ABSTRACT
In the preceding chapter we considered one specific type of product market imperfection – the case of a pure production externality of the Meade variety. In this chapter we shall analyse the consequences of yet another type of product market imperfection, namely the presence of monopoly. 1 The assumption of perfect product markets is relaxed and instead it is assumed that either one or both industries are characterised by monopoly. Monopoly represents the polar opposite of the assumption of perfect competition. There are several market forms that lie between perfect competition and monopoly, for instance, duopoly and oligopoly. The real world is characterised probably more by these intermediate market forms than by the extreme cases of perfect competition and monopoly. However, in studying market imperfections, monopoly provides us with a case that is not as difficult to handle as, say, oligopoly. Moreover, an analysis of monopoly provides some insight into the workings of imperfect markets.
