ME_Session 13 Markets

8/3/2019 ME_Session 13 Markets

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Session Objectives

Understand the Structure of VariousMarkets Pure/Perfect Competition

Monopolistic Oligopoly

Duopoly

Monopoly Oligopsony

Duopsony

MonopsonyApril 29, 2012 Session 13 1


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MARKETMeans by which buyers

and sellers are broughtinto contact with each

other and goods andservices are exchanged

April 29, 2012 Session 13 2


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Market Structure

Determinants of market structure

Freedom of entry and exit

Nature of the product homogenous(identical), differentiated?

Control over supply/output

Control over price

Barriers to entry



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Very

Many

Cable TV

Water

Agric. products

Fishery

Some

Fair

Amount

Fair amount

with

differentiatedoligopolies

Extensive

Extensive



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Monopoly

Pure monopoly where only oneproducer exists in the industry. Inreality, rarely exists always someform of substitute available!

No substitutes for the good There are barriers to entry into themarket

Monopoly exists therefore where one

firm dominates the market Firms may be investigated for

examples of monopoly power whenmarket share exceeds 25%



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industrys on a monopoly

board?

Trains

Water

Electricity Taxman

Bank

Jail Car Parking


Which of these

industries do youthink are

MONOPOLIES?


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Monopoly power

Monopoly power refers to cases wherefirms influence the market in some way

through their behaviour determined bythe degree of concentration in theindustry Influencing prices Influencing output

Erecting barriers to entry Pricing strategies to prevent or stifle

competition May not pursue profit maximisation

encourages unwanted entrants to the market Sometimes seen as a case of market failureApril 29, 2012 Session 13 8


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Monopoly

Origins of monopoly: Natural monopoly usually on a network or

grid wasteful to duplicate! Geographical factors where a country or

climate is the only source of supply of a rawmaterialquite rare. However, consider a singlegrocery store in a isolated village

Through growth of the firmThrough amalgamation, merger or takeover

Through acquiring patent or licenseThrough legal means Royal charter,

nationalisation, wholly owned plc



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Monopoly characteristics

Price could be deemed too high, may be set todestroy competition (destroyer or predatory pricing),price discrimination possible.

Efficiency could be inefficient due to lack of

competition (X- inefficiency) or could be higher due to availability of high

profits Innovation - could be high because of the promise

of high profits, Possibly encourages high investment

in research and development (R&D). Could be low asthere is no incentive to reduce costs.

Collusion possible to maintain monopoly power ofkey firms in industry



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Revenue in Monopoly

Single seller situation So Demand Curve of Industry and the

Monopolist is the same

AR and MR curves are downward sloping

Position of MR Curve

If TR = PQ and P = a bQ

MR and DD curve start from same point

i.e. a

MR has ve slope and is twice as steep

as DD curve


Qty Demanded

Pric

e

P

Industry Demand Curve

Q

Price/MR

Quantity

P

O

A

B

C

MR

AR


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Equilibrium of a Monopoly

Objective Profit Maximization Conditions

MC = MR

Slope of MC > Slope of MR

In the fig.

MC intersects MR from below at E

At this Point OQ is the equilibrium

Output

OC is the equilibrium Price

TR = OCDQ

TC = OBAQ

Profits = TR TC = ABCD


Output

Cost/Revenu

e

MC

AVC

O

C

Q

E

A

ATC

B

D


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Price discrimination

Refers to the practice by the seller ofcharging different prices in differentmarkets or to different buyers for the

same commodity.

Mr. John Robinson it is the act of sellingthe same product produced under asingle control, at different prices todifferent buyers.April 29, 2012 Session 13 13

Diff t f f i


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Different forms of pricediscrimination

Personal price discrimination

Regional price discrimination

Trade price discrimination

Price discrimination on the basis of Ageand Sex

Price discrimination on the basis ofuantit of the roduct urchasedApril 29, 2012 Session 13 14


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Conditions essential for the successof price discrimination

Monopoly No resale Differences in the elasticity of demand

Immobility of buyers Personal service- ignorance

- indifferent attitude

Existence of more than one market Boundaries and tariff



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Degrees of pricediscrimination

First degree price discrimination

Second degree pricediscrimination

Third degree price discrimination



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First-degree pricediscrimination 1

Monopolist charges consumers theirreservation value for each unit consumed.

Extracts all consumer surplus

Since profit is now total surplus, find thatfirst-degree price discrimination is efficient.



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First Degree DiscriminationPerfect Discrimination

The entire Consumers Surplus is

appropriated

The Monopolist charges different price for

every successive unit sold

Also as successive units are sold at different

rates equilibrium shift to G intersection of

MC and DD curve

Thus Profits are maximized when the MC

intersects the Demand Curve


Output

Cost/Re

venue

MCO

C

Q2

A

D

F

G

OCDQ1 is the TR for Simple

Monopolist With Price Discrimination ACD

the consumers surplus getsappropriated in TR of theMonopolist

Q1


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Second Degree PriceDiscrimination

Price varies according to quantitysold

Though the monopolist charge

different prices for the sameproduct, he is not able to charge themaximum possible price.

In other words he is not able toconvert the same consumer surplusof the buyer into his profit.

Mrs. John Robinson calls it the

Imperfect discriminating monopolyApril 29, 2012 Session 13 19


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The diagram indicates the

different prices OP1, OP2,OP3, charged by the sellerfrom three different groupof consumers(1, 2, 3) form

each group, the sellercharges price according towhat they are willing topay


1

2

3

K

P

P1

P2

P3

Q1 Q2 Q3 Q4 Quantity

x

Y

O


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Explanation The diagram indicates the different prices

OP1, OP2, OP3, charged by the sellerfrom three different group ofconsumers(1, 2, 3) form each group, the

seller charges price according to whatthey are willing to pay.

However, he does not charge themaximum possible price.

In other words he allows the consumer toenjoy a part of their consumers surplusApril 29, 2012 Session 13 21


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Third Degree Discrimination A Monopolist may try to

segment the market based

elasticity of demand in order tocapture Consumers Surplus

In the fig The Monopolist has divided his

market in 2 segments AR1 isrelatively inelastic demand whileAR2 is relatively elastic demand

MR1 and MR2 are thecorresponding MR curves CMR is the combined MR curve

for the Monopolist Condition for Equilibrium MR =

MC E is the point of firms

equilibrium with Output OQ

How is the Output to bedistributed in the two markets ? Such that the MR1 = MR2 = MC

at equilibrium Thus F and G is such level of

MR1 and MR2 respectively


Therefore OQ1 and OQ2 are

corresponding quantities in the 2markets

P1 and P2 are corresponding prices

Price charged is higher in market

with inelastic demand

AR1MR1

AR2

MR2

CMR

MC

Q1 Q2 Q

P1

P2

P

EGF

OOutput

Price

/R/

C


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discrimination

Price varies by location or by customersegment

Takes place when a seller chargesdifferent prices for the same product atdifferent markets on the basis ofelasticity of demand.

Normally the seller charges a lower pricein a market where the demand isrelativel elastic and a hi her rice in aApril 29, 2012 Session 13 23


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EXAMPLES

Movie Tickets

Airline Prices

Discount Coupons

Financial Aid



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Applications of Discriminating

Monopoly Pricing of Premium and Economy segments

Two part tariffs of utilities eg. Telecom, Toll-roads, etc.

Dumping

Different charges for foreign citizens Special discounts for women, children, senior citizens,

etc.

Pre-requisites for successful discrimination Markets separated

Different price elasticities in different markets



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Perfect Competition

Free entry and exit to industry

Homogenous product identical so noconsumer preference

Large number of buyers and sellers no

individual seller can influence price Sellers are price takers have to accept the

market price

Perfect information available to buyers and

sellers



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Perfect Competition

Advantages of Perfect Competition:

High degree of competition helps allocateresources to most efficient use

Price = marginal costs Normal profit made in the long run

Firms operate at maximum efficiency

Consumers benefit



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Perfect Competition

What happens in a perfectlycompetitive environment? New idea? firm makes short term abnormal

profit

Other firms enter the industry to takeadvantage of abnormal profit Supply increases price falls Long run normal profit made Choice for consumer

Price sufficient for normal profit to be made butno more!



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MonopolisticCompetition

Many buyers and sellers Products differentiated Relatively free entry and exit Each firm may have a tiny monopoly because

of the differentiation of their product Firm has some control over price Examples restaurants, professions, solicitors,

building firms etc.



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Monopolistic Competition Essential characteristics

Differentiated products

Easily substitutable

Free entry and exit

Every player tries to create productdifferentiation by Brand building

Thus for the limited differentiated

category the player enjoys limitedMonopoly

The degree of Monopoly enjoyed by theplayer can be measured by the mark-uphe can charge above MC

Degree of Monopoly / Monopoly Powermeasured by Lerner Index

L = (P MC)/P = (P MR)/P

L = [P P(1 + 1/e)]/P = 1/e

Higher e Lower Monopoly Power


Mark-up

Mark-up

Mark-up is small when e is high


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Equilibrium in Monopolistic

Competition


Short-run EquilibriumTR > TCFirms are able to earn

abnormal profits

Long-run EquilibriumTR = TCBecause of free-entry and presence of

close substitutes abnormal profits areabolished in the Long-run

As Prices fall

And elasticity of demand for individual firm

increases

P

P

MC

AC

ARMR

MCAC

ARMR

A B

C

O Q O Q


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Oligopoly

Competition amongst the few Industry dominated by small number of large firms Many firms may make up the industry High barriers to entry Products could be highly differentiated branding or

homogenous Nonprice competition Price stability within the market - kinked demand curve? Potential for collusion? Abnormal profits

High degree of interdependence between firms



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Oligopoly

Examples of oligopolisticstructures: Supermarkets

Communication Chemicals

Broadcasting



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Kinked Demand CurvePrice

Quantity

D = elastic

D = Inelastic

5

100

Kinked D Curve

Oligopoly



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Duopoly

Industry dominated by two large firms

Possibility of price leader emerging rival will follow price leaders pricingdecisions

High barriers to entry

Abnormal profits likely


uopo yuopo y w en rms om na e an


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uopo yuopo y w en rms om na e anindustry.

1. Coke ClassicCoke Classic

2. Pepsi Cola2. Pepsi Cola3. Diet Coke3. Diet Coke

4. Mountain Dew4. Mountain Dew

5. Diet Pepsi5. Diet Pepsi

April 29 2012 Session 13 36

Coke products have 43% of the market and Pepsi products have 32%.

Pepsis first commercial in 1939 became so popular, it becamePepsis first commercial in 1939 became so popular, it became

a hit recorda hit record andand was played in jukeboxes. A 12-ounce bottle soldwas played in jukeboxes. A 12-ounce bottle sold

for a nickelfor a nickel

6. Sprite6. Sprite

7. Dr. Pepper7. Dr. Pepper

8. Caffeine Free Diet Coke8. Caffeine Free Diet Coke

9. Diet Dr Pepper9. Diet Dr Pepper

10. Sierra Mist10. Sierra Mist

ME_Session 13 Markets

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