After studying the theories of perfect competition, we now transition into the opposite extreme in the spectrum of competition between firms. ‘Mono’ means ‘one’ and ‘poly’ means ‘seller’. A monopolistic market, therefore, is one in which only a single seller produces the output for the entire market. Examples of pure monopolies are rare, but they do exist; some examples include:
- Utility companies, such as water and electricity, in particular towns,
- Cell service providers in some countries
- Professional sports teams (the Denver Broncos are the only professional football team in Denver)
- Microsoft (a near monopolist in PC operating systems)
There have been many monopolies in various markets throughout history, but often such firms get broken up into smaller firms, sometimes due to government intervention aimed at increasing competition to lower prices for consumers.
That brings us to some of the characteristics of monopolistic markets: Besides there being just one seller, such firms are also price-makers, they face a downward sloping demand curve (compared to the PC firm’s perfectly elastic demand), and there are high barriers to entry, enabling monopolists to earn economic profits in the long-run. In addition, the marginal revenue a firm receives for additional units of output is always lower than the price it is selling the output for. This last characteristic may sound mundane, but in fact it is the reason monopolists will always charge higher prices and produce at lower quantities than perfectly competitive markets.
This lesson will introduce some of the characteristics of monopolies and use a demand schedule to derive the demand and marginal revenue curves for a hypothetical monopolistic airplane manufacturer. We will then place cost curves on the graph to determine the profit maximizing quantity a monopolist should produce at, and we’ll briefly examine the level of output and price as it would compare to a perfectly competitive market.
After watching this lesson, download and begin working on the activity: Pure Monopoly Practice Activity