Monopoly, Monopolistic Competition, and Price Discrimination in Economics

Monopoly

A monopoly exists when a firm is the sole seller of a product without close substitutes.

How Monopolies Arise

1. Natural Monopoly: Economies of scale allow only one firm to produce the entire output at the lowest average cost.
2. Control of Resources: Ownership or control of essential raw materials or unique production techniques.
3. Legal Protection: Patents, copyrights, and trademarks grant exclusive production rights.

Public Policies Against Monopoly

1. Competitive Legalisation: Banning anti-competitive pricing strategies like price fixing, predatory pricing, or price gouging.
2. Public Ownership: Government operation of a private monopoly.

Price Discrimination

Price discrimination occurs when a firm charges different prices for the same product to different consumer groups. This practice can increase total surplus, primarily benefiting producers.

Examples of Price Discrimination

1. Cinema Tickets: Lower prices for children and seniors due to their lower willingness to pay.
2. Quantity Discounts: Effectively charging a higher price for the first unit purchased compared to subsequent units.

Monopolistic Competition

Monopolistic competition is characterized by:

• Many Sellers: Numerous firms compete for the same customer group.
• Product Differentiation: Products are slightly different, reducing substitutability and fostering brand loyalty.
• Downward-Sloping Demand Curve: Each firm faces a downward-sloping demand curve.
• Free Entry and Exit: Firms can enter or exit the market without restriction.

Examples include computer games, restaurants, driving schools, and dentists.

Advertising as a Signal of Quality

High advertising expenditure can signal product quality to consumers. A firm with a superior product is more likely to invest heavily in advertising as it expects a higher return on investment, regardless of the advertisement's content. This contrasts with firms offering mediocre products, who may avoid substantial advertising spending due to lower expected returns.