Economics - Monopoly - Notes - Economics, Study notes of Economics

Download Economics - Monopoly - Notes - Economics and more Study notes Economics in PDF only on Docsity! MONOPOLY Price and Output Decisions under Monopoly The type of monopolistic and monopsonistic situations may be distinguished according to the nature and extent of the deviation from the conditions of perfect competition. A useful classification can be (i) Monopoly and Monopsony; (ii) Monopolistic competition; and (iii) Oligopoly and oligopsony. Main Features of Monopoly The main features of Monopoly are: 1. There is only one seller of a particular good or service. 2. Rivalry from the producers of substitutes insignificant. This implies that the cross-elasticity of demand between the monopolists’ product and any other product is low 3. The monopolist is in a position to set the price himself. The strength of a monopolist lies in his power to raise his prices without frightening away all his customers. How much he can raise them depends on the elasticity of demand for his particular product. This, in turn, depends on the extent to which substitutes for his products are available. And in most cases, there is rather an infinite series of closely competing substitutes. Even exclusive monopolies like railways or telephones must take account of potential competition by alternative services. An undue increase in rates may lead to substitution of railways by motor transport and of telephone calls by telegrams. The closer the substitute and the greater the elasticity, therefore, of the demand for a given manufacturing’s product, the less he can raise his price without frightening away his customers. In fact, two conditions are necessary to make a monopolist strong: (i) A gap in the chain of substitutes, and (ii) Possibility of securing control over all the close substitutes. In fact, it is very difficult to draw a line between what is and what is not a monopoly. Causes of Monopoly Monopoly may arise due to the following reasons: (i) The Government may grant a license to any particular person or persons for operating public utilities like a gas company or an electricity undertaking. (ii) A producer may possess certain scarce raw materials, patent rights, secret methods of production, or specialized skill which might give him monopoly power. For example, Hoechst held a monopoly for some time in oral medicines for diabetes because they were the first to find out the methods of reducing blood sugar by an oral dose. (iii) The necessity of having large resources, as is the case where the minimum efficient scale of operations is very large, may often create monopoly. For example, it is so for making some chemicals. (iv) Ignorance, laziness and prejudice of the buyers may create monopoly in favor of a particular producer. (iii) The absence of competition means that there will be no pressure on the monopolist firms to be as economical as feasible. Wasteful costs tend to be reflected in higher prices. (iv) The exercise of monopoly power causes resources to be misallocated from society’s point of view. As the monopolist restricts output, his output is too small. He employs too little of society’s resources. As a result, too much of these resources may go into the production of goods with low consumer preferences. Thus resources are misallocated. (v) A firm enjoying monopoly position in a strategic sector may provide too big a risk for the economy. For example, it has been pointed out that putting all the power engineering facilities in one company, i.e., BHEL, is full of risks, as an natural or man- made causes of slow-down or stoppage of production would give severe setback to the economy. Monopsony Monopsony is a market situation in which there is only one buyer. The main features of monopsony are:- 1. There is only one buyer of the goods or service. 2. Rivalry from buyers who offer substitutive outlets is so remote as to be insignificant. 3. As a result, the buyers are in a position to determine the price he pays for the goods or services he buys.