Transcript
“Pure Monopoly”
“PURE MONOPOLY” A market in which one
company has control over the entire market for a product, usually because of a barrier to entry such as a technology only available to that company.
CHARACTERISTICS OF PURE MONOPOLY
Single Seller
No Close Substitute
Price Maker
Blocked Entry
“ADVANTAGES
”
Provides incentiv
e for innovati
on.
Take advantage of
economies of scale
and scope.
“Disadvantages”
Limits options to consumers (and we pay a higher price).Profit and losses don’t send proper
signals or send proper incentives.
Rent seeking behavior (rent is another word for monopoly profit), spending money to obtain a monopoly
position.
Monopoly
• Is the sole provider• Faces a downward-
sloping demand curve• Is a price maker• Reduces price to
increase sales
Competitive Firm
• Is one of many producers
• Faces a horizontal demand curve
• Is a price taker• Sells as much or as
little at same price
HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISION
MONOPOLY DEMAND
AssumptionsPatents, economies of scale, or resource ownership secure the monopolist's status.
No unit of government regulates the firm.
The firm is a single-price monopolist; it charges the same price for all units of output.
Three implications of the downward-sloping demand curve
Marginal revenue is less than price
The monopolist is a price maker
The monopolist sets prices in the elastic region of demand
Demand and MR for a Monopolist
P1
P2
P3
P, C
ost
Q1 Q2 Q3
Q
Tota
l R
eve
nu
e MR
TR
PED>1
PED=1
PED<1
D=AR=P
At which price/output combination will a monopolist produce?
OUTPUT AND PRICE DETERMINATION
Cost dataAssumption - a pure monopolist hires
resources competitively and has the same technology as a purely competitive firm.MR=MC rule
A monopolist seeking to maximize total profit will employ the same rationale as a profit-seeking firm in a competitive industry; they will produce at the point where MR = MC.•Profit maximizing price: Find MC= MR and draw a vertical line up to the demand curve.•Draw a horizontal line. This is the price they set.
Pure Monopolist Earning Profits
Economic Profit
P1
ATC1
P,
Cost
MC ATC
D=AR=P
Q1 MR Q
No monopoly supply curve
No unique relationship between price and quantity supplied for a monopolist → no supply curve. Because the monopolist does not equate marginal cost to price, it is possible for different demand conditions to bring about different prices for the same output
Misconceptions concerning monopoly pricing
Not Highest PriceMisconception: Monopolists will charge highest price
possible because they can manipulate output & priceMonopolies still face consumer demand. If the price is too high, consumers won't buy their products, and profits are decreased. Although there are many prices above Pm, monopolists don't charge at those prices because they would yield a smaller-than-maximum total profit. (High prices would potentially reduce sales and total revenue too severely to offset any decrease in total cost) Monopolist seek maximum total profit, NOT the maximum price
Total, Not Unit, ProfitOutput level may not be at maximum per-unit profit, but additional sales make up for lower unit profit, which in turn maximizes total profit.
Pure Monopolist Experiencing Losses
ATC1
P1
LOSSATCMC
Q1
MR
D=AR=P
P, C
ost
Q
Price Discrimination
The practice of selling a specific product at more than one price when the price differences are not justified by cost differences.
Ways of Price Discriminating
1. Charge each person his or her max willing-to-pay price 2. Charge more for the first set of the
product, then less for each additional product bought by the same consumer
3. Charge different customers different price based on factors such as race, gender, age, abilities etc.
Price discrimination
Is possible when the following conditions are realized:
Monopoly PowerMarket Segregation
No ResaleLittle or No Cost Difference
Perfect Price Discrimination
to charge what each consumer is willing to buy. Although
perfect price discrimination is unlikely to be achieved, consumer surplus will be
reduced to zero.
P1
ATC1
Q1
MR
Q
ATC
MC
Economic Profit
D=AR=P
P,
Cost
ATC1
ATC
MC
MR=D=AR=P
Q1 Q
Economic ProfitP
, C
ost
Single Price Monopolist Earning ProfitsPrice Discriminating Monopolist
Price Determination
MR = MC Rule Monopolies maximize total profit by producing at a level of output where MR = MC This is the same as a purely competitive industry At this level of output, the difference between TR and TC is also at its greatest
Consequences of Price Discriminating Monopolies
1. More profit2. More output3. Lowest price will = MC4. Zero consumer surplus (when
perfect)5. Creates allocative efficiency6. No productive efficiency because P>
min ATC7. MR is reunited with DARP because
the firm no longer has to decrease the price of every unit sold prior. In other words, at each quantity, the product will be sold at a different price.
GROUP 2 MEMBERSAizell Bernal
Dianne De GuzmanSheryl Tolentino
Shara Jane ClaytonJean Marie Canona
Kate GarciaJeradie Joves
Miguel AprueboPatrizia Louiz Reyes
Allan Roi Mapa
top related