Marketing 4
Yvonne Harvey, Contributor

Last week's lesson dealt with perfect competition as a market structure. Perfect competition is at one end of the market structure spectrum; at the other is monopoly. I will begin with a definition.

Definition and examples of monopoly

A pure monopoly is a market structure where there is only one firm in the industry, therefore, the firm is the sole supplier of that good or service. However, in the case where a firm controls approximately 20 per cent of a large market, it is considered a virtual monopoly.

Examples of monopolies in Jamaica:

• The Jamaica Public Service Company
• The National Water Commission

Characteristics/features of monopoly

1. As indicated in the definition, there is only one firm in the industry. The importance of this is that the demand curve for the firm's goods or services will be relatively inelastic, allowing the monopolist to exercise his monopolistic power and restrict quantity, causing prices to rise substantially. Consumers will either have to pay the higher price or go without the goods or services altogether.

2. There are strong barriers to entry. A barrier to entry is anything that prevents a firm from entering an industry in the long run. Barriers to entry in this case would include things such as legal protection and government restrictions. The importance of strong barriers to entry is that in the long run, new firms will be kept out of the industry.

3. Monopolies are price-makers or fixers. Since they face downward sloping demand curves, they can choose what price to charge. However, they are still constrained by the demand curve in that, having decided on price, they must allow the demand curve to determine the quantity. A rise in price will lower the quantity demanded.

4. The product of the monopolist is unique, therefore, no close substitute for it is being produced by any other firm.

5. The monopolist may price discriminate, that is, charge people different prices for the same good and/or charge different unit prices for successive units bought by a given buyer. Those who price discriminate do so in order to earn increased profits.

Short-run equilibrium

It is likely that the monopolist will earn super-normal profits in the short run. Monopoly does not necessarily mean super-normal profits; some monopolies, at their profit-maximising output, face a situation where average cost is everywhere above average revenue. Thus, they are earning sub-normal (less-than-normal) profits.

Long-run equilibrium

Since there are strong barriers to entry, it is likely that if the firm were earning super-normal profits in the short run, it would maintain or continue to earn super-normal profits in the long run.

If the firm had been earning sub-normal profits in the short run, it would leave the industry in the long run and go into an industry where it can earn at least normal profits.

Homework

Your homework is the simple task of discussing the advantages and disadvantages of the monopolistic market structure. Remember, you can use economics texts to research this area.

You will recall from our last lesson that, in practice, there is no market which can be classified as perfectly competitive, though I did give examples of a market approaching near to perfection. Where pure monopoly is concerned, there are very few markets that can be classified as such in reality. Most markets, therefore, lie between these two extremes. In other words, most markets are either under monopolistic competition or oligopoly.

These two market structures (monopolistic competition and oligopoly) will be dealt with in next week's lesson. Keep safe until then.

Collette Ridley, principal of St George's Girls' Primary and Infant school in downtown Kingston, beams with pride as she receives the Key to the City of Kingston from Mayor of Kingston, Desmond McKenzie, during a civic ceremony held on April 21, 2009 at the school hall. - Rudolph Brown/Chief Photographer

Yvonne Harvey teaches at Glenmuir High School.