Overview
This lesson covers the characteristics of a monopoly, how monopolies are formed, and how they differ from other market structures like perfect competition.
Monopoly Definition and Formation
- A monopoly is a market structure with one seller and many buyers.
- The monopolist sells a unique product with no close substitutes.
- Monopolies may form due to legal rights (e.g., patents, licenses) or unique inventions.
- Examples include firms with exclusive rights (like Eskom in South Africa) or a company creating a unique drug.
Characteristics of a Monopoly
- Only one firm exists in the entire industry.
- The product offered is unique.
- Entry is highly restricted through patents, licenses, or import restrictions.
- Collusion is impossible because there are no competitors to collude with.
- Complete information is assumed to be available to both the monopolist and buyers.
- The monopolist is a price maker, not a price taker.
Demand Curve and Pricing
- Monopoly has a downward sloping demand curve, indicating inelastic demand.
- Changes in price do not significantly affect the quantity demanded.
- The monopolist can set prices, usually leading to higher prices and lower output compared to perfect competition.
Competition and Efficiency
- Non-price competition is not relevant in monopoly since there are no rivals.
- Decision making is independent, as the monopolist’s choices do not affect other firms.
- Monopolies cannot achieve productive efficiency (output less than minimum average total cost).
- Monopolies also fail to achieve allocative efficiency, producing less and charging more than what is socially optimal.
Examples
- Examples of monopolies include Eskom (electricity provider) and Transnet (railways) in South Africa.
Key Terms & Definitions
- Monopoly — A market with one seller offering a unique product and high barriers to entry.
- Patent — Legal right giving exclusive production of an invention to its creator.
- Price Maker — A firm that can set its own prices due to lack of competition.
- Productive Efficiency — Producing at minimum average total cost.
- Allocative Efficiency — Producing the optimal output mix as preferred by consumers.
Action Items / Next Steps
- Draw a monopoly diagram showing price, profit, quantity, and cost curves.
- Review characteristics of other market structures for comparison.