the monopolist and others must be negligible or zero.

Positive And Negative Purpose Of Monopoly:

Currently, in many countries around the world, the monopoly in the business still has debatement and it is applied in some fields. Therefore, there will be two exclusive aspects: positive and negative when applied in the business methods of a certain field. The main points lead to monopoly are Government concessions resources for a certain firm, the ownership of inventions, patents and intellectual property, ownership is a great resource.

Positive Purpose:

As a result, we can analyze the positive outlook base on Viet Nam Oil And Gas Group (Petrovietnam) – one of the most popular corporations in Viet Nam since 1985 till now. Petrovietnam has supposed as a powerful economic group in Vietnam, known in the region and the world. In this situation, the profits that Petrovietnam earns to provide funds that can be invested in equipment and development.

Whereas perfect competition must be accepted with a normal return on invested capital, the monopolist has more funds to undertake the development further. Importantly, the ability to achieve a monopoly position or to maintain it and step ahead of potential competitors, Petrovietnam has to do innovation in products, techniques and cost savings. They also may not need to spend more money on advertising, marketing, promotions, etc.

Negative Purpose:

Due to maximize revenue, the monopolist would produce goods which marginal sales equal marginal revenue instead of producing output level which prices higher than marginal cost as in the market (supply equals demand). Besides, different from perfect competition which price depends on the quantity of producing of a firm. Price of Petrovietnam would increase while decreasing the quantity of produce. For this reason, profit margins will be higher than selling price.

Besides, producing more oil products will make the enterprise gets more revenue and it also will be the higher selling price. Accordingly, sometimes Petrovietnam suddenly increases the price higher while the international market price was decreasing and the market did not change. Thus, people have to buy oil and gas at an expensive price because oil and gas are important in life. Although people complained, Petrovietnam still keeps the price high.

In this case, we can see easily that they misused the power of monopolist sometimes. In short, the monopolist will produce lower and price of selling goods is higher than the competitive market. In addition, society has to bear loss by increased output minus the marginal total cost to produce the output which should be produced more. It is the toll by the monopolist. In addition, lack of incentive to innovate also impact the demand and supply.

Measuring Monopoly Power (Strength):

Different measures that have been suggested are as follows:

By Concentration Ratio:

Concentration ratio refers to the fraction of total market sales controlled by the largest group of sellers. The inclusion of the market shares of several firms in the concentration ratio rests upon the possibility that large firms will adopt a common price- output policy which may not be very different from the one they would adopt if they were under unified management. But here the difficulty arises that they may not do so. Therefore, a high concentration ratio may be necessary for the exercise of monopoly power but it is not sufficient.

In an industry, usually there exist some smaller firms and some larger firms in the sense that smaller firms have relatively smaller shares in total industry sales (or profits or assets), and the larger firms have relatively larger shares. That is, sales (or profits or assets) may be more concentrated in a few firms of the industry, or such concentration may be less. Now, the size of the largest firms’ share in total industry sales, etc. is known as the concentration ratio.

For example, if we consider sales as the criterion, then the n largest firms’ share in total industry sales is called an n-firm concentration ratio which is denoted by CRn. Usually, the four-firm and eight-firm concentration ratios denoted by CR4 and CR8, are used as a measure of monopoly power.

The concentration ratio may act as a measure of monopoly power because, in a competitive industry, sales are more evenly distributed among firms—concentration of sales is more or less absent. On the other hand, in a monopolistic industry, sales tend to concentrate in a few large firms—in the limiting case, sales are concentrated in only one firm when we have the case of a pure monopoly.

By Profit-Rate:

J.S. Bain used profit-rate as a measure of monopoly power. By high profits, economists mean returns sufficiently in excess of all opportunity costs which potential new entrants desire for entering the industry. The size of super-normal profits which a firm is able to earn is an indication of its monopoly power. In perfect competition, a firm earns only normal profits. In a monopoly, new entrants will not normally compete away monopoly profits.

But there will be some level of profits at which new firms will find it worth taking the risk of trying to break the monopoly. The stronger the monopolist’s position, the greater the profits he will be able to earn without attracting new rivals. In short, it is said that neither concentration ratio nor profit-rate is ideal measures of the degree of monopoly power, both are of some value nor both are widely used.

By Lerner’s:

It is the oldest measure and is based on the difference between the price charged by the monopolist and his marginal cost. Bober gives the formula 1/E. Thus, the degree of monopoly power varies inversely with the elasticity of demand for the commodity.

However, the more commonly used formula is:

Degree of monopoly power = (P-MC) / P

Where P is the price charged by the monopolist and MC his marginal cost.

In perfect competition,

P = MC and the formula (P-MC)/P gives zero answers indicating no monopoly power. If the monopolized product is a free good, MC = 0 and the formula registers unity. The index of monopoly power thus varies from zero to unity. Since monopolized goods are seldom free, monopoly power is seldom as high as unity.

This method is not free from defects as:
- Firstly it does not measure non-price competition. Secondly, monopoly power is shown itself not only in high price but also in output restriction. The output may be restricted by under-utilization of capacity already in existence or by restricting new entry.
- Lerner’s method throws no light on these aspects of monopoly power.
January 11, 2019
What does Monopoly mean? Understand Monopoly control Methods.
What is the Monopoly? The word Monopoly has been derived from the combination of two words i.e., “Mono” and “Poly”. Mono refers to a single and poly to control. “Mono” means one and “Poly” means seller. A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. Thus monopoly refers to a market situation in which there is only one seller of a particular product. This means that the firm itself is the industry and the firm’s product has no close substitute. So, what is the question we are going to discuss; What does Monopoly mean? Understand Monopoly control Methods. Read in Hindi.

Here are explained What does Monopoly mean? after Understand Control and Regulation of Monopoly Methods.

The monopolist is not bothered by the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve. In this way, monopoly refers to a market situation in which there is only one seller of a commodity.

There are no close substitutes for the commodity it produces and there are barriers to entry. The single producer may be in the form of an individual owner or a single partnership or a joint-stock company. In other words, under monopoly, there is no difference between firm and industry. The monopolist has full control over the supply of the commodity.

Having control over the supply of the commodity he possesses the market power to set the price. Thus, as a single seller, the monopolist may be a king without a crown. If there is to be the monopoly, the cross elasticity of demand between the product of the monopolist and the product of any other seller must be very small.

Can there be the complete monopoly in the real commercial world? Some economists feel that by maintaining some barriers to entry a firm can act as the single seller of a product in a particular industry. Others feel that all products compete for the limited budget of the consumer. Therefore, no firm, even if it is the only seller of a particular product, is free from competition from the sellers of other products.

Thus complete monopoly does not exist in reality. The monopolist is the sole seller of a particular product. Therefore, if the monopolist is to enjoy excess profit in the long run that must exist certain barriers to the entry of new firms into the industry. Such barriers may refer to any force which prevents rival firms (competing producers) from entering the industry.

Learn Control and Regulation of Monopoly:

There are three methods of controlling and regulating monopoly:

First, the government may adopt anti-monopoly laws and restrictive trade practices legislation. Second, the government may either run natural monopolies directly or regulate monopolies by imposing price ceilings. Third, the government may regulate monopolies through taxation.

Besides, there are certain fears that prevent the monopolist from charging a very high price in order to earn large super-normal profits.

They are discussed as under.

Fear of Potential Rivals:

The fear of potential competitors may prevent a monopolist to charge a very high price to his customers. If he sets a very high price, he will earn large super-normal profits. Attracted by these monopoly profits, new entrants may force themselves into the monopolized industry. The monopolist, being averse to the entry of new firms, would prefer to charge a reasonable price and thus earn only a modest profit.

Fear of Government Regulation:

The same consideration applies to potential government regulation. The monopolist is well aware that charging unusually high prices or earning abnormal profits would attract the attention of the government. Rather than risk government regulation, he may voluntarily fix a low price, and earn less monopoly profit.

Fear of Nationalisation:

The fear of nationalization also prevents the monopolist to wield absolute monopoly power. If the product or service which the monopolist provides is a public utility service, there is every likelihood of the state taking over the monopoly organization in public interest. This consideration may prevent the monopolist from charging too high a price.

Fear of Public Reaction:

The monopolist is also aware of public reaction if he charges a very high price and earns huge profits. Voices may be raised against the monopoly firm in parliament to press for anti-monopoly legislation.

Fear of Boycott:

People may even boycott the use of monopolized service and start their own service instead. For instance, if in a big city taxi operators combine to charge high rates, people may boycott taxi service and even start operating their own services by forming a cooperative society. Naturally, such a fear compels monopoly firms to charge reasonable prices and earn only nominal profits.

Fear of Substitutes:

Then there is the fear of substitutes. In fact, the fear of substitutes is the most potent factor which prevents monopoly firms from charging very high prices and thereby earn super-normal profits. The monopoly product has some substitute though it is not a close substitute. Therefore, the fear of the emergence of very close substitutes is always uppermost in the mind of the monopolist which acts as a restraint on his absolute power.

Differences in Elasticities of Demand:

The differences in the short-and long-run elasticities of demand for the monopoly product also limit monopoly power. In the short-run, the monopolist can charge a very high price because customers take time to adjust their habits, tastes, and incomes to some other substitutes.

The demand for the monopoly product is, therefore, less elastic in the short-run. But in the long-run, the fear of public opinion, the emergence of substitutes, government regulations, etc. will force the monopolist to set a low price. He will view his demand curve as elastic, and sell more at a low price.

1. Control of Monopoly through Legislation:

Government tries to control monopoly by anti-monopoly laws and restrictive trade practices legislation.

These measures tend to:
- Remove restrictive trade practices and fixation of high prices.
- Reduce the incidence of market-sharing agreements.
- Remove unfair competition.
- Restrict the control of a very large share of the market.
- Prevent unfair price discrimination.
- Restrict mergers in order to avoid market domination, and.
- Prohibit exclusive agreements between the producer and retailer to the detriment of other traders.
2. Control of Monopoly through Price Regulation:

We now take the case where the government feels that monopoly price is very high and tries to bring it down by price regulation. To regulate monopoly, the government imposes price ceiling so that monopoly price should be near or equal to competitive price.

This is done when the government appoints a regulating authority or commission which fixes a price for the monopoly product below the monopoly price, thereby increasing output and lowering the price for the consumer.

Before the regulation of monopoly price, the monopolist is making PF * OM profits by selling OM output at MP (=OA) price. Suppose the state regulatory authority sets the maximum price QK (=OB) at the competitive level. The new demand curve facing the monopolist becomes BKD. Its corresponding MR curve becomes BKHMR. Now the monopolist behaves like a perfectly competitive producer. He produces and sells OQ output at point К where the MC curve cuts the BKHMR curve from below.

As a result of price regulation, the monopolist increases his output to OQ from OM. He still makes supernormal profits equal to KG * OQ that are smaller than the monopoly profits (PF * OM) at the unregulated price MP. If the price regulatory authority fixes the monopoly price WS equal to the average cost where the AC curve cuts the D/AR curve at point S, the monopolist would be able to place a greater quantity of output OW in the market.

At this level, the monopolist would earn only normal profits. In such a situation, the monopolist would continue to produce so long as he is getting a fair return on his capital investment. But the regulatory authority cannot force him to increase output beyond OW because the monopolist would not be operating at a loss.

3. Control of Monopoly through Taxation:

Taxation is another way of controlling monopoly power. The tax may be levied lump-sum without any regard to the output of the monopolist. Or, it may be proportional to the output, the amount of tax rising with the increase in output.

Lump-sum Tax:

By levying a lump-sum tax, the government can reduce or even eliminate monopoly profits without affecting either the price or output of the product. A lump-sum tax imposed on the monopoly firm is shown in suppose where AC and MC are the average cost and marginal cost curves before the tax is levied. The monopolist earns APRT super-normal profits by selling OM product at MP Price.

The imposition of the lump-sum tax is, in fact, a fixed cost to the monopoly firm because it is independent of output. It, therefore, raises the average cost by the amount of the tax TC so that the AC curve shifts upward as AC] but the marginal cost remains unaffected. So the imposition of a lump-sum tax has the effect of reducing monopoly profit from APRT to APBC.

The entire burden of the tax will be borne by the monopolist himself. He cannot shift any part of it to his customers at any stage by raising the price and reducing output. Since the monopolist’s marginal cost curve and the marginal revenue curve remain unaffected by the tax imposition, any change in the existing price-output combination would only lead to losses.

Specific Tax:

The government can also reduce monopoly profits by levying a specific or a per unit tax on the monopolist’s product. A per unit tax on monopoly output has the effect of shifting both the average and marginal cost curves upward by the amount of the tax.

Illustrates this case. AC and MC are the monopoly firm’s average cost and marginal cost curves before the tax imposition. It earns BPGK monopoly profits by selling OM quantity of the product at the UP price. Suppose a government levies a specific tax which is a variable cost to the monopoly firm tends to shift the cost curves upward to AC1 and MC1.

The monopolist’s new equilibrium point is E1 where the MC1 curve cuts the MR curve. The new price is M1P1 >MP (the old price) and the output is OM1

Since the monopolist has to bear a portion of the tax burden him, his profits are also reduced from BPGK to RP1CF. Such a tax does not help in regulating monopoly price and output. For the higher, the demand elasticity of tax, the higher the price for the product and the lower the output. The ultimate loss will be borne by the public rather than by the monopolist.
January 10, 2019