Market Structure II: Monopoly Market

Question 1

What is a monopoly market?

Answer 1

A monopoly market is a market where there is only a single seller dealing in goods which have no close substitute in a market where there are barriers to entry.

Question 2

Sources of Monopoly Power

Answer 2

1. Sole ownership of strategic materials or exclusive knowledge of some production process.
2. The government has licensed only a single firm to produce a given product/ the imposition of trade barriers to exclude foreign competition.
3. Production involves enormous economies of scale that can only be reaped by one firm.
4. Limit pricing e.g. price undercutting, heavy advertisement, continuous product differentiation etc. to create barriers to potential competition and make entry unattractive.

Question 3

Describe short-run equilibrium in the Monopoly market

Answer 3

For monopolist to maximize his short-run profit, that is be in equilibrium at point where MR=MC.