4.2- monopoly

• Monopoly


  A single seller in the market
• Natural monopoly

  A market structure where the most efficient number of firms is 1
• Price discrimination

  When a monopolist charges different groups of consumers different prices for the same good or service.
• What are barriers to entry and exit?

  Barriers to entry are obstacles that make it difficult for new firms to enter a market, while barriers to exit are obstacles that make it difficult for firms to leave a market.
• What is 1st degree price discrimination?

  Charging each customer the maximum price they are willing to pay.
• what is 1st degree price discrimination?

  Pricing strategy where a seller charges different prices to different groups of customers based on their willingness to pay.
• what is 3rd degree price discrimination?

  Pricing strategy based on charging different prices to different customer segments based on their willingness to pay.
• what are strengths of price discrimination?

  Increased profits, better resource allocation, and increased consumer surplus.
• what are limitations of price discrimination?

  Consumer resentment, reduced consumer surplus, inequality, higher prices, administration costs, doesn’t always lead to allocative efficiency and potential for market segmentation.
• Leads to the consumer surplus is directed to the monopoly as opposed to being a benefit to the consumer.
• 3rd degree Price discrimination is when lower prices are charged to people who purchase large quantities, encouraging larger orders and turning some of the consumer surplus into revenue for the seller.
• 3rd degree price discrimination is when consumers are grouped into 2 or more independent markets, such as train companies offering discounts for people over 65 and to people travelling off-peak.
• 3rd degree price discrimination - Firm charges different prices for the same product to different segments of the market, these different segments could be customers of different ages, customers who buy at different times, or customers in different places.
• To maximise profit, the seller would set the price for each group at a level where MC=MR.
• This means the seller will charge a higher price to the group with inelastic PED and a lower price to the group with a more elastic PED.
• The red areas represent the supernormal profit earned from each group, this total supernormal profit is greater than if the same price were charged to everyone.
• Price discrimination can increase revenue for a firm, may lead to increased R&D, and may lead to better products for consumers.
• Price discrimination can lead to higher prices for some consumers, resulting in allocative inefficiency and a loss of consumer surplus.
• Price discrimination can lead to inequality, as those who benefit from lower prices may not be the poorest.
• Administration costs can be high in price discrimination, as the costs involved in separating the market and implementing different prices may be high.
• Price discrimination doesn’t always lead to allocative efficiency, as in all cases AR>MC so price discrimination doesn’t lead to allocative efficiency.
• In a monopoly, the consumer doesn’t have a choice to go somewhere else, there’s 1 seller, so a monopoly can use price discrimination and charge customers what they’re willing to pay rather than the market price.
• In monopolies, the customer doesn’t have a choice to go somewhere else as there’s only 1 seller, so a monopoly can use price discrimination and charge customers what they are willing to pay, not the market price, leading to the consumer surplus being directed to the monopoly as opposed to being a benefit to the consumer.
• Price discrimination is the ability of a firm to charge different prices to different customers, occurring when a firm charges a different price for the same good to different groups of consumers, with no difference in costs of production.
• Price discrimination aims to increase revenue and profits by selling extra units of a good or service at a price above marginal cost of supply.
• Price discrimination transfers consumer surplus to producer surplus, as consumer surplus is the difference between the actual selling price of a product and the price a consumer would be willing to pay.
• Perfect/first degree price discrimination is a situation arising in a market whereby a monopoly firm is able to charge each consumer a different price, which is the price they are willing to pay, eroding consumer surplus, and is very difficult in practice.
• 2nd degree price discrimination is when consumers are charged different prices according to how much they consume, often used in wholesale markets.
• Pure monopoly


  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 to choose what price to sell its products
• Characteristics of monopoly


  Single seller in a market

  barriers to entry and exit

  price maker

  no close substitutes

  supernormal profit in the short and long run
• monopoly diagram

  
• Dynamic efficiency


  Occurs in the long run, leading to the development of new product and more efficient processes that improve productive efficiency
• X-inefficiency 


  Lack of incentive to reduce costs
• Productive efficiency


  Operating at the lowest average cost

  where MC curve crosses AC curve
• Efficiency under monopoly


  Productively inefficient

  Allocatively inefficient

  X-inefficient

  Possibly dynamically efficient
• Price discrimination


  Business practice of selling the same good at different prices to different customers with no different costs of production
• Conditions necessary for price discrimination

  Firm must be a price maker

  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

  must be different elasticity of demand for the different market sections

  Cost of separating markets must be less than the extra revenue gained

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

  Firm can increase revenue

  • may otherwise make abnormal profits

  lead to increased research and development

  • leading to better products for consumers and dynamic efficiency

  cheaper prices for some consumers

  • e.g pensioner discounts

  makes provision of a service economically viable