Market Structure: Monopoly
A monopoly exists when a single seller dominates the entire market with no close substitutes. The monopolist is a price maker.
Sources of Monopoly Power
Legal barriers: patents, copyrights, government licenses (Nepal Electricity Authority historically). Natural monopoly: single firm serves entire market at lower cost due to enormous economies of scale (electricity distribution, water supply). Control of essential resources: owning the only source of a key input. Brand loyalty and network effects: strong brands or platform effects (Google search, Facebook).
Revenue in Monopoly
Monopolist faces entire market demand curve — downward-sloping. To sell more, must lower price on ALL units. Therefore MR < P. MR curve lies below demand curve with twice the slope. TR maximised where MR = 0. Monopolist operates in elastic portion of demand curve.
Profit Maximisation
Maximise profit where MR = MC. Then charge price from demand curve: P > MR = MC. The difference P − MC = markup (monopolist’s pricing power). Monopoly profit = (P − ATC) × Q. Unlike perfect competition, profits persist in long run because barriers prevent entry.
Inefficiency
Compared to perfect competition: less output (Qm < Qc) and higher price (Pm > Pc). Creates deadweight loss — reduction in total surplus. Allocative inefficiency (P > MC). Productive inefficiency (may not produce at minimum ATC — X-inefficiency).
Price Discrimination
First-degree: charge each consumer maximum willingness to pay. Second-degree: different prices for different quantities (bulk discounts). Third-degree: different prices to different segments (student discounts, peak pricing). Conditions: market power, identifiable groups with different elasticities, prevention of resale.
Government Regulation
Price controls (P = MC for allocative efficiency, or P = ATC for normal profit). Antitrust laws. Nationalisation (Nepal Telecom historically). Encouraging competition (Nepal’s telecom became competitive after licensing Ncell). Regulation of natural monopolies.
Summary
Monopoly results in higher prices, lower output, and deadweight loss versus perfect competition. Price discrimination, government regulation, and the trade-off between efficiency and innovation are key themes.
Perfect Competition vs Monopoly Comparison
| Feature | Perfect Competition | Monopoly |
|---|---|---|
| Number of firms | Very many | One |
| Product | Homogeneous (identical) | Unique (no close substitutes) |
| Entry barriers | None (free entry/exit) | High (legal, natural, technological) |
| Price setting | Price taker (accepts market price) | Price maker (sets own price) |
| Demand curve | Perfectly elastic (horizontal) | Downward sloping (market demand) |
| MR vs Price | MR = P = AR | MR < P (MR below demand curve) |
| Profit maximisation | P = MC | MR = MC, then price from demand curve |
| Long-run profit | Normal profit only (zero economic) | Supernormal profit can persist |
| Efficiency | Allocative (P=MC) + Productive (min ATC) | Neither — deadweight loss exists |
| Consumer surplus | Maximum | Reduced (transferred to producer) |
| Nepal example | Rice farmers in Terai (approximately) | Nepal Electricity Authority (historically) |
Worked Example: Monopoly Profit
A monopolist faces demand: P = 100 − 2Q, and has TC = 20 + 10Q + Q².
Step 1: Find TR = P × Q = (100−2Q)Q = 100Q − 2Q²
Step 2: Find MR = dTR/dQ = 100 − 4Q
Step 3: Find MC = dTC/dQ = 10 + 2Q
Step 4: Set MR = MC: 100 − 4Q = 10 + 2Q → 90 = 6Q → Q = 15 units
Step 5: Price from demand: P = 100 − 2(15) = Rs 70
Step 6: Profit = TR − TC = (70×15) − (20+10×15+15²) = 1050 − (20+150+225) = 1050 − 395 = Rs 655 supernormal profit
Note: Under perfect competition, P = MC: P = 10 + 2Q, and from demand 100−2Q = 10+2Q → Q = 22.5, P = Rs 55. So monopoly produces LESS (15 < 22.5) and charges MORE (70 > 55), creating deadweight loss.
Price Discrimination Types
| Degree | Method | Nepal Example |
|---|---|---|
| First (Perfect) | Each consumer pays maximum willingness to pay | Auto-rickshaw bargaining in Kathmandu (different tourists pay different prices) |
| Second | Different prices for different quantities | NEA electricity tariff — lower rate for first 20 units, higher for above |
| Third | Different prices to different groups | Movie tickets: Rs 150 for students, Rs 300 for adults at QFX Cinemas |
Exam Tips
Tip 1: Perfect competition vs monopoly comparison table is the MOST commonly asked market structure question. Tip 2: Monopoly profit calculation (MR=MC, find Q, find P from demand, calculate profit) is frequently tested numerically. Tip 3: Price discrimination types with Nepal examples shows practical understanding. Tip 4: Always mention deadweight loss and explain why monopoly is allocatively inefficient (P > MC).