Price and
Output Determination Under Monopoly:
Monopoly is from the Greek word meaning one seller. It is the polar
opposite of perfect competition. Monopoly is a market structure in which one
firm makes up the entire market.
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The main
conditions which give rise to monopoly are various. They are called
collectively, "Barriers to Entry". These barriers block the
entry of new firms into the industry and thus create monopoly.
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Under perfect competition, the demand curve which an
individual seller has to face is perfectly elastic, i.e., it runs parallel to
the base axis. The competitive seller being unable to affect the market price
sells its output at prevailing market price.
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In the
short period, the monopolist behaves like any other firm. A monopolist will
maximize profit or minimize losses by producing that output for which marginal
cost (MC) equals marginal revenue (MR).
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The monopolist creates barriers of entry
for the new firms into the industry. The entry into the industry
is blocked by having control over the raw materials needed for
the production of goods or he may hold full rights to the
production of a certain good (patent) or the market of the good
may be limited.
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The main
points of difference and similarities of
monopoly model with competitive model are as follows:
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A
question can be asked; can a monopolist
charge very high price for his product? The answer to this
question is not a difficult one; When a monopolist has to
determine the price of his product, he has two options before
him.
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A monopolist, being the sole supplier creates some undesirable aspects in the
market: Continue reading.
While discussing price determination
under monopoly, it was assumed that a monopolist charges only
one price for his product from all the customers in the market.
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Price
discrimination takes place when a given product is sold by a monopolist at more
than one price and these price differences are not justified by
cost differences.
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Price
discrimination is said to occur when a monopolist charges more than one
price for an identical product and these price differences are
not justified by cost differences.
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Dumping
is a special case of price discrimination.
Dumping is a situation in which the price, a firm
charges for its goods in a foreign market is lower than either
the price it charges in its home market or the production cost.
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