Monopoly

• Monopoly Characteristics 


  • Single seller – a sole producer
  • No close substitutes – unique product
  • Price maker – control over price
  • Blocked entry – strong barriers to entry block potential competition
  • Non-price competition – mostly PR or advertising the product

  
• Barrier to Entry


  A factor that keeps firms from entering an industry
• Economies of Scale


  • Modern technology – incur declining ATC with added firm size. In such, firm's LR-ATC will decline over a large output
  • Given market demand, only single large firm can achieve ATC
• Economies of scale allow a firm to produce output with a low average cost due to the large quantities produced
• The output produced is able to accommodate almost all the demand in the market
• Economies of scale prevent new firms from entering the market as new firms need to sell its output at a price as low as the price of the firm experiencing economies of scale, which will probably result in a loss and the new firm will soon have to leave the market
• Legal Barriers


  • Patents – exclusive right of an inventor to use, or to allow another to use, her/his invention
  • Licenses – government limit entry into an industry or occupation through licensing
  • Copyrights - patent given to writings and publications of books and song writing
• Ownership of Essential Resources

  • A monopoly can occur when a particular firm is able to control a large portion or the entire supply of raw material that cannot be afforded by other firms
  • De Beers is a common example that exemplifies world monopoly of the mining of precious gems. Almost all of the world's precious gem mining is controlled by De Beers
• Pricing


  • Monopolist 'create and entry barrier' – slash price, advertising, etc
  • Price discrimination is the practice of selling different units of a good or service for different prices. Many firms price discriminate, but not all of them are monopoly firms
  • A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers

  
• Monopoly Demand


  • The pure monopolist is the industry - Demand curve is the market demand curve
  • Downsloping demand curve
  • Quantity demanded increases as price decreases

  
• Marginal revenue is Less Than Price (MR < P)


  The lower price is applied to all of the units being produced, not just the last unit thereby causing marginal revenue to be less than price
• Monopoly is a price maker, which is the ability of the firm to set its own price

  
• The monopolist avoids setting the price in the inelastic range of demand
• Profit-maximization in a monopoly firm

  • The monopoly chooses an output level where profit = TR – TC is maximized
  • The monopoly selects the profit-maximizing level of output in where MR = MC

  
• There is no unique relationship between price and quantity supplied for a monopolist, as they do not have a supply curve
• Monopolists do not necessarily charge the highest possible price, their total profits can be low, and they can even make losses
• Monopolies are inefficient compared to perfect competition, as they charge a higher price and produce a lower quantity
• Economic Effects of Monopoly

  • Income transfer - monopoly has market power to charge higher price and transfer income from consumers to business owners
  • Product innovations - patents and copyrights provide protection from competition and let the monopoly enjoy the profits stemming from innovation for a longer period of time
  • Cost complications - economies of scale, simultaneous consumption, network effects
  • X-Inefficiency - no competitive pressure, firm produce outputs at a higher cost than necessary
  • Rent seeking expenditures - activity designed to transfer income or wealth to particular firm or resource supplier at someone else's or society's expenses
  • Technological advance - monopolist may not be technologically progressive due to lack of competition

  
• Price discrimination


  • Monopolist imposes different prices on the same good to different consumers, not based on cost differences
  • Three forms: first degree (maximum price willing to pay), second degree (one price for first set of units, lower price for subsequent units), third degree (one price for one customer group, another price for other groups)
• Conditions for successful price discrimination: monopoly power, market segregation, no resale

  
• In a single-price monopoly, equilibrium output is lower and price is higher compared to perfect competition

  
• Regulated Monopoly


  • Socially optimal price - sets output where MR= MC and price equal to marginal cost
  • Fair return price - permits price discrimination to cover loss from marginal cost pricing, or produces quantity where price equals average total cost

  
• What is the characteristics of Monopoly?

  Single seller, no close substitutes, price maker, blocked entry, nonprice competition