Question

Monopoly is a market structure in which there is a single seller and large number of buyers and selling products that have no close substitution and have a high entry and exit barrier. For the purpose of regulation, monopoly power exists when a single firm controls 25% or more of a particular market. Discuss how the existence of a single dominant supplier for a commodity affects the market and consumer demand.give example

Answer 1

Affecting the market: High domination indicates monopoly. The whole market demand is supplied by a single supplier. Therefore, there is no scope of getting other alternative. An example of it is “utility service, like water” in a city. The market doesn’t have any competition – consumers are bound to purchase from that supplier and there is no way out. Although this is a free-market system, means demand and supply meet freely and without any government intervention, a monopolist is price-setter and can price discriminate. Therefore, the market would experience a higher price for consumers.

Example: suppose there is two-part pricing (a type of price discrimination). The 1st part is at the equilibrium where (P = MC) and the 2nd part is the whole consumer surplus (CS). Therefore, there would be no CS for consumers – this actually goes to suppliers as producer surplus.

Affecting the demand: since consumers have no other alternative, they keep purchasing from the monopolist. Demand in this case is not so high but steady (almost fixed) – people would like to purchase as per their definite necessities. Usually, demand becomes high if consumer surplus is high; this may not happen here, since the whole CS becomes PS in this market and consumers would be reluctant to purchase more.