• Single Seller: The monopolist is the sole provider, controlling the entire supply of the product.
• Barriers to Entry: High barriers prevent other firms from entering the market. These barriers can be natural (e.g., economies of scale, control of essential resources) or artificial (e.g., patents, government regulations).
• Price Maker: Unlike in perfect competition, the monopolist has significant control over the price, setting it at a level that maximizes profit.
• Unique Product: The product offered is unique with no close substitutes, ensuring consumer dependence on the monopolist.

Demand and Revenue:

Since the monopolist faces the market demand curve, it experiences a downward-sloping demand. To sell additional units, the monopolist must lower the price, affecting both average revenue (AR) and marginal revenue (MR). The relationship between AR and MR in a monopoly is crucial for understanding profit maximization.

Profit Maximization:

A monopolist maximizes profit where marginal cost (MC) equals marginal revenue (MR):

At this point, the difference between AR and MC represents the monopolist's profit per unit.

Examples of Monopolies:

• Utility companies often operate as monopolies due to high infrastructure costs.
• De Beers in the diamond industry historically controlled diamond supplies.
• Microsoft held monopoly power in the PC operating system market for years.

• Few Large Firms: The market is controlled by a handful of firms, each holding a significant market share.
• Barriers to Entry: High barriers prevent new firms from entering, such as capital requirements, access to technology, or brand loyalty.
• Interdependent Decision-Making: Firms must consider the potential reactions of competitors when making pricing and production decisions.
• Product Differentiation: Products may be homogeneous or differentiated, influencing the level of competition.

Pricing Strategies:

In an oligopoly, firms may engage in non-price competition (e.g., advertising, product innovation) or price competition. The kinked demand curve model illustrates how firms may be reluctant to change prices:

Game Theory and Strategic Behavior:

Game theory is essential in analyzing oligopolistic behavior. The Prisoner's Dilemma exemplifies how firms might choose to collude or compete, often leading to suboptimal outcomes for all.

Collusion and Cartels:

Firms in an oligopoly may collude to set prices and output, forming a cartel, as seen in OPEC. While this can lead to higher profits, it is illegal in many countries due to its negative impact on consumers and market efficiency.

Examples of Oligopolies:

• Automobile industry with firms like Toyota, Ford, and General Motors.
• Airline industry with major carriers such as Delta, American Airlines, and United.
• Telecommunications industry with key players like AT&T, Verizon, and T-Mobile.

Deadweight Loss:

The deadweight loss in a monopoly represents the loss of economic efficiency when the monopolist's output is less than the socially optimal level. It is illustrated graphically where the demand curve intersects with the marginal cost curve, but the monopolist restricts output to maximize profit.

Types of Price Discrimination:

• First-Degree (Perfect): Charging each consumer their maximum willingness to pay.
• Second-Degree: Prices vary based on the quantity consumed or the version of the product.
• Third-Degree: Different prices for different consumer groups based on observable characteristics.

Conditions for Price Discrimination:

• Market power to set prices.
• Ability to segment the market.
• No arbitrage between consumer groups.

Effects of Price Discrimination:

While price discrimination can lead to increased producer surplus, it may reduce consumer surplus and potentially lead to efficiency gains if it results in increased total output.

Cournot Model:

Firms compete by choosing quantities simultaneously. Each firm assumes the other's output is fixed when making its decision, leading to a Nash equilibrium where neither firm can improve profit by unilaterally changing its output.

Bertrand Model:

Firms compete by setting prices instead of quantities. In this model, even with only two firms, the equilibrium leads to prices equal to marginal costs, similar to perfect competition.

Stackelberg Model:

Firms compete based on quantity, but one firm acts as a leader and sets its output first, with the follower firms adjusting their quantities in response. This model shows how the leader can gain a strategic advantage.

Edgeworth's Model:

Focuses on price and capacity adjustments, allowing for multiple equilibria and price cycles, reflecting the complex dynamics of real-world oligopolies.

Prisoner's Dilemma:

A classic example where two firms may choose to collude or compete. Although mutual cooperation yields higher profits, the dominant strategy for each firm is to defect, leading to lower profits for both.

Nash Equilibrium:

In the given matrix, (Defect, Defect) is the Nash equilibrium as neither firm can improve its payoff by changing its strategy unilaterally.

Repeated Games:

When firms interact repeatedly, strategies like tit-for-tat can sustain cooperation, mitigating the dilemma inherent in one-shot games.

Antitrust Laws:

Governments implement antitrust laws to regulate monopolies and prevent anti-competitive practices in oligopolies. Understanding these laws is crucial for analyzing the legal constraints on market power.

Behavioral Economics:

Insights from behavioral economics can explain consumer responses to monopolistic and oligopolistic pricing strategies, such as price sensitivity and brand loyalty.

Environmental Economics:

Monopolies in resource-based industries can impact environmental policies and sustainability efforts, linking economic structures to ecological outcomes.

• Monopolies and oligopolies are key market structures with significant market power.
• Monopolies feature single sellers with high barriers, leading to inefficiency.
• Oligopolies consist of few large firms, characterized by strategic interactions and potential collusion.
• Advanced concepts include game theory applications and price discrimination strategies.
• Understanding these structures is essential for analyzing market failures and regulatory policies.