Question

What is a natural monopoly? Discuss the relative degree and timing of utilization and development of technology in (a) a pure monopolistic and (b) a pure competitive system. What is an example of a natural monopoly in your area?

Question 02 Under what conditions is it profitable for a monopolistic firm to practice price discrimination ?

Answer 1

1)

NATURAL MONOPOLY

This is a situation where a market's entire demand can be supplied for a good or service by one firm at a price lower than two or more firms .

a)

Pure monopoly is the market structure where one company is the only source of a product and there are no close substitutes.

Usually a pure monopoly has a very little incentive in case of technological development and have less interaction with the research and development department . this is mainly because of its main characteristic , ie, entry barriers.It can earn economic profit because of this entry barrier. but inorder to reduce the risk of bankruptcy it has to indulge itself in activities of technological development and innovations.

But generally pure monopoly do least in the areas of techno innovations.

b)

Pure competition arises where a market has a wide range of competitors for same kind of products.

As there exist strong competition because of the existence of many competitors there arises the call for innovation.If a firm doesn't move on to technological development  then the life of such a firm will be too short.They will be no doubt wiped out from the existing market.So here the competitors to achieve a long run survival divert themselves towards technological innovations and achieve short run profit.

The best example for a natural monopoly is RAILWAY.

2)

Monopoly exists where there is a single seller for a particular product.It has control over demand , over pricing, supply decisions.It set a price at which it can earn maximum profit.

Charging different prices for different customers is known as Price Discrimination.

The following are the different conditions under which price discrimination will become profitable:

• Buyers should not have contact with each other - as we are charging different prices for different customers in the same market ,if they come to know the different prices they will move to that section and will buy the good at lowest price and re-sell it at high price.
• Separate market - there should be more than two markets so that we can separate it and exercise the process of price discrimination.
• Existence of monopoly - the main subject matter to implement the concept of price discrimination is 'monopoly'.
• Elasticity of demand - elasticity is the effect of demand in respect to price changes. If the elasticity is high then we should charge low price and if the elasticity is low price can be fixed high.If there exists same elasticity then the price discrimination fails.