What are the Main Features of Monopoly Market? – Answered!

The Main Features of Monopoly Market are described below:

(i) A Monopoly is a Price Maker, with its AR and MR Distinct and Downward Sloping From Left to Right:

Let us list some of the results about AR and MR we have arrived at:

(a) AR and MR both slops downwards

(b) MR is twice as steep as AR

(c) MR bisects all the horizontal intercepts between the vertical axis and AR curve

(d) MR as a function of AR and price elasticity of demand is given as MR =AR (1 – 1/| e |)

Here we take up some observations about a monopoly in respect of its price output decisions:

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(a) A Monopoly Always Sticks to the Upper Half of Its AR Curve for Setting Price:

We know that MR for a monopoly is always positive. In other words, MR, the revenue realised from the sale of an additional unit of output, cannot be negative.

(B) Monopoly Always Producer along the Falling Part of Its AC Curve:

The profit maximizing output of a monopoly does not correspond to the minimum average cost. Instead, it is always to the left of it on the falling part of AC.

That is, a monopoly does not minimise its AC at the point at which it maximises its profits. In other words, it always operates below its optimal capacity. As against this, a competitive firm always operates at its optimal capacity in the long run.

(ii) A Monopoly Resorts to Discriminatory Pricing Policies:

A monopoly, if private, aims at profit maximisation. They even resort to discriminatory pricing policies for the purpose. Price discrimination is a practice of charging different prices for the same product from different individuals, at different times, or at different places.

This practice is called personal discrimination, that of charging different prices at different places is called geographical discrimination and that of charging different prices at different points of time, is referred to as time discrimination.

The practice of price discrimination is common not only with private monopolies but also with professionals such as doctors, lawyers, chartered accountants and the like. They charge different fee for identical services from

different persons, at different times, or in different locations. Private monopolies generally resort to geographical and time discrimination. Price charged by them in domestic and foreign markets are widely different. Prices charged by them are usually high in the beginning but gradually reducing thereafter.

The practice of price discrimination has gained ground even with the regulated (government) monopolies. Apart from use-based and slab-based discrimination, government monopolies practice personal discrimination with a difference. Electricity charges on commercial consumers are higher than those on domestic consumers. Even in the domestic world, there are lower rates for lower levels of consumption in practice, not only with electricity departments but also with the telephone department.

Railway department charges different fares for same journey in the name of some comforts. The objectives of the private and the regulated monopolies however are not the same. While private monopolies do it for profit motive, regulated monopolies do it for cost recovery. The question that arises now is ‘can such practices be carried out indefinitely?’

Let us look for the answer in the following conditions that are essential for the success of price discrimination, (a) In respect of geographical discrimination, the condition for success of price discrimination is that the price elasticities of demand must be different in different regions. Let us take domestic and foreign markets. Also, let the price elasticities be e₁ in domestic and e₂ in foreign market. Let the prices charged in these markets be respectively P_l and P₂ and let the respective MRs in the two be MR₁ and MR₂. Then,

= P₁ / P₂ > 1

= P₁ > P₂

Thus, a higher price is set in a less elastic market and a lower one in a more elastic one. If the price elasticities in the two markets were the same, the prices charged too would have been the same, i.e., P₁ = P₂. This means price discrimination can’t be practised if the two markets have identical price elasticities.

Apart from the condition of different price elasticities of demand in the two markets, segregation of markets is also essential for the success of the geographical price discrimination.

If the markets are not segregated, consumers would shift from the costlier market to the cheaper market and the practice of price discrimination would collapse.

i. In respect of personal discrimination, it is essential that the consumers do not belong to the same social group. This is particularly relevant to the case of price discrimination as practised by professionals.

A doctor charging different fees from individuals belonging to the same social group cannot last long with his discriminatory policies. The patients would learn of it soon and he would lose at least those ones who he had overcharged.

ii. Even government, or the regulated monopolies, cannot succeed unless there is some rationality behind their discriminatory policies. For example, charging a high rail fare from rich passengers, only on the basis of their incomes, would be resented and the government might be voted out from power in the next general elections.

However, people do not come to resent the practice of charging much more than the due fare for two and three tier AC travel.