Topic 9 - ECON - Chapters 8 and 9

8/12/2019 Topic 9 - ECON - Chapters 8 and 9

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The monopoly market structure• Monopoly is characterised by:

– a single seller in the market – a unique product

– high barriers to entry that make it difficult orimpossible for other firms to enter the market.

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A natural monopoly

• An industry where the LRAC declines along theentire range of output.

• A single firm can supply the entire marketdemand at a lower cost than two or more smallerfirms.



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Price and output decisions for a monopolist

• The major difference between monopoly andperfect competition is the shape of the demandcurve faced by the firm.

• Monopolists are price makers – they face adownward-sloping demand curve for theirproducts.

• This means they can choose between price andoutput combinations.



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The monopolist’s demand curve

• The monopolist’sdemand curveand the industrydemand curve areone and thesame .



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Demand and marginal revenue curves

• If demand is downward sloping, then themonopolist must lower price in order to sell an

extra unit.• This price-cut applies to all units, not just the

last unit. This means marginal revenue isalways less than price .

• The marginal revenue for a monopolistintersects the quantity axis halfway betweenthe origin and the demand curve.



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Profit maximisation

• Economists assume that all firms try to maximiseprofits (or minimise losses).

• Like the perfectly competitive firm, the monopolist

also maximises profit by producing that level ofoutput for which MR = MC .



Monopoly in the short run

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Monopoly in the long run

• If the factors determining the positions of amonopolist’s demand and cost curves mean itearns an economic profit , and if nothingdisturbs these factors, economic profit willcontinue in the long run.





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Conditions forprice discrimination

• A firm can engage in price discrimination if theseller:

– is a price maker

– can separate consumers into marketsegments (perhaps on the basis of priceelasticity of demand)

– can prevent arbitrage (buying then resellingfor a higher price).



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Price discriminationin practice

• Many firms with a downward-sloping demandcurve (not just monopolists) can practise pricediscrimination: – different fares based on age or status – different seat prices at sporting events – restaurant discounts to senior citizens – discounts for volume purchases.



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Is price discrimination unfair?• Price discrimination allows sellers to charge what

buyers are willing to pay.

• Many buyers benefit from the discrimination by

not being excluded from purchasing a productthey could not otherwise afford.



Comparing monopoly and perfectcompetition

• Compared to perfect competition, the monopolist: – allocates resources inefficiently – produces less output

– charge a higher price.

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Chapter 9 ImperfectCompetition

Monopolistic competition and oligopoly



The monopolistic competition marketstructure

• Monopolistic competition features: – many small sellers – differentiated product

– non-price competition – easy entry and exit.

• It is the market structure in which we find more

firms than any other structure.

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Many small sellers

• Each firm is so small, relative to the total market,that each firm’s pricing decisions have anegligible effect on the market price.

• However, monopolistically competitive firms areprice makers ; that is, they have some control overtheir price.



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Product differentiation

• Product differentiation is the key feature ofmonopolistically competitive markets.

• Product differentiation is the process of creating

real or apparent differences between goods andservices.

• Such differences give firms the capacity toincrease their prices .



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Non-price competition

• In monopolistically competitive markets, firmscompete using non-price techniques: – advertising – packaging – product development – better service.

• This avoids having to compete by lowering prices.





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The monopolistic competitor’s demandcurve

• The demand curve for a monopolisticallycompetitive firm is downward sloping .

• It is less elastic than the demand curve for the

perfectly competitive firm.• It is more elastic than a monopolist’s demand

curve.



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Advertising

• Advertising is one of the types of non-pricecompetition used in monopolistic competition.

• Its purpose is to help differentiate the product

from its competitors.• Advertising is probably more effective in the short

run than in the long run.



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Monopolistic competition in the long run

• In the long run, each firm in a monopolisticallycompetitive market will earn normal profit .

• This is because there is relatively easy entry and

exit.• For example, if a restaurant earns a short-run

economic profit, new firms have an incentive toenter the market.



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Benefits ofmonopolistic competition

• Although monopolistic competition fails theefficiency test , the product variety that occursbecause of product differentiation mayoutweigh efficiency loss.

• Differentiated products allow consumer choice (not available in perfect competition).



The oligopoly market structure• Oligopolistic markets tend to be dominated by afew large firms.

• Oligopolistic markets feature:

– few sellers – homogeneous/differentiated product – difficult market entry.

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Mutual interdependence

• Mutual interdependence is the distinguishingfeature of oligopoly.

• This means a decision by one firm is likely tocause some reaction from other firms in the samemarket, e.g. banks and the fees they charge.

• Interdependence means decisions in oligopolyare more complex than in other market forms.



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Price and outputdecisions for an oligopolist

• Mutual interdependence makes the oligopolymarketplace more difficult to analyse than perfectcompetition, monopolistic competition ormonopoly.

• So the price – output decision also takes intoaccount the possible reactions of other firms.



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Kinked demand curve

• This is one explanation of oligopolistic behaviour.• The firm assumes rivals will ignore a price

increase and match a price cut.

• The demand curves therefore have twosegments , above and below a price point.

• This model suggests prices will be ‘sticky’.



Topic 9 - ECON - Chapters 8 and 9

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