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Monopoly: DR Monika Jain

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67 views

Monopoly: DR Monika Jain

Hhjfjhhhfjjfjfjgfjfhfjfhfghjjfjhjgjhgggggggggggggggggggggggg

Uploaded by

Rachit
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© © All Rights Reserved
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You are on page 1/ 33

MONOPOLY

DR MONIKA JAIN
MONOPOLY
• Only one seller of a particular product
• A firm is considered a monopoly if . . .
• it is the sole seller of its product.
• its product does not have close substitutes.

• While a competitive firm is a price taker, a


monopoly firm is a price maker.
WHY MONOPOLIES ARISE

• The fundamental cause of monopoly is barriers to


entry.
WHY MONOPOLIES ARISE

• Barriers to entry have three sources:


• Ownership of a key resource.
• The government gives a single firm the exclusive right to
produce some good.
• Costs of production make a single producer more efficient
than a large number of producers.
MONOPOLY RESOURCES

• Although exclusive ownership of a key resource is


a potential source of monopoly, in practice
monopolies rarely arise for this reason.
GOVERNMENT-CREATED MONOPOLIES

• Government-Created Monopolies
Governments may restrict entry by giving a single
firm the exclusive right to sell a particular good in
certain markets.
• Patent and copyright laws are two important
examples of how government creates a monopoly
to serve the public interest.
NATURAL MONOPOLIES

• An industry is a natural monopoly when a single


firm can supply a good or service to an entire
market at a smaller cost than could two or more
firms.
• A natural monopoly arises when there are
economies of scale over the relevant range of
output.
HOW MONOPOLIES MAKE PRODUCTION
AND PRICING DECISIONS
• Monopoly versus Competition
• Monopoly
• Is the sole producer
• Faces a downward-sloping demand curve
• Is a price maker
• Reduces price to increase sales
FIGURE 2 DEMAND CURVES FOR COMPETITIVE AND
MONOPOLY FIRMS

(a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve

Price Price

Demand

Demand

0 Quantity of Output 0 Quantity of Output

Copyright © 2004 South-Western


A MONOPOLY’S REVENUE

• Total Revenue
P  Q = TR
• Average Revenue
TR/Q = AR = P
• Marginal Revenue
DTR/DQ = MR
TABLE 1 A MONOPOLY’S TOTAL, AVERAGE,
AND MARGINAL REVENUE

Copyright©2004 South-Western
A MONOPOLY’S REVENUE

• A Monopoly’s Marginal Revenue


• A monopolist’s marginal revenue is always less than the
price of its good.
• The demand curve is downward sloping.
• When a monopoly drops the price to sell one more unit, the
revenue received from previously sold units also decreases.
FIGURE 3 DEMAND AND MARGINAL-REVENUE
CURVES FOR A MONOPOLY

Price
$11
10
9
8
7
6
5
4
3 Demand
2 Marginal (average
1 revenue revenue)
0
–1 1 2 3 4 5 6 7 8 Quantity of Water
–2
–3
–4

Copyright © 2004 South-Western


PROFIT MAXIMIZATION

• A monopoly maximizes profit by producing the


quantity at which marginal revenue equals
marginal cost.
• It then uses the demand curve to find the price
that will induce consumers to buy that quantity.
FIGURE 4 PROFIT MAXIMIZATION FOR A MONOPOLY

Costs and
Revenue 2. . . . and then the demand 1. The intersection of the
curve shows the price marginal-revenue curve
consistent with this quantity. and the marginal-cost
curve determines the
B profit-maximizing
Monopoly quantity . . .
price

Average total cost


A

Marginal Demand
cost

Marginal revenue

0 Q QMAX Q Quantity
Copyright © 2004 South-Western
FIGURE 5 THE MONOPOLIST’S PROFIT

Costs and
Revenue

Marginal cost

Monopoly E B
price

Monopoly Average total cost


profit

Average
total D C
cost
Demand

Marginal revenue

0 QMAX Quantity

Copyright © 2004 South-Western


PROFITS AND MONOPOLY

• The monopolist will make a profit if price exceeds


average total cost.

• The monopolist will make a normal


return if price equal average total
cost.
• The monopolist will incur a loss if
price is less than average total cost.
A MONOPOLIST MAKING A PROFIT

• A monopolist can make a profit.


A MONOPOLIST MAKING A PROFIT

MC
Price

ATC
PM A
Profit
B
CM

MR D
0 QM Quantity
A MONOPOLIST BREAKING EVEN

• A monopolist can break even.


A MONOPOLIST BREAKING EVEN

MC
Price
ATC

PM

MR D
0 QM Quantity
A MONOPOLIST MAKING A LOSS

• A monopolist can make a loss.


A MONOPOLIST MAKING A LOSS

MC
Price ATC

CM B
Loss
A
PM

MR D
0 QM Quantity
MONOPOLY PROFIT AND LOSS

• A monopolist will suspend operations in


the short run if its price does not exceed
the average variable cost at the quantity
the firm produces.
• A monopolist will shut down permanently if
revenue is not likely to equal or exceed all
costs in the long run.
• In contrast, however, if a monopolist
makes a profit, barriers to entry will keep
other firms out of the industry.
PROFIT MAXIMIZATION

• The monopoly firm will not set the price


arbitrarily high, the profit-maximizing price still
corresponds to the point where MR=MC.

• The monopoly firm’s market power will allow


the firm to achieve above-normal profits.
MONOPOLY MYTHS

1. A monopolist can charge any price it wants and

!
will reap unseemly profits by continually
e
u
increasing the price.

t Tr
o
2. A monopolist is not sensitive to customers.

ll N
3. A monopolist cannot make a loss.

A
PRICE DISCRIMINATION

• Price discrimination is the business practice of


selling the same good at different prices to
different customers, even though the costs for
producing for the two customers are the same.
PRICE DISCRIMINATION

• Price discrimination is not possible when a good is


sold in a competitive market since there are
many firms all selling at the market price. In
order to price discriminate, the firm must have
some market power.
•.
PRICE DISCRIMINATION OF FIRST
DEGREE

• Price Discrimination of first degree refers to the situation


when the monopolist knows exactly the willingness to
pay of each customer and can charge each customer a
different price. Thus every buyer is forced to pay the
price which is equal to maximum amount he is willing to
pay .
• Price Discrimination of Second degree- In Price
Discrimination of Second degree the buyers are divided
into different groups and from each group a different
price is charged which is the lowest price of that good.
PRICE DISCRIMINATION OF THIRD
DEGREE-

• Price Discrimination of Third degree- In Price


Discrimination of third degree the buyers are
divided into different groups or sub market and
from each group a different price is charged
which need not be lowest price of that good.
EXAMPLES OF PRICE
DISCRIMINATION
• Retail incentives
• Dry cleaning
• Haircutting
• Train Tickets

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