MONOPOLIES: The Behaviour of a Monopoly

The Behaviour of a Monopoly

The definition of a monopoly is a single seller in a market. However, in the real world there aren’t many viable monopolies and thus they are a rarity. So legally, a monopoly is defined as a firm with a 25+ % share of the market. Such a market structure is possesses complete barriers to entry, as well as the firm being the price maker – enabling it to earn supernormal profit.

Because monopolies are profit maximizers. The price in a monopoly is found at the point where marginal revenue equals marginal cost. This also determines the output of the market. This price is at point Z on the diagram above.

Developing on the diagram, it can also be seen that monopolies restrict output, push up prices and are productively and allocatively inefficient.

Monopolies don’t achieve allocative efficiency because the market price/quantity is not at point Y on the diagram i.e. where average costs are at their lowest point. It isn’t productively efficient market price doesn’t equal marginal cost i.e. at point X on the diagram. As well, it should be noted that because of these reasons, price will be higher due to the relatively high strong degree of market power.

Therefore, monopolies behave in such a way that they make abnormal profits in the long run (The shaded are of the diagram). They hike up the price and restrict output – that’s how they behave. They are inefficient productively and allocatively and are therefore causing overall economic inefficiency.

A final point to make is that monopolies use price discrimination as one of their many barriers to entry – be it legal or artificial. 

If you fancy learning more about economics and the financial world around you check out my other articles on my blog: http://insighteconomics.blogspot.co.uk/

Thanks for reading and if you have any queries please email me at:samandchrisshapley56@gmail.com or post a comment on the page itself and I’ll try to get back to you as soon as I can.