unit iii 1 monopoly

8/8/2019 Unit III 1 Monopoly

1/23

1


2/23

2

SRI SHARADA INSTITUTE OF

INDIAN MANAGEMENT-RESEARCH

PRESENTED BY-MRIDUL SINGH BHADAURIA (20090191)


3/23

3

Unit -III

Price out-put decisions under differentmarket conditions-Perfect and Imperfect

Conditions, Monopoly , MonopolisticCompletion, Oligopoly, Non-PriceCompetition,, Price Discrimination,Products Differentiation


4/23

4

MonopolyMonopoly is a particular type of market structurewhere a single seller of a product / service having noclose substitute serves the entire market . It is characterized as:

1 . O nly one firm produces a specific product O nly one firm produces a specific product /

product line in a specified market and there are many many buyers in the market buyers in the market ..

2. The product/ product line does not have any close product/ product line does not have any closesubstitutesubstitute , i .e . the cross price elasticity of demand is

very low.

3. There are substantial barriers to entry and /or exit ,which may arise due to (i) absolute cost advantage,absolute cost advantage,(ii) product differentiation, (iii) scale economies, (iv)(ii) product differentiation, (iii) scale economies, (iv)

legal constraints, (v) control over raw materials,legal constraints, (v) control over raw materials,(vi)huge requirement of capital (vi)huge requirement of capital etc .


5/23

5

Sources of Monopoly Power

1 . Exclusive control over raw material Exclusive control over raw material- - Acquiring control over the essential raw control over the essential raw material acts as an entry material acts as an entry- -barrier for barrier for

potential entrants potential entrants and thus, helps insustaining monopoly power of theincumbent. Potential entrants may acquireraw material from foreign market, but not

feasible alternative, because of licence fees,tax, cost of transport, etc. may enhance costto a certain levels that are nor competitive.


6/23

6

A substantial cost advantage A substantial cost advantage for the existingmonopolist precludes entry of potential entrantsbecause of a threat that post-entry competitionwould not allow the new entrant to earn positivebecause of efficient incumbent is already there.2. Economies of ScaleEconomies of Scale

When a single firm manufactures a large quantity a large quantity of a particular product economies of scale helpsof a particular product economies of scale helpsto reduce the cost of production per unit of to reduce the cost of production per unit of output output . This happens where factors of production(machine, raw material etc.) are indivisible. As a

result, variable cost as well as the fixed cost variable cost as well as the fixed cost reduces with an increase in the scale of reduces with an increase in the scale of operationoperation . By lowering the cost of production, a firmBy lowering the cost of production, a firmcan offer the products at a cheaper pricecan offer the products at a cheaper price .. Thisraises entry barriers. This is early mover advantage.


7/23

7

3 . High Capital Requirement High Capital Requirement

Requirement of large amount of capital may Requirement of large amount of capital may also restrict new entry also restrict new entry (e.g. automobiles, iron andsteel, oil refining, etc. huge capital is required for setting up plants). Similarly, in pharmaceuticals andelectronics, heavy investment is required towardsresearch and development. High requirement of High requirement of investment acts as an entry barrier, not investment acts as an entry barrier, not because of capital is scare but due to the risk because of capital is scare but due to the risk involved in post involved in post- -entry losses.entry losses. Since investmentis irreversible, any decision taken in this regardmust be appropriate, particularly where hugeamount is involved in order to avoid heavy losses.


8/23

8

4 . Product Differentiation4 . Product Differentiation- - Product differentiation acts as a strong Product differentiation acts as a strong barrier, when the incumbent hasbarrier, when the incumbent hascreated a preference among the target created a preference among the target

group of customers for his unique group of customers for his unique product or band image through various product or band image through various promotional campaigns promotional campaigns . Such barrier

are most effective in case of sensitiveitems (e.g. baby food, medicines etc.) andalso for premium products (eg. Highvalued wrist watch, branded diamond etc.)


9/23

9

5 .5 . Patents, Trademarks and O ther Legal BarriersPatents, Trademarks and O ther Legal Barriers- - Legal barrier help to protect the monopoly Legal barrier help to protect the monopoly

position of the incumbent. e.g a patent offers position of the incumbent. e.g a patent offersthe holder exclusive rights to make use of, or the holder exclusive rights to make use of, or sell, his invention during a stipulated period of sell, his invention during a stipulated period of timetime . If a potential entrant tries to make use of or

sell the same idea, process o or system within thattime span it is considered as violation of thePatents Act and thus punishable by a court of law.A copyright, another legal barrier, prohibits A copyright, another legal barrier, prohibits

copying of an original work without permissioncopying of an original work without permission

from the appropriate authority. It is specially from the appropriate authority. It is specially applicable to the publishing industry.applicable to the publishing industry.Sometimes, the Government sets legal barriers andenjoy monopoly over certain areas, e.g oilproduction, gold mines etc.


10/23

10

6 . Market Size and Minimum Efficient Scale6 . Market Size and Minimum Efficient Scale- -

In some cases, total demand of atotal demand of a particular product in a market is so small particular product in a market is so small that it does not allow more than onethat it does not allow more than one

player to operate player to operate . If more than one player intend to coexist in the same product field,total demand will be distributed amongthem and it may so happen that none of

them will attain Minimum Efficient Scale(MES). As a result, small size of marketalong with high MES constraint can also be

regarded as a strong barrier.


11/23

11

7. Strategic Barrier 7. Strategic Barrier- -A monopolist may exercise `limit pricing or A monopolist may exercise `limit pricing or may hold excess capacity, to discourage new may hold excess capacity, to discourage new entry.entry. For limit pricing, the monopolist keepsprices of the product abnormally low, which

indicates that this business is not feasible for thepotential entrant to operate in. Sometimes, themonopolists intentionally maintain excess capacityto make the potential entrants feel that the

incumbent can quickly increase output by utilizingits full capacity to meet any additional demand for the product in the market.


12/23

12

8 . Causal A mbiguity 8 . Causal A mbiguity- -

Sometimes, the superiority of a product canclearly be recognized but the technicalknowledge as well as the synergetic effectsresponsible for that superiority of thatcommodity are obscure and partially under stood. It creates an ambiguity among It creates an ambiguity among rival firms over the specific logistics and rival firms over the specific logistics and technical know technical know- -how that contributehow that contributesuch `extra value addition, because of such `extra value addition, because of no formula available for this extra valueno formula available for this extra valueaddition.addition.


13/23

13

Equilibrium Price-Output Combination Under Profit Maximizing Monopoly.

It needs two marginal cost curve and marginal cost curve and marginal revenue curve, these curvesmarginal revenue curve, these curvesdetermine equilibrium price and quantity determine equilibrium price and quantity

of individual firmsof individual firms . By equilibrium price andquantity means per unit price to becharged and total quantity of output to beproduced which together satisfy theobjectives of individual firms (maximizingprofit).


14/23

14

(a) Downward Sloping Demand Curve(a) Downward Sloping Demand Curve- -

For a monopolist, the slope of marginal cost slope of marginal cost curve and average cost curve will remain thecurve and average cost curve will remain thesame as under perfect competition, whilesame as under perfect competition, whileaverage and marginal revenue curves areaverage and marginal revenue curves aredifferent different from that of the perfect competition.In monopoly, a single firm caters to the totaldemand of market. It faces the entire demand for aparticular commodity, the demand curve becomesdemand curve becomesdownward sloping, i.e. if the monopolist downward sloping, i.e. if the monopolist increases the price, the quantity demanded increases the price, the quantity demanded reduces and the vicereduces and the vice- -versa. Thus monopolistsversa. Thus monopolistshave the option to adjust both the price and have the option to adjust both the price and quantity.quantity.


15/23

15

Figure:

Q

P

Demand curve of afirm under perfectcompetition

P

Q

Market demand curve isthe demand curve for themonopolists product


16/23

16

(b) Demand curve is Average Revenue Curve: For amonopolist, the demand curve (D) and the average revenue( A R) curve are same . The corresponding marginal revenue(MR) curve is also downward sloping and steeper than the A R curve.

Perfect CompetitionMonopoly

P=AR=MR

Q

P

P

Q

ARMR


17/23

17

(c) Determination of Profit-maximizing Price andQuantity-(i) MC=MR (first order condition)(ii) Slope of MC>Slope of MR (second order condition)

For monopolists the market demand curve D isthe same as AR curve.The relationship between MC and AC (MC willpass through the lowest point of AC).

At point e, MR equal MC and the slope of MR isless than the slope of MC. So, both theconditions of profit maximization are satisfied.The quantity level corresponding to point e is Q*.


18/23

18

ARMR

C

B

A MC AC

C*

P*

O

P,C,R

Q*


19/23

19

Using the demand curve, price P* can be findout corresponding to the output level Q*.

At OQ* output level, cost per unit of output isOC*, because at OQ* output level, average costper unit of output is BC* = OC*. Total revenuegenerated by the monopolist at OQ* outputlevel is,OP* (price per unit) x OQ* (number of unit sold)= the area OP*AQ*Similarly, at total cost incurred by themonopolist to produce OQ* output is equal to,OC* (average cost per unit) x OQ* (number of units sold)= the are OC*BQ*


20/23

20

Therefore, the total profit earned by themonopolist by selling OQ* units of output is:=Total Revenue - Total Cost,=area OP*AQ* - area OC*BQ*

= area C*P*ABIn this particular case profit per unit is equalto C*P*.


21/23

21

Price DiscriminationPrice DiscriminationIn case of monopoly, as the firm under

consideration is the only one firm in themarket which produces and / or sells aparticular commodity /service (that has noclose substitute), may charge differentprices from different customers for thesame product or service . This practice practiceof differentiating customers with regard of differentiating customers with regard to price is called price differentiation.to price is called price differentiation.Charging different prices from different Charging different prices from different customers might be a welfare measurecustomers might be a welfare measure .e.g Doctors, Railways, Airlines etc.


22/23


23/23

23

Thank You

unit iii 1 monopoly

Documents