Transcript Monopoly.ppt

Monopoly

Gail (Gas Authority of India), which has
had a monopoly in the gas transmission
sector, is set to see some tough
competition in the coming days. The new
competitors are Reliance and British
Gas.
Example of Monopoly

Railways in India are a public transport
monopoly in transportation which does
not really has any other private railway
transport as competitors. But, when road
transport and air transport is taken it has
competition.
PURE MONOPOLY
MAIN FEATURES:
 One and only one firm produces and
sells a particular commodity or a service
 There are no rivals or direct competitors
of the firm
 Indirect rivalry may exist
 No other seller can enter the market
 Monopolist is a price-maker
Monopoly

In Monopoly, the firm and industry
coincide – the single firm producing the
product is itself both the firm and the
industry.
Monopoly
The monopolist is the supply-side of the
market and has complete control over
the amount offered for sale
 Monopolist controls price but must
consider consumer demand
 Profits will be maximized at the level of
output where marginal revenue equals
marginal cost

Average and Marginal Revenue
The monopolist’s average revenue,
price received per unit sold, is the market
demand curve
 Monopolist also needs to find marginal
revenue, change in revenue resulting
from a unit change in output

Total, Marginal, and Average
Revenue
Price (P)
Quantity
(Q)
Total
Marginal Average
Revenue Revenu Revenue
(R)
e (MR)
(AR)
0
-
6
0
5
1
5
5
5
4
2
8
3
4
3
3
9
1
3
2
4
8
-1
2
1
5
5
-3
1
Total, Marginal, and Average
Revenue

Revenue is zero when price is 6

Nothing is sold
At lower prices, revenue increases as
quantity sold increases
 When demand is downward sloping, the
price (average revenue) is greater than
marginal revenue


For sales to increase, price must fall
Total, Marginal, and Average
Revenue
Since there is a single firm in the
industry, the firm’s demand curve is
identical with the industry’s demand
curve.
 This curve has a downward slope
implying that in order to sell more the
firm would have to lower its price.
 MR curve is twice the slope of AR curve.

Average and Marginal Revenue
per
unit of
output
7
6
5
Average Revenue (Demand)
4
3
2
1
Marginal
Revenue
0
1
2
3
4
5
6
7 Output
Monopoly

Observations
1.
2.
3.
To increase sales the price must fall
MR < P
Compared to perfect competition


No change in price to change sales
MR = P
Sources of Monopoly Power
Why do some firms have considerable
monopoly power, and others have little
or none?
 Monopoly power is determined by ability
to set price higher than marginal cost
 A firm’s monopoly power, therefore, is
determined by the firm’s elasticity of
demand

Monopoly
Short-Run Equilibrium
Q* = 500
P* = 11
Elasticity of Demand and Price
Markup
Rs/Q
Rs/Q
The more elastic is
demand, the less the
markup.
P*
MC
MC
P*
P*-MC
D
P*-MC
MR
D
MR
Q*
Quantity
Q*
Quantity
Sources of Monopoly Power
The less elastic the demand curve, the
more monopoly power a firm has
 The firm’s elasticity of demand is
determined by:
1) Elasticity of market demand
2) Number of firms in market
3) The interaction among firms

Elasticity of Market Demand

With one firm, their demand curve is
market demand curve


Degree of monopoly power is high as the
demand curve is less elastic
With more firms, individual demand may
differ from market demand

Demand for a firm’s product is more elastic
when the number of firms are more as
substitutes are available and the monopoly
power is less
Number of Firms

The monopoly power of a firm falls as
the number of firms increases; all else
equal
More important are the number of firms with
significant market share
 Market is highly concentrated if only a few
firms account for most of the sales


Firms would like to create barriers to
entry to keep new firms out of market

Patent, copyrights, licenses, economies of
scale
Interaction Among Firms
If firms are aggressive in gaining market
share by, for example, undercutting the
other firms, prices may reach close to
competitive levels
 If firms collude (violation of antitrust
rules), could generate substantial
monopoly power
 Markets are dynamic and therefore, so is
the concept of monopoly power

Monopoly Long-Run Equilibrium
Q* = 700
P* = 9
DISCRIMINATING MONOPOLY (OR) PRICE
DISCRIMINATION
Price discrimination is said to exist when
the same product is sold at different
prices to different buyers.
Conditions when price discrimination is
possible:
 Difference in price elasticities
 Market segmentation
 Effective separation of sub-markets.
Difference in Price Elasticities

Depending on the preference of buyers,
their income, their location and the ease
of availability of substitutes, the product
has different elasticity with different
customers.
Market segmentation

It must be possible to divide the market
into sub-markets with different priceelasticities of the customers. A different
price can then be fixed for each market
segment, e.g., doctors charging different
fees from the rich and poor of the same
locality.
Degrees of Price Discrimination
First Degree Price Discrimination
 Second Degree Price Discrimination
 Third Degree Price Discrimination

First Degree Price Discrimination

This is said to occur when the monopolist is
able to sell each separate unit of the output at
a different price at the same buyer.
 This is known as perfect price discrimination.
 In negotiating with each buyer the monopolist
charges him the maximum price he is willing to
pay under threat of denying the sale of any
quantity to him.
 The buyer is offered a ‘take it or leave it’
choice.
Second Degree Price Discrimination
In this, the goods are divided into
different blocks of units and for each
block a different price is charged.
 Example: quantity discounts.

Third Degree Price Discrimination

This is based on location, types of uses
of the product, time of the purchase, size
of product, age of the customers.
MONOPSONY
A resource market situation in which
there is a single buyer for a particular
resource is called a monopsony
situation.