Monopoly

• Monopoly (pure): Situation in which there is a single seller in the market with no competitors
• Legal monopoly: When a business has 25% or more of the market share
• Price maker: A firm that has the ability/power to choose at what price it sells its products.
• The characteristics of monopoly:

  Single seller in a market.

  Barriers to entry and exit from a market

  Price maker

  No close substitutes

  Supernormal profit in SR and LR
• Efficiency under monopoly

  1. Allocative efficiency -No

  2. X-efficiency -No

  3. Dynamic efficiency -Yes, possible

  4. Productive efficiency -No
• Price discrimination: The business practice of selling the same good at different prices to different customers (with no difference in costs of production)
• Conditions necessary for price discrimination

  1. The firm must be a price maker.

  2. The firm must be able to separate the market into different sections and prevent resale, e.g. it must be impossible for an adult to use a child’s ticket​

  3. There must be a different elasticity of demand for the different market sections

  4. The cost of separating markets must be less than the extra revenue gained​

  5. It usually requires low or constant marginal cost
• Arguments for price discrimination

  1. Firm will be able to increase revenue, who may have otherwise made a loss

  2. May lead to increased R & D, leading to better products for consumers​

  3. Cheaper prices for some consumers e.g. pensioner discounts​

  4. To make provision of a service economically viable.
• Arguments against price discrimination

  1. Higher prices. Some consumers will face higher prices, leading to allocative inefficiency and a loss of consumer surplus.​

  2. Inequality. Often those who benefit from lower prices may not be the poorest. For example, some old people may be quite rich, but the unemployed will have to pay the full adult rate.​

  3. Administration costs. The costs involved in separating the market and implementing different prices may be high.
• Natural monopoly: Type of monopoly in which there are large economies of scale to be gained to the point where only one firm is viable and efficient.
• Advantages of a monopoly/natural monopoly

  1. Can be dynamically efficient

  2. Can gain EOS, reducing average costs

  3. More ability to be internationally competitive

  4. Supernormal profits can be reinvested creating more jobs and new products

  5. The potential of becoming a monopoly may incentivise a firm to be more successful

  6. Can avoid duplication of effort and be more efficient than running two services as the EOS may be so great e.g rail companies, utilities
• Disadvantages of a monopoly/natural monopoly

  1. High prices for consumers (loss of consumer surplus)

  2. X-inefficiency leading to higher average costs

  3. Less incentive to innovate due to lack of competition

  4. Potential diseconomies of scale

  5. Less consumer choice

  6. Allocatively inefficient

  7. Productively inefficient
• monopoly diagram:

  A) mc

  B) AC

  C) D=AR

  D) MR

  E) AC

  F) Price

  G) Quantity

  H) Profit max

  I) Supernormal profit

  
• Monopoly deadweight welfare loss: monopoly vs competitive market

  You can argue monopolies are bad for society as they cause market failure

  A) A B C

  B) A

  C) D E

  D) B D

  E) A B C D E

  F) A B D

  G) Deadweight loss consumer surplus

  H) Deadweight loss producer surplus

  
• In a natural monopoly diagram, a downwards sloping AC curve shows it is more efficient to have one single firm operate in a market
• 1st Degree Price disc: This involves charging consumers the maximum price that they are willing to pay. There will be no consumer surplus.
• Second Degree Price Discrimination This involves charging different prices depending upon the choices of consumer. For example quantity, time period, collecting coupons
• 2nd-degree price discrimination is sometimes known as ‘indirect price discrimination’ because the firm allows consumers to choose which price they will pay. Some choices are offered cheaper because they impose costs on consumers (e.g. collecting coupons, buying in bulk or unsocial hours.
• • Third Degree Price Discrimination – ‘Group price discrimination’ This involves charging different prices to different groups of people
• Firms will be able to increase revenue. Price discrimination will enable some firms to stay in business who otherwise would have made a loss. They can also reinvest this. For example price discrimination is important for train companies who offer different prices for peak and off-peak. Without price discrimination, they may go out of business or be unable to provide off-peak services
• It can lead to lower prices for some. Some consumers will benefit from lower fares. For example, old people benefit from lower train companies; old people are more likely to be poor. Also, customers willing to spend time in researching ‘special offers’ and travelling at awkward times will be rewarded with lower prices.
• It manages demand. Airlines can use price discrimination to encourage people to travel at unpopular times (early in the morning) This helps avoid over-crowding and helps to spread out demand.
• It can lead to higher prices for some. Under price discrimination, some consumers will end up paying higher prices (e.g. people who have to travel at busy times). These higher prices are likely to be allocatively inefficient because P > MC.
• Leads to a decline in consumer surplus. Price discrimination enables a transfer of money from consumers to firms – contributing to increased inequality.
• First Degree PD

  A) Original Revenue

  B) Consumer Surplus turned into revenue