Monopoly Characteristics and Barriers to Entry

Characteristics of a Monopoly

• Single seller exists with a large number of buyers.
• The product is unique with no close substitutes.
• The monopoly is a price maker.
• Significant barriers to entry exist.
• Minimum advertising is typically needed

Barriers to Entry

• Barriers to entry prevent other firms from entering the industry.
• Weaker barriers to entry may permit entry of a few firms, leading to an oligopoly.

Types of Barriers to Entry

• Occurs when the average cost decreases as output production expands.
• In a monopoly, new firms cannot enter due to economies of scale.
• Protected from competition.
• New firms must start large-scale operations to enter, which is difficult.
• Small-scale producers struggle to achieve normal profits and usually fail.

Ownership / Control

• Monopolists may prevent rivals by controlling raw materials.
• For example, a sugar producer in Malaysia controls the resources, making new entry nearly impossible.

Licenses

• The government may restrict new firms by requiring a legal license.
• The imposition of licenses on television stations can prevent potential firms from entering, encouraging a monopoly.

Patents and Copyright

• A patent gives the inventor the exclusive right to use or allow its use.
• Patent laws prevent competitors, providing monopoly power for the patent's life.
• Copyrights prevent rivals from copying products, making entry impossible.
• A copyright gives exclusive rights to authors, music composers, film producers, etc.

Monopoly Demand Curve

• The key difference between a competitive firm and a monopolist is on the demand side.
• Demand curve for a monopoly firm slopes downward, following the law of demand.
• The monopolist sets the price based on demand elasticity and total revenue.

Marginal Revenue

• The marginal revenue curve lies below the demand curve.
• When MR is positive (or MR<0), demand is inelastic, increasing total revenue as prices rise.
• Total revenue is unchanged with price changes when demand is unitary elastic, and MR = 0.

Monopoly Short Run Equilibrium (Profit Maximisation)

• Total approach to profit maximisation conditions using total revenue and total cost is applicable in a monopoly market.
• The vertical distance between total revenue and total cost shows the total profit.
• The difference between TR and TC is highest when the quantity is at 3 units.
• This results in a maximum profit of USD160 and represents the firm's equilibrium.
• Marginal revenue curve lies below the demand curve.
• Monopoly achieves equilibrium when marginal revenue equals marginal cost.
• The intersection between MR and MC shows on the graph at point E*.
• Profit-maximising price shows on the graph at P*.

Short Run Profit Types

• A monopolist earns supernormal profit when average revenue is greater than average cost, due to graphs.
• Equilibrium is at the point where Marginal Revenue equals Marginal Cost.
• The profit maximizing quantity is at Q and the monopolist changes the price at A shown on the graph.
• The shaded area ACDB represents supernormal profit.
• A monopolist may experience losses when average revenue is less than average cost at equilibrium of position MR = MC (point E*) on graphs.
• Profit maximisation is obtained at Q, with price at B, visually using graphs.
• The monopolist faces these losses visually represented by the shaded area ADCB.
• If at the equilibrium point, MR = MC the monopolist will have a break even/profit and a normal profit on graphs.
• AR equals AC, hence the monopolist earns normal profit.

Monopoly Long Run Equilibrium

• Long-run equilibrium follows the short-run equilibrium (MR = MC).
• A monopolist earns supernormal profit due to barriers to entry.
• With no competition, the monopolist adjusts prices based on costs.
• They may increase prices to avoid losses if production costs increase.

Long run Model

• Long-run equilibrium achieved when LRMR = LRMC at point E*
• Profit-maximising price is at point A, output at point Q
• ACBD the shaded area, represents supernormal profit because it is gained due to barriers to entry.