Answer to Question #194630 in Macroeconomics for hafsa

Question

(a) Define a monopoly and stage its main features.

(b) Why MUL is called a monopoly? Does it enjoy monopoly in car manufacture?

(c) In what way do customers surfer from monopoly practices of MUL.

(d) What do you suggest to remedy the situation?

Answer 1

(a)

Monopoly refers to the market structure where there is a single seller who sells a unique product. There is no perfect substitute for the product sold by the monopolist. In monopoly, the firm is the price setter instead of a price taker.

The main features of the monopoly are given below:

(1). Single seller: there is a single seller of the product in the monopoly market.

(2). High barriers to entry: there are high restrictions in the monopoly market for the new firms who want to enter.

(3). Price discrimination: monopolist practices price discrimination. It charges different prices from different sets of consumers. But to practice price discrimination the elasticity of demand for each set of consumers should be different.

(4). No close substitutes: to form a monopoly there should be no close substitutes of the product otherwise people will buy the substitute if the monopolist keeps the price of its product high and it will lose monopoly power.

(b)

Maruti Udyog Limited (MUL) enjoyed its monopoly power from 1980 to 1991 when India became liberalized. During the earlier era, only maruti 800 was available in the market and it was the only player in the market. 

It enjoyed monopoly in the car production and was the only player in the market earlier. However, after the liberalization policies the situation has changed and now the car market has many players.

c)

Customers suffered due to the monopoly practices of maruti especially about the long waiting list to get the car and its exorbitant price quota due to it. Customers suffered greatly by not getting their cars on time and the legal formalities about the car were not cleared when the car was received. Even the technical supplies of the car were not adequately met during its years leading to high demand and exorbitant price of cars.

(d)

Trade liberalization brought an end to the monopoly rule of the automobile industry and many other players like Tata,Hyundai,Fiat entered into the market and revolutionized the market. Efficiency was catered about quality due to increased competition and globalization positively impacted on the economy. Even prices would be lowered due to globalization and many firms entered into the market which reduced the price of the cars highly.