III.

Theory of Monopoly

Economists have developed a complicated body of theory to explain why the behaviour of a monopoly firm differs significantly from that of a competitive firm. A monopoly company, like any other business, confronts two forces: (1) a set of demand conditions for the commodity or service it produces; (2) a set of cost conditions that governs how much it has to pay to those who supply the resources and labour required to produce its product. Every business firm must adjust its production to the point at which it is able to maximize its profit—that is, the difference between the revenue it receives from its sales and the costs it incurs in producing the amount sold. The level of production at which it achieves its maximum profit is not necessarily the one at which the firm is getting the highest possible price for its product. The major difference between a monopoly firm and one in a competitive industry is that the monopoly will have greater control over the price it charges for its product, although this control is never absolute. The monopoly firm thus has more freedom than the competitive firm to adjust price as well as production as it strives to achieve a maximum profit.

From the viewpoint of society, monopoly leads to effects that are less desirable than those resulting from economic competition. In general, monopoly results in a smaller output of goods or services as compared with competition, and also in prices that are often higher than those in competitive industries. Another practice associated with monopoly is price discrimination, which involves charging a different price for the same goods or services to different segments of the same market.