In economics, a monopoly (from Greek monos / μονος (alone or single) + polein / πωλειν (to

sell)) exists when a specific individual or an enterprise has sufficient control over a particular
product or service to determine significantly the terms on which other individuals shall have
access to it. (This is in contrast to a monopsony which relates to a single entity's control over a
market to purchase a good or service, and contrasted with oligopoly where a few entities exert
considerable influence over an industry)[1][clarification needed] Monopolies are thus characterised by a
lack of economic competition to produce the good or service and a lack of viable substitute
goods.[2] The verb "monopolise" refers to the process by which a firm gains persistently greater
market share than what is expected under perfect competition.

A monopoly must be distinguished from monopsony, in which there is only one buyer of a
product or service ; a monopoly may also have monopsony control of a sector of a market.
Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which
several providers act together to coordinate services, prices or sale of goods. Monopolies,
monopsonies and oligopolies are all situations where one or a few of the entities have market
power and therefore must interact with their customers (monopoly), suppliers (monopsony) and
the other firms (oligopoly) in a game theoretic manner - meaning that expectations about their
behavior affects other players' choice of strategy and vice versa. This is to be contrasted with the
model of perfect competition where firms are price takers and do not have market power.

When not legally coerced to do otherwise, monopolies typically produce fewer goods and sell
them at higher prices than under perfect competition to maximize their profit at the expense of
consumer satisfaction. (See also Bertrand, Cournot or Stackelberg equilibria, market power,
market share, market concentration, Monopoly profit, industrial economics). Sometimes
governments legally decide that a given company is a monopoly that doesn't serve the best
interests of the market and/or consumers. Governments may force these companies to splinter
into smaller independent corporations as in the case of United States vs AT&T, or alter its
behavior as in the case of United States vs Microsoft, to protect consumers.

Monopolies can be established by a government, form naturally, or arise via vertical or

horizontal merges. A monopoly is said to be coercive when the monopoly actively prohibits
competitors from entering the field by using unfair competitive practices which derive from its
market or political influence (see Chainstore paradox). There is often heated debate over whether
market restrictions are in the best long-term interest of present and future consumers.

In many jurisdictions, competition laws place specific restrictions on monopolies. Holding a

dominant position or a monopoly in the market is not illegal in itself, however certain categories
of behavior can, when a business is dominant, be considered abusive and therefore be met with
legal sanctions. A government-granted monopoly or legal monopoly, by contrast, is sanctioned
by the state, often to provide an incentive to invest in a risky venture or enrich a domestic
interest group. Patents, copyright, and trademarks are all examples of government granted and
enforced monopolies. The government may also reserve the venture for itself, thus forming a
government monopoly.

Contents
  1 Market structures
 2 Characteristics
 3 Sources of monopoly power
 4 Monopoly versus competitive markets
 5 The inverse elasticity rule
 6 Price discrimination and capturing consumer surplus
o 6.1 Pricing with market power
o 6.2 Purpose of price discrimination
o 6.3 Conditions for price discrimination
 6.3.1 Market power
 6.3.2 Willingness to pay
 6.3.3 Enforcement
 6.3.4 Basic forms
 6.3.5 Example
 6.3.6 Classifying customers
 7 Monopoly and efficiency
o 7.1 Natural monopoly
o 7.2 Government-granted monopoly
 8 Monopolist shutdown rule
 9 Breaking up monopolies
 10 Law
 11 Historical monopolies
o 11.1 Examples of monopolies
 12 Countering monopolies
 13 See also
 14 Notes and references
 15 Further reading
 16 External links
o 16.1 Criticism

[edit] Market structures

In economics, monopoly is a pivotal area to the study of market structures, which directly
concerns normative aspects of economic competition, and sets the foundations for fields such as
industrial organization and economics of regulation. There are four basic types of market
structures under traditional economic analysis: perfect competition, monopolistic competition,
oligopoly and monopoly. A monopoly is a market structure in which a single supplier produces
and sells the product. If there is a single seller in a certain industry and there are no close
substitutes for the goods being produced, then the market structure is that of a "pure monopoly".
Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the
goods being produced, but nevertheless firms retain some market power. This is called
monopolistic competition, whereas in oligopoly the main theoretical framework revolves around
firm's strategic interactions.
In general, the main results from this theory compare price-fixing methods across market
structures, analyze the impact of a certain structure on welfare, and play with different variations
of technological/demand assumptions in order to assess its consequences on the abstract model
of society. Most economic textbooks follow the practice of carefully explaining the perfect
competition model, only because of its usefulness to understand "departures" from it (the so
called imperfect competition models).

The boundaries of what constitutes a market and what doesn't is a relevant distinction to make in
economic analysis. In a general equilibrium context, a good is a specific concept entangling
geographical and time-related characteristics (grapes sold in October 2009 in Moscow is a
different good from grapes sold in October 2009 in New York). Most studies of market structure
relax a little their definition of a good, allowing for more flexibility at the identification of
substitute-goods. Therefore, one can find an economic analysis of the market of grapes in
Russia, for example, which is not a market in the strict sense of general equilibrium theory
monopoly.

[edit] Characteristics
 Single seller: In a monopoly there is one seller of the good who produces all the output. [3]
Therefore, the whole market is being served by a single firm, and for practical purposes, the firm
is the same as the industry.
 Market power: Market power is the ability to affect the terms and conditions of exchange so
that the price of the product is set by the firm (price is not imposed by the market as in perfect
competition).[4][5] Although a monopoly's market power is high it is still limited by the demand
side of the market. A monopoly faces a negatively sloped demand curve not a perfectly inelastic
curve. Consequently, any price increase will result in the loss of some customers.
 Firm and industry: In a monopoly, market, a firm is itself an industry. Therefore, there is no
distinction between a firm and an industry in such a market.
 Price Discrimination: A monopolist can change the price and quality of the product. He sells
more quantities charging less price against the product in a highly elastic market and sells less
quantities charging high price in a less elastic market.

[edit] Sources of monopoly power

Monopolies derive their market power from barriers to entry - circumstances that prevent or
greatly impede a potential competitor's entry into the market or ability to compete in the market.
There are three major types of barriers to entry; economic, legal and deliberate.[6]

 Economic barriers: Economic barriers include economies of scale, capital requirements,

cost advantages and technological superiority. [7]

Economies of scale: Monopolies are characterised by declining costs over a relatively large
range of production.[8] Declining costs coupled with large start up costs give monopolies an
advantage over would be competitors. Monopolies are often in a position to cut prices below a
new entrant's operating costs and drive them out of the industry. [8] Further the size of the
 industry relative to the minimum efficient scale may limit the number of firms that can
effectively compete within the industry. If for example the industry is large enough to support
one firm of minimum efficient scale then other firms entering the industry will operate at a size
that is less than MES meaning that these firms cannot produce at an average cost that is
competitive with the dominant firm. Finally, if long run average cost is constantly falling the
least cost way to provide a good or service is through a single firm. [9]
Capital requirements: Production processes that require large investments of capital, or large
research and development costs or substantial sunk costs limit the number of firms in an
industry.[10] Large fixed costs also make it difficult for a small firm to enter an industry and
expand.[11]

Technological superiority: A monopoly may be better able to acquire, integrate and use the best
possible technology in producing its goods while entrants do not have the size or fiscal muscle to
use the best available technology.[8] In plain English one large firm can sometimes produce
goods cheaper than several small firms.[12]

No substitute goods: A monopoly sells a good for which there is no close substitutes. The
absence of substitutes makes the demand for the good relatively inelastic enabling monopolies
to extract positive profits.

Control of Natural Resources: A prime source of monopoly power is the control of resources
that are critical to the production of a final good.

Network Externalities: The use of a product by a person can affect the value of that product to
other people. This is the network effect. There is a direct relationship between the proportion of
people using a product and the demand for that product. In other words the more people who
are using a product the higher the probability of any individual starting to use the product. This
effect accounts for fads and fashion trends. [13] It also can play a crucial role in the development
or acquisition of market power. The most famous current example is the market dominance of
the Microsoft operating system in personal computers.

 Legal barriers: Legal rights can provide opportunity to monopolise the market in a good.
Intellectual property rights, including patents and copyrights, give a monopolist
exclusive control over the production and selling of certain goods. Property rights may
give a firm the exclusive control over the materials necessary to produce a good.
 Deliberate Actions: A firm wanting to monopolise a market may engage in various types
of deliberate action to exclude competitors or eliminate competition. Such actions
include collusion, lobbying governmental authorities, and force.

(see anti-competitive practices.)

In addition to barriers to entry and competition, barriers to exit may be a source of market power.
Barriers to exit are market conditions that make it difficult or expensive for a firm to leave the
market. High liquidation costs are a primary barrier to exit.[14] Market exit and shutdown are
separate events. The decision whether to shut down or operate is not affected by exit barriers. A
firm will shut down if price falls below minimum average variable costs.

[edit] Monopoly versus competitive markets

While monopoly and perfect competition mark the extremes of market structures[15] there are
many points of similarity. The cost functions are the same.[16] Both monopolies and perfectly
competitive firms minimize cost and maximize profit. The shutdown decisions are the same.
Both are assumed to face perfectly competitive factors markets. There are distinctions, some of
the more important of which are as follows:

 Market Power - market power is the ability to raise the product's price above marginal
cost and not lose all your customers. [17] Specifically market power is the ability to raise
prices without losing all one's customers to competitors. Perfectly competitive (PC)
firms have zero market power when it comes to setting prices. All firms in a PC market
are price takers. The price is set by the interaction of demand and supply at the market
or aggregate level. Individual firms simply take the price determined by the market and
produce that quantity of output that maximize the firm's profits. If a PC firm attempted
to raise prices above the market level all its "customers" would abandon the firm and
purchase at the market price from other firms. A monopoly has considerable although
not unlimited market power. A monopoly has the power to set prices or quantities
although not both.[18] A monopoly is a price maker.[19] The monopoly is the market[20] and
prices are set by the monopolist based on his circumstances and not the interaction of
demand and supply. The two primary factors determining monopoly market power are
the firm's demand curve and its cost structure. [21]

 Marginal revenue and price - In a perfectly competitive market price equals marginal
revenue. In a monopolistic market marginal revenue is less than price. [22]

 Product differentiation: There is zero product differentiation in a perfectly competitive

market. Every product is perfectly homogeneous and a perfect substitute. With a
monopoly, there is high to absolute product differentiation in the sense that there is no
available substitute for a monopolized good. The monopolist is the sole supplier of the
good in question.[23] A customer either buys from the monopolizing entity on its terms or
does without.

 Number of competitors: PC markets are populated by an infinite number of buyers and

sellers. Monopoly involves a single seller.[23]

 Barriers to Entry - Barriers to entry are factors and circumstances that prevent entry
into market by would-be competitors and limit new firms from operating and expanding
within the market. PC markets have free entry and exit. There are no barriers to entry,
exit or competition. Monopolies have relatively high barriers to entry. The barriers must
be strong enough to prevent or discourage any potential competitor from entering the
market.
  Elasticity of Demand; the price elasticity of demand is the percentage change in
demand caused by a one percent change in relative price. A successful monopoly would
face a relatively inelastic demand curve. A low coefficient of elasticity is indicative of
effective barriers to entry. A PC firm faces what it perceives to be perfectly elastic
demand curve. The coefficient of elasticity for a perfectly competitive demand curve is
infinite.

 Excess Profits- Excess or positive profits are profit above the normal expected return on
investment. A PC firm can make excess profits in the short run but excess profits attract
competitors who can freely enter the market and drive down prices eventually reducing
excess profits to zero.[24] A monopoly can preserve excess profits because barriers to
entry prevent competitors from entering the market. [25]

 Profit Maximization - A PC firm maximizes profits by producing where price equals

marginal costs. A monopoly maximises profits by producing where marginal revenue
equals marginal costs.[26] The rules are not equivalent. The demand curve for a PC firm is
perfectly elastic - flat. The demand curve is identical to the average revenue curve and
the price line. Since the average revenue curve is constant the marginal revenue curve is
also constant and equals the demand curve, Average revenue is the same as price (AR =
TR/Q = P x Q/Q = P). Thus the price line is also identical to the demand curve. In sum, D
= AR = MR = P.

 P-Max quantity, price and profit - If a monopolist obtains control of a formerly perfectly
competitive industry, the monopolist would raise prices, cut production, and realise
positive economic profits.[27]

 Supply Curve - in a perfectly competitive market there is a well defined supply function
with a one to one relationship between price and quantity supplied. [28] In a monopolistic
market no such supply relationship exists. A monopolist cannot trace out a short run
supply curve because for a given price there is not a unique quantity supplied. As
Pindyck and Rubenfeld note a change in demand "can lead to changes in prices with no
change in output, changes in output with no change in price or both." [29] Monopolies
produce where marginal revenue equals marginal costs. For a specific demand curve the
supply "curve" would be the price/quantity combination at the point where marginal
revenue equals marginal cost. If the demand curve shifted the marginal revenue curve
would shift as well and a new equilibrium and supply "point" would be established. The
locus of these points would not be a supply curve in any conventional sense. [30][31]

The most significant distinction between a PC firm and a monopoly is that the monopoly faces a
downward sloping demand curve rather than the "perceived" perfectly elastic curve of the PC
firm.[32] Practically all the variations above mentioned relate to this fact. If there is a downward
sloping demand curve then by necessity there is a distinct marginal revenue curve. The
implications of this fact are best made manifest with a linear demand curve, Assume that the
inverse demand curve is of the form x = a - by. Then the total revenue curve is TR = ay - by2 and
the marginal revenue curve is thus MR = a - 2by. From this several things are evident. First the
marginal revenue curve has the same y intercept as the inverse demand curve. Second the slope
of the marginal revenue curve is twice that of the inverse demand curve. Third the x intercept of
the marginal revenue curve is half that of the inverse demand curve. What is not quite so evident
is that the marginal revenue curve lies below the inverse demand curve at all points.[32] Since all
firms maximise profits by equating MR and MC it must be the case that at the profit maximizing
quantity MR and MC are less than price which further implies that a monopoly produces less
quantity at a higher price than if the market were perfectly competitive.

The fact that a monopoly faces a downward sloping demand curve means that the relationship
between total revenue and output for a monopoly is much different than that of competitive
firms.[33] Total revenue equals price times quantity. A competitive firm faces a perfectly elastic
demand curve meaning that total revenue is proportional to output.[34] Thus the total revenue
curve for a competitive firm is a ray with a slope equal to the market price.[34] A competitive firm
can sell all the output it desires at the market price. For a monopoly to increase sales it must
reduce price. Thus the total revenue curve for a monopoly is a parabola that begins at the origin
and reaches a maximum value then continuously falls until total revenue is again zero.[35] Total
revenue reaches its maximum value when the slope of the total revenue function is zero. The
slope of the total revenue function is marginal revenue. So the revenue maximizing quantity and
price occur when MR = 0. For example assume that the monopoly’s demand function is P = 50 -
2Q. The total revenue function would be TR = 50Q - 2Q2 and marginal revenue would be 50 -
4Q. Setting marginal revenue equal to zero we have

1. 50 - 4Q = 0
2. -4Q = -50
3. Q = 12.5

So the revenue maximizing quantity for the monopoly is 12.5 units and the revenue maximizing
price is 25.

A company with a monopoly does not undergo price pressure from competitors, although it may
face pricing pressure from potential competition. If a company raises prices too high, then others
may enter the market if they are able to provide the same good, or a substitute, at a lower price.
[36]
The idea that monopolies in markets with easy entry need not be regulated against is known
as the "revolution in monopoly theory".[37]

A monopolist can extract only one premium,[clarification needed] and getting into complementary
markets does not pay. That is, the total profits a monopolist could earn if it sought to leverage its
monopoly in one market by monopolizing a complementary market are equal to the extra profits
it could earn anyway by charging more for the monopoly product itself. However, the one
monopoly profit theorem does not hold true if customers in the monopoly good are stranded or
poorly informed, or if the tied good has high fixed costs.

A pure monopoly follows the same economic rationality of firms under perfect competition, i.e.
to optimise a profit function given some constraints. Under the assumptions of increasing
marginal costs, exogenous inputs' prices, and control concentrated on a single agent or
entrepreneur, the optimal decision is to equate the marginal cost and marginal revenue of
production. Nonetheless, a pure monopoly can -unlike a competitive firm- alter the market price
for its own convenience: a decrease in the level of production results in a higher price. In the
economics' jargon, it is said that pure monopolies "face a downward-sloping demand". An
important consequence of such behaviour is worth noticing: typically a monopoly selects a
higher price and lower quantity of output than a price-taking firm; again, less is available at a
higher price.[38]

[edit] The inverse elasticity rule

A monopoly chooses that price that maximizes the difference between total revenue and total
cost. The basic markup rule can be expressed as (P - MC)/P = 1/PED.[39] The markup rules
indicates that the ratio between profit margin and the price is inversely proportional to the price
elasticity of demand.[40] The implication of the rule is that the more elastic the demand for the
product the less pricing power the monopoly has.

[edit] Price discrimination and capturing consumer surplus

Improved price discrimination allows a monopolist to gain more profit by charging more to those
who want or need the product more or who have a higher ability to pay. For example, most
economic textbooks cost more in the United States than in "Third world countries" like Ethiopia.
In this case, the publisher is using their government granted copyright monopoly to price
discriminate between (presumed) wealthier economics students and (presumed) poor economics
students. Similarly, most patented medications cost more in the U.S. than in other countries with
a (presumed) poorer customer base. Perfect price discrimination would allow the monopolist to
charge a unique price to each customer based on their individual demand. This would allow the
monopolist to extract all the consumer surplus of the market. Note that while such perfect price
discrimination is still a theoretical construct, it is becoming increasingly real with the advances
in information technology, data mining, and micromarketing. Typically, a high general price is
listed, and various market segments get varying discounts. This is an example of framing to
make the process of charging some people higher prices more socially acceptable. (see also
behavioral economics, decision biases).

It is important to realize that partial price discrimination can cause some customers who are
inappropriately pooled with high price customers to be excluded from the market. For example, a
poor student in the U.S. might be excluded from purchasing an economics textbook at the U.S.
price, that she might have purchased at the China price. Similarly, a wealthy student in China
might have been willing to pay more (although naturally it is against their interests to signal this
to the monopolist). These are deadweight losses and decrease a monopolist's profits. As such,
monopolists have substantial economic interest in improving their market information, and
market segmenting.

There are important points for one to remember when considering the monopoly model diagram
(and its associated conclusions) displayed here. The result that monopoly prices are higher, and
production output lower, than a competitive firm follow from a requirement that the monopoly
not charge different prices for different customers. That is, the monopoly is restricted from
engaging in price discrimination (this is called first degree price discrimination, where all
customers are charged the same amount). If the monopoly were permitted to charge
individualised prices (this is called third degree price discrimination), the quantity produced, and
the price charged to the marginal customer, would be identical to a competitive firm, thus
eliminating the deadweight loss; however, all gains from trade (social welfare) would accrue to
the monopolist and none to the consumer. In essence, every consumer would be just indifferent
between (1) going completely without the product or service and (2) being able to purchase it
from the monopolist.

As long as the price elasticity of demand for most customers is less than one in absolute value, it
is advantageous for a firm to increase its prices: it then receives more money for fewer goods.
With a price increase, price elasticity tends to rise, and in the optimum case above it will be
greater than one for most customers.

[edit] Pricing with market power

Price discrimination is charging different consumers different prices for the same product when
the cost of servicing the customer is identical.[41][42] Absent price discrimination each consumer
pays the same market price. The purpose of price discrimination is to capture consumer surplus
and transfer it to the producer.[43] Price discrimination is not limited to monopolies. Any firm that
has market power can engage in price discrimination. Perfect competition is the only market
form in which price discrimination would be impossible.[44] There are three forms of price
discrimination. First degree price discrimination charges each consumer the maximum price the
consumer is willing to pay. Second degree price discrimination involves quantity discounts.
Third degree price discrimination involves grouping consumers according to willingness to pay
as measured by their price elasticities of demand and charging each group a different price. Third
degree price discrimination is by far the most prevalent form

[edit] Purpose of price discrimination

The purpose of price discrimination is to earn higher profits by capturing consumer surplus and
transferring it to the seller.[45] A firm maximizes profit by selling where marginal revenue equals
marginal cost. A firm that does not engage in price discrimination will charge the profit
maximizing price, P*, to all its customers. Under such circumstances there are customers who
would be willing to pay a higher price than P* and those who will not pay P* but would buy at a
lower price. A price discrimination strategy is to charge less price sensitive buyers a higher price
and the more price sensitive buyers a lower price.[46] Thus additional revenue is generated from
two sources. The basic problem is to identify customers by their willingness to pay and have
them pay the price.

[edit] Conditions for price discrimination

There are three conditions that must be present for a firm to engage in successful price
discrimination. First, the firm must have market power.[47] Second, firm must be able to sort
customers according to their willingness to pay for the good.[48] Third, the firm must be able to
prevent resell.

[edit] Market power

Market power is the firm’s ability to raise prices without losing all its customers. A firm must
have some degree of market power to practice price discrimination. Without market power the
firm cannot charge more than the market price.[49] Any market structure characterized by a
downward sloping demand curve has market power - monopoly, monopolistic competition and
oligopoly.[50] The only market structure that has no market power is perfect competition.[51]

[edit] Willingness to pay

Consumers must differ in their price sensitivity as reflected in their demand elasticities and the
seller must know something about how demand elasticities vary among consumers.[52][53] Without
this information the seller will not know the relative elasticities of various groups of
consumers[43] would not be able to separate customers according to their PEDS.[54] In plain
English the objective is to divide consumers between those who will pay more than the optimal
price and those who will only pay less.[55]

[edit] Enforcement

A firm wishing to practice price discrimination must be able to prevent middle men or brokers
from capturing the consumer surplus for themselves. The firm accomplishes this by preventing
or limiting resale. Many methods are used to prevent resale. For example persons are required to
show photo identification and a borading pass before boarding a plane. Most travelers assume
that this practice is strictly a matter of security. However, a primary purpose in requesting photo
id is to confirm that the ticket purchaser is the person about to board the plane and not someone
who has repurchased the ticket from a discount buyer.

The inability to prevent resale is the largest obstacle to successful price discrimination.[56]
Companies have however developed numerous methods to prevent resale. For example,
universities require that student show identification before entering sporting events.
Governments may make it illegal to resale tickets or products. In Boston Red Sox tickets can
only be resold to the team. Resale to individuals is illegal.

[edit] Basic forms

The three basic forms of price discrimination are first, second and third degree price
discrimination. In first degree price discrimination the firms charge the maximum price each
customer is willing to pay. The maximum price a consumer is willing to pay for a unit of the
good is the reservation price. Thus for each unit the seller tries to set the price equal to the
consumer’s reservation price.[57] Direct information about a consumer’s willingness to pay is
rarely available. Sellers tend to rely on secondary information such as where a person lives (zip
codes),[58] how she dresses, what kind of car she drives, her occupation, how much money she
makes and her spending patterns.[59] First degree price discrimination most frequently occurs in
the area of professional services or in transactions involving direct buyer seller negotiations. For
example, an accountant who has prepared a consumer's tax return has information that can be
used to charge customers based on an estimate of their ability to pay.[60]
In second degree price discrimination or quantity discrimination customers are charged
different prices based on how much they buy. There is a single price schedule for all consumers
but the prices vary depending on the quantity of the good bought.[61] The theory behind second
degree price discrimination is a consumer is willing to buy only a certain quantity of a good at a
given price and then no more. Companies know that consumer’s willingness to buy falls as more
units are purchased, The task for the seller is to identify these price points and to reduce the price
once one is reached in the hope that a reduced price will trigger additional purchases from the
consumer. For example, sell in units blocks rather than individual units.

In third degree price discrimination or multi-market price discrimination [62] the seller divides
the consumers into different groups according to their willingness to pay as measured by their
price elasticity of demand. Each group of consumers effectively becomes a separate market with
its own demand curve and marginal revenue curve.[63] The firm then attempts to maximize profits
in each segment by equating MR and MC,[47][64][65] Generally the firms charge a higher price to
the group with a more price inelastic demand and a relatively lower price to the group with a
more elastic demand.[66] Examples of third degree price discrimination abound. Airlines charge
higher prices to business travelers than to vacation travelers. The reasoning is that the demand
curve for a vacation traveler is relatively elastic while the demand curve for a business traveler is
relatively inelastic. Any determinant of price elasticity of demand can be used to segment
markets. For example, seniors have a more elastic demand for movies than do young adults
because they generally have more free time. Thus theaters will offer discount tickets to seniors.
[67]

[edit] Example

Assume that under a uniform pricing system the monopolist would sell five units at a price of
$10 per unit. Assume that his marginal cost is $5 per unit. Total revenue would be $50, total
costs would be $25 and profits would be $25. If the monopolist practiced price discrimination he
would sell the first unit for $50 the second unit for $40 and so on. Total revenue would be $150,
his total cost would be $25 and his profit would be $125.00.[68] Several things are worth noting.
The monopolist captures all the consumer surplus and eliminates practically all the deadweight
loss because he is willing to sell to anyone who is willing to pay at least the marginal cost.[69]
Thus the price discrimination promotes efficiency. Secondly, under the pricing scheme price =
average revenue and equals marginal revenue. That is the monopolist is behaving like a perfectly
competitive firm.[70] Thirdly, the discriminating monopolist produces a larger quantity than the
monopolist operating under a uniform pricing scheme.[71]

Qd Price

1 50

2 40

3 30

4 20
5 10

[edit] Classifying customers

Successful price discrimination requires that firms separate consumers according to their
willingness to buy. Determining a customer's willingness to buy a good is difficult. Asking
consumer's directly is fruitless. Consumer's don't know and to the extent they do they are
reluctant to share that information with marketers. The two main methods for determining
willingness to buy are observation of personal characteristics and consumer actions. As noted
information about where a person lives (zip codes), how she dresses, what kind of car she drives,
her occupation, how much money she makes and her spending patterns can be helpful in
classifying consumers.

[edit] Monopoly and efficiency

This section does not cite any references or sources.
Please help improve this section by adding citations to reliable sources. Unsourced material may be
challenged and removed. (October 2009)

Surpluses and deadweight loss created by monopoly price setting

According to the standard model,[citation needed] in which a monopolist sets a single price for all
consumers, the monopolist will sell a lower quantity of goods at a higher price than would firms
under perfect competition. Because the monopolist ultimately forgoes transactions with
consumers who value the product or service more than its cost, monopoly pricing creates a
deadweight loss referring to potential gains that went neither to the monopolist or to consumers.
Given the presence of this deadweight loss, the combined surplus (or wealth) for the monopolist
and consumers is necessarily less than the total surplus obtained by consumers under perfect
competition. Where efficiency is defined by the total gains from trade, the monopoly setting is
less efficient than perfect competition.

It is often argued that monopolies tend to become less efficient and innovative over time,
becoming "complacent giants", because they do not have to be efficient or innovative to compete
in the marketplace. Sometimes this very loss of psychological efficiency can raise a potential
competitor's value enough to overcome market entry barriers, or provide incentive for research
and investment into new alternatives. The theory of contestable markets argues that in some
circumstances (private) monopolies are forced to behave as if there were competition because of
the risk of losing their monopoly to new entrants. This is likely to happen where a market's
barriers to entry are low. It might also be because of the availability in the longer term of
substitutes in other markets. For example, a canal monopoly, while worth a great deal in the late
18th century United Kingdom, was worth much less in the late 19th century because of the
introduction of railways as a substitute.

[edit] Natural monopoly

A natural monopoly is a firm which experiences increasing returns to scale over the relevant
range of output.[72] A natural monopoly occurs where the average cost of production "declines
throughout the relevant range of product demand." The relevant range of product demand is
where the average cost curve is below the demand curve.[73] When this situation occurs it is
always cheaper for one large firm to supply the market than multiple smaller firms, in fact,
absent government intervention in such markets will naturally evolve into a monopoly. An early
market entrant who takes advantage of the cost structure and can expand rapidly can exclude
smaller firms from entering and can drive or buy out other firms. A natural monopoly suffers
from the same inefficiencies as any other monopoly. Left to its own devices a profit seeking
natural monopoly will produce where marginal revenue equals marginal costs. Regulation of
natural monopolies is problematic.[citation needed] Breaking up such monopolies is by definition
inefficient. The most frequently used methods dealing with natural monopolies is government
regulations and public ownership. Government regulation generally consists of regulatory
commissions charged with the principal duty of setting prices.[74] To reduce prices and increase
output regulators often use average cost pricing. Under average cost pricing the price and
quantity are determined by the intersection of the average cost curve and the demand curve.[75]
This pricing scheme eliminates any positive economic profits since price equals average cost.
Average cost pricing is not perfect. Regulators must estimate average costs. Firms have a
reduced incentive to lower costs and regulation of this type has not been limited to natural
monopolies.[75]

[edit] Government-granted monopoly

Main article: Government-granted monopoly

A government-granted monopoly (also called a "de jure monopoly") is a form of coercive

monopoly by which a government grants exclusive privilege to a private individual or firm to be
the sole provider of a good or service; potential competitors are excluded from the market by
law, regulation, or other mechanisms of government enforcement. Copyright, patents and
trademarks are examples of government-granted monopolies.[citation needed]

[edit] Monopolist shutdown rule

A monopolist should shutdown when price is less than average variable cost for every output
level.[76] In other words where the demand curve is entirely below the average variable cost
curve.[76] Under these circumstances at the profit maximum level of output (MR = MC) average
revenue would be lower than average variable costs and the monopolists would be better off
shutting down in the short run.[76]

[edit] Breaking up monopolies

When monopolies are not broken through the open market, sometimes a government will step in,
either to regulate the monopoly, turn it into a publicly owned monopoly environment, or forcibly
break it up (see Antitrust law and trust busting). Public utilities, often being naturally efficient
with only one operator and therefore less susceptible to efficient breakup, are often strongly
regulated or publicly owned. AT&T and Standard Oil are debatable examples of the breakup of a
private monopoly: When AT&T, a monopoly previously protected by force of law, was broken
up into the "Baby Bell" components in 1984, MCI, Sprint, and other companies were able to
compete effectively in the long distance phone market.

[edit] Law
Main article: Competition law

The existence of a very high market share does not always mean consumers are paying excessive
prices since the threat of new entrants to the market can restrain a high-market-share firm's price
increases. Competition law does not make merely having a monopoly illegal, but rather abusing
the power a monopoly may confer, for instance through exclusionary practices.

First it is necessary to determine whether a firm is dominant, or whether it behaves "to an

appreciable extent independently of its competitors, customers and ultimately of its consumer".
[77]
As with collusive conduct, market shares are determined with reference to the particular
market in which the firm and product in question is sold. The Herfindahl-Hirschman Index
(HHI) is sometimes used to assess how competitive an industry is.[78] In the US, the merger
guidelines state that a post-merger HHI below 1000 is viewed as unconcentrated while HHI's
above that provoke further review.[79]

Under EU law, very large market shares raises a presumption that a firm is dominant,[80] which
may be rebuttable.[81] If a firm has a dominant position, then there is "a special responsibility not
to allow its conduct to impair competition on the common market".[82] The lowest yet market
share of a firm considered "dominant" in the EU was 39.7%.[83]
Certain categories of abusive conduct are usually prohibited under the country's legislation,
though the lists are seldom closed.[84] The main recognised categories are:

 Limiting supply
 Predatory pricing
 Price discrimination
 Refusal to deal and exclusive dealing
 Tying (commerce) and product bundling

Despite wide agreement that the above constitute abusive practices, there is some debate about
whether there needs to be a causal connection between the dominant position of a company and
its actual abusive conduct. Furthermore, there has been some consideration of what happens
when a firm merely attempts to abuse its dominant position.

[edit] Historical monopolies

This section requires expansion.

The term "monopoly" first appears in Aristotle's Politics, wherein Aristotle describes Thales of
Miletus' cornering of the market in olive presses as a monopoly (μονοπωλίαν).[85][86]

Common salt (sodium chloride) historically gave rise to natural monopolies. Until recently, a
combination of strong sunshine and low humidity or an extension of peat marshes was necessary
for winning salt from the sea, the most plentiful source. Changing sea levels periodically caused
salt "famines" and communities were forced to depend upon those who controlled the scarce
inland mines and salt springs, which were often in hostile areas (the Sahara desert) requiring
well-organised security for transport, storage, and distribution. The "Gabelle", a notoriously high
tax levied upon salt, played a role in the start of the French Revolution, when strict legal controls
were in place over who was allowed to sell and distribute salt.

Robin Gollan argues in The Coalminers of New South Wales that anti-competitive practices
developed in the Newcastle coal industry as a result of the business cycle. The monopoly was
generated by formal meetings of the local management of coal companies agreeing to fix a
minimum price for sale at dock. This collusion was known as "The Vend". The Vend collapsed
and was reformed repeatedly throughout the late 19th century, cracking under recession in the
business cycle. "The Vend" was able to maintain its monopoly due to trade union support, and
material advantages (primarily coal geography). In the early 20th century as a result of
comparable monopolistic practices in the Australian coastal shipping business, the vend took on
a new form as an informal and illegal collusion between the steamship owners and the coal
industry, eventually going to the High Court as Adelaide Steamship Co. Ltd v. R. & AG.[87]

[edit] Examples of monopolies

 The salt commission, a legal monopoly in China formed in 758.

 British East India Company; created as a legal trading monopoly in 1600.
 Dutch East India Company; created as a legal trading monopoly in 1602.
 Western Union was criticized as a price gouging monopoly in the late 19th century. [88]
 Standard Oil; broken up in 1911, two of its surviving "baby companies" are ExxonMobil and the
Chevron Corporation.
 U.S. Steel; anti-trust prosecution failed in 1911.
 Major League Baseball; survived U.S. anti-trust litigation in 1922, though its special status is still
in dispute as of 2009.
 United Aircraft and Transport Corporation ; aircraft manufacturer holding company forced to
divest itself of airlines in 1934.
 National Football League; survived anti-trust lawsuit in the 1960s, convicted of being an illegal
monopoly in the 1980s.
 American Telephone & Telegraph; telecommunications giant broken up in 1982.
 De Beers; settled charges of price fixing in the diamond trade in the 2000s.
 Microsoft; settled anti-trust litigation in the U.S. in 2001; fined by the European Commission in
2004 for 497 million Euros. [89] which was upheld for the most part by the Court of First Instance
of the European Communities in 2007. The fine was 1.35 Billion USD in 2008 for noncompliance
with the 2004 rule.[90][91]
 Joint Commission; has a monopoly over whether or not US hospitals are able to participate in
the Medicare and Medicaid programs.
 Telecom New Zealand; local loop unbundling enforced by central government.
 Deutsche Telekom; former state monopoly, still partially state owned, currently monopolizes
high-speed VDSL broadband network.[92]
 Monsanto has been sued by competitors for anti-trust and monopolistic practices. They hold
between 70% and 100% of the commercial seed market.
 AAFES has a monopoly on retail sales at overseas military installations.
 SAQ is a monopoly.
 Long Island Power Authority (LIPA)
 Long Island Rail Road (LIRR)