Diminishing Number of Sellers

More and More Limitations to Entry of New Firms

A homogeneous product – advertising unnecessary		A "differentiated" product + advertising		Homoge-neous product		The monopolists's need to brand his product and to advertise depend on the threat of competition rather than on actual competition

What Do We Mean by "Monopoly"?

Comparison with Perfect Competition

Under perfect competition, there are many sellers each producing a very small amount of the total supply of a homogeneous product. The result is that each producer is faced with an infinitely elastic demand curve. It would be nice, therefore, if, at the other extreme, we could define a monopolist, which literally means "one seller", as a producer who is faced with an absolutely inelastic demand curve.

Unfortunately this is impossible. Because income is limited, goods compete with one another for this income. To a greater or lesser degree, therefore, all goods are substitutes for each other.

Has the Monopolist's Demand Curve a Constant Elasticity of 1?

It has been suggested, therefore, that the only true monopolist is one who sold all goods and therefore obtained all consumers' spending. The demand curve facing him would then be of unit elasticity at all prices. Any rise in the price of goods would simply mean that, although less were bought, total expenditure was unchanged.

But if we follow this argument through we can see that this definition is untenable for two reasons:

1. Any reduction in output will result in the same receipts, but lower costs. Where, then, does the reduction stop?

2. What the monopolist pays to the factor of production (his costs) is also the income of households which they spent on the goods he produces. If he goes on reducing output (in order to lower costs), where do receipts come from?

Monopoly in Practice

Since, therefore, a theoretical definition of monopoly is impossible, we have to consider the situation from a practical point of view. While to some extent all goods are substitutes for one another, there may be essential characteristics in a good or group of goods which give rise to gaps, as it were, in the chain of substitution. If one producer can so exclude competitors that he controls the supply of such a good, he can be said to be a "monopolist" – a single seller.

In practice, "pure" monopoly is seldom found in real life. But one producer may dominate the supply of a good or group of goods. Monopoly legislation in the UK now considers that, where a dominant seller controls one-quarter of a market sales, it can be considered to be a "monopoly".

Key Words and Phrases

imperfect competition	недосконала (монополістична) конкуренція
breach of conditions	порушення умов
untenable definition	невідповідне визначення
receipts	грошові надходження; прибутки
"pure" monopoly	чиста монополія
marginal revenue	граничний (додатковий) прибуток (надходження, отриманої від продажу додаткової одиниці продукції)

Exercises on the text:

Ex. 1. Read and translate the text.

Ex. 2. Answer the following questions:

1. What is imperfect competition?

2. In what cases firms can control over the market supply?

3. What do we mean by "monopoly"?

4. What is the difference between monopoly and monopolistic competition?

Ex. 3. Give Ukrainian equivalents for the following words and word combinations:

downward-sloping demand curve; rising supply curve; marginal revenue; split up the market; upward-sloping supply curve; perfect competition; consumers spending; give rise to gaps; to reduce output; to exclude competitors; dominate the supply; to control one-quarter of a market sales.

Ex. 4. Fill in the blanks with noun, verb or adjective forms. Use your dictionary if necessary.

	Noun	Verb	Adjective
	significance	signify	significant
	—	entry	—
	movement	—	—
	—	—	existent
	—	indicate	—
	substitution	—	—