Monopoly Market Structure

• Monopoly is a market structure characterized by a single seller, unique product, and significant barriers to entry.

Defining Monopoly

• A monopoly has the power to set the price of its product due to a lack of competition.
• Market power enables a monopoly to determine price and output without the risk of being undercut.

Sources of Barriers to Entry

• Factors that prevent new firms from entering a monopolized market include economies of scale, product differentiation, brand loyalty, lower costs for established firms, ownership/control of key factors or outlets, legal protection, mergers, takeovers, retained profits, and aggressive tactics.

TMA and Maldivian Air Taxi

• Blackstone acquired TMA and Maldivian Air Taxi in 2013 with 48 aircrafts, leading to increased seaplane contract prices
• There was a reduction in services and benefits to hospitality groups and an exclusivity clause prevented deals with other seaplane operators.
• There was a contractual link to use landplane operations, allegedly planned by TMA.
• A minimum contract term of three years for seaplane operations was imposed.
• Manta Air entered the market in 2019 with 3 seaplanes.

Monopoly Demand Curve

• A monopolist faces a downward-sloping demand curve.
• The greater the market power, the less elastic (steeper) the demand curve.
• Marginal Revenue (MR) is below Average Revenue (AR), also known as the Demand curve (D).
• The slope of the MR curve is twice that of the AR curve
• For every £1 change in AR results in a £2 change in MR.
• Monopolies operate in the elastic portion of the AR curve, where price increases lead to higher revenue.

Profit Maximization

• Profit is maximized at the output level where Marginal Cost (MC) equals Marginal Revenue (MR).
• The profit-maximizing price is found on the demand curve (where Demand = Average Revenue).
• Supernormal profits can persist in the long run due to barriers to entry.

Monopoly vs. Perfect Competition

• Compared to perfect competition, monopolies produce lower short-run output at a higher price as the market is not flooded.
• Costs may remain high due to a lack of competition and no incentive to drive costs down.
• There is less incentive to innovate in monopolies; however, there is a greater possibility of Research and Development (R&D) and innovation through the investment of ploughed-back profit.
• Monopoly profit may encourage risk-taking and the development of new industries.

Output and Price Comparison

• In monopolies output is lower and price is higher than in perfect competition.