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Monopoly |
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Three characteristics of monopoly In reality the government and other agencies call firms who have more than 25% of any particular market a monopoly. Monopolies can be national (royal mail), regional (water companies) or local (petrol station). The downward sloping demand curve for the industry must also be the demand curve for the firm. This gives the monopolist the power to be a price maker, he can set the price and then sell whatever quantity consumers are willing to buy at that price. Rather than setting the price, he can set the quantity he wishes to sell and then accept the price the market is willing to pay. Ideally
the monopolist would like to be able to sell a large quantity at a high
price, however it can only set one or the other. The demand curve is relatively inelastic as there are no substitutes available.
There are three possible outcomes, abnormal profits, normal profits and losses.
If losses persist in the long run the monopolist will leave the market (unless it receives a subsidy or it has an objective other than making a profit). If abnormal or normal profits are being earned, the monopolist will remain in the market in the long run. Unlike perfect competition, it is possible to earn abnormal profits in the long run due to the presence of barriers to entry, which prevent firms entering the industry and eroding the profits.
Notes
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