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MONOPOLY

Made by:-AnamMehmood-ShivaniBabbar-Sagar

Khandelwal-Abrar


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Definition

A monopoly is a situation inwhich single company ownsall or nearly all of the market

for a given type of product orservice.


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Monopoly arises when

Barriers to Entry :that allowsthe single company to operatewithout competition.

In such an industry structure, theproducer will often produce avolume that is less than the amount

which would maximize socialwelfare.

Three types of Barriers to Entry

Economic


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1. Economic Barriers

Economies of Scale :

It refers economic efficiency thatresults from carrying out a process(such as production or sales) on alarger and larger scale.

Declining cost coupled with largestart up costs give monopolies anadvantage over would becom etitors.


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They are in position to cut pricesbelow a new entrant's operatingcosts and drive them out of the

industry.

The size of the industry relative tothe minimum efficient scale maylimit the number of firms that caneffectively compete within the

industry.

Contd

.


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Technological SuperiorityMay be better able to acquire,

integrate and use the best possible

technology in producing its goodswhile entrants do not have the sizeor fiscal muscle to use the best

available technology.

In nut shell one large firm can

sometimes produce goods cheaper

Contd

.


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Non Availability of Substitute

Makes the demand for the goodrelatively elastic enabling themonopolies to extracts positive

profits.

Capital Requirements:

Large fixed cost limits the numberof firms in the industry.

Difficult for small firms to enter an

Contd

.


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2. Legal barriers

Legal rights can provide opportunityto monopolise the market.

For eg :Intellectual property rights,including patents and copyrights,give a monopolist exclusivecontrol over the production andselling of certain goods.

Contd

.


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3. Deliberate Actions

A firm wanting to monopolise amarket may engage in various types

of deliberate action to excludecompetitors or eliminatecompetition.

Such actions include collusion,lobbying governmental authorities,

and force.

Contd

.


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Benefits of Monopoly

Reduction in price of good due toeconomies of scale.

No risk of over production

There is enough capital for research

Company promotes R&D for theirroduct to maintain its com etitive


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Disadvantages of Monopoly

Exploitation of consumers

Restriction of consumers choice

Absence of competition leads to

inefficiency

Increase in price of product


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Demand Curve forMonopoly

The monopolisticconfronts adownward slopingdemand curve. TheIndustry demandcurve is same asfirms demandcurve.


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Marginal Revenue Curve For aMonopolist


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As observed from the figure

At every level of output except 1 unit, amonopolists marginal revenue (MR) is belowprice

This is so because

1. We assume that the monopolist must sell allits product at a single price (no pricediscrimination).

2. To raise output and sell it, the firm mustlower the price it charges. Selling the

additional output will raise revenue, but this


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Monopoly: Equilibrium

Pm = theprice

Qm =quantity


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Monopoly: Equilibrium

Firm = Market

MR=MC

MC curve cuts MR curve from below.


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Profit Maximization

To maximize profit , monopolist shouldchoose to produce that output levelwhere Marginal Revenue equals

Marginal Cost.

Since MR = MC at the profit maximizingoutput and P> MR for a monopolist, themonopolist will set a price greater thanmarginal cost


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Monopoly Profit

A maximizingmonopolist willraise the output

as long as MRexceed MC.

Above Q* units ofoutput, MC isgreater than MR,

thus increasing

Pr ce and Output C o ces or a


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3/11/12Pr ce and Output C o ces or aMonopolist Suffering Losses in the

Short-Run

It is possible fora profit-maximizingmonopolist to

suffer short-runlosses.

If the firm cannotgenerate enough

revenue to covertotal costs, it willgo out ofbusiness in thelong-run.


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Normal profit in shortrun period

IN SHORTRUN

EQUILLIBRUM1)(MC=MR),2)(AR=AC),

So they willearn onlynormal

profit.


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Long- run equilibrium:

The firmwill earn

super-normalprofits inlong run.

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Supply Curve of Monopoly

A monopoly firm has no supply curvethat is independent of the demandcurve for its product.

A monopolist sets both price andquantity, and the amount of output thatit supplies depends on both itsmarginal cost curve and the demandcurve that it faces.

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Perfect

CompetitionAnd Monopoly

Compared

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Monopoly Vs. CompetitiveMarkets

q Market Power

Perfectly Competitive Firms :

Zero market power, in terms ofsetting prices.

Firm is a Price Taker.

Monopoly :

Considerable market power.

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q Price

Perfectly Competitive Firms:

Market Price is equal toMarginal Cost

Monopoly:

Market Price is greater thanMarginal Cost.

Contd

.

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q

Product DifferentiationPerfectly Competitive Firms:

Homogeneous product

Close Substitute available.

Monopoly:High product differentiation

No Close substitute available.

Contd

.

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3/11/12Contd

.

q Elasticity of DemandPerfectly Competitive Firms:

Demand curve is perfectlyElastic.

Monopoly:Demand Curve is relativelyinelastic.

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q

Number of BuyersPerfectly Competitive Firms:

Populated by an infinite number

of buyers and sellers.

Monopoly

It involves a single seller.

Contd

.

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In a perfectly competitive industry in the long run, pricewill be equal to long-run average cost. The market supplycurve is the sum of all the short-run marginal cost curvesof the firms in the industry. Here we assume that firms areusing a technology that exhibits constant returns to scale:

APerfectlyCompetitiveIndustryinLong-RunEquilibrium

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Perfect Competition and MonopolyCompared

Comparison of Monopoly and Perfectly CompetitiveOutcomes for a Firm with Constant Returns toScaleIn the newly organized monopoly, the marginal cost curveis the same as the supply curve that represented thebehavior of all the independent firms when the industry

was organized competitively. Quantity produced by the

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Price Discrimination

This occurs when a firm charges adifferent price to different groups ofconsumers for an identical good or service,for reasons not associated with the costs of

production.

It is important to stress that charging

different prices for similar goods is not pricediscrimination. For example, pricediscrimination does not does not occur whena rail company charges a higher price for a

first class seat. This is because the price

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A monopoly engages in pricediscrimination if it is able to sellotherwise identical units of output at

different prices.

Whether a price discriminationstrategy is feasible depends on theinability of buyers to practicearbitrage

Contd

.

3/11/12Contd


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Perfect Price Discrimination

If this monopolist wishes to practiceperfect price discrimination, he will wantto produce the quantity for which themarginal buyer pays a price exactly equal

to the marginal cost.

Contd

.

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Market Separation

The profit maximizing price will behigher in markets where demand isinelastic.

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