Question

Q2

2a) List and explain the characteristics of a monopoly market with relevant examples.

2b) With relevant examples, explain the THREE(3) types of price discrimination and the conditions for price discrimination.

(Atleast 2-3 pages long)

Answer 1

a) Characteristics of a monopoly market are-

1. Single seller
In a monopoly market there is only a single seller and thus there is no competition of it in the market. It is not a perfect market structure as there is only a single seller in it.
Single seller means that if the prices of goods are set high by the seller than the customers have to buy it as they have no option rather than to purchase from him.
Customers has no choice in these type of market.

EXAMPLE- If we take Microsoft as an example of the monopoly market. In this Microsoft has no other competitor as he is the single seller. Customers buy Microsoft Office as it is unique good and also they have no other option.

2) Unique goods
In monopoly market unique goods are made which is the main reasons why it has no close substitutes in it.
As everyone cannot make that unique good so they have full advantage to charge higher prices because of no competition. It has the freedom to alter the prices of various good and service sold by them.

EXAMPLE- As Microsoft is producing unique goods so it has no competitor. Microsoft uses its own unique and specialized ideas in creating their products.

3) High barriers for entry
There are many barriers for entering into the monopoly market. A limit on different new industries is set which makes it even more hard to enter in this kind of market.

EXAMPLE- Google is also an example of Monopoly Market.
Google has a very large market capitalization and its almost impossible to enter in this type of market.

4) Price discrimination
In the monopoly market firm can alter the prices as per their choice. Their is no restriction in it and the customer have to buy it. No competitors leads to this kind of situation in monopoly market.

EXAMPLE- Patents has the legal monopoly to a company. This is usually for a short span of the time and during this period the company can charge price according to their wish.

b) Three types of price discrimination are-

First degree price discrimination
In this type of price discrimination the customers are charged the maximum amount which they are ready to pay for the products and the services. In this the prices can vary depending on the customer, if the customer is willing to pay high then he will be charged high. There is no fixed charge in it.

EXAMPLE- In the case of sale of second-hand cars, prices are charged based upon the customer income, age, budget etc.

Second degree price discrimination
In this type of price discrimination the customers are charged upon the preferences of different groups.
Customer is charged on basis of how he valued products or services.

EXAMPLE- In case of bulk purchase customer is charged more and in case of less quantity to be purchased customer is charged at a high price.

Third degree price discrimination
In this type of price discrimination the customers are charged on the basis of their demographic traits.

EXAMPLE- This type of price discrimination is often seen in software packages. Student software package is different and professional software package is different.

Conditions for price discrimination are-

1) There should be market power with firm

2) Seller must be capable in dividing market into a minimum of two sub-markets

3) Firms should be capable to prevent arbitration