Monopoly

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MONOPOLYEQUILIBRIUM, PRICE

DISCRIMINATION, AND CONTROL MECHANISM

FEATURES OF MONOPOLY1.Single seller and large no. of

buyers.2.No close substitutes.3.Closed entry4.Price maker5.Price discrimination

KINDS OF MONOPOLY1.Public and private monopoly2.Simple and discriminating

monopoly3.Natural and artificial

monopoly4.Technological monopoly5.Fiscal and legal monopoly

MONOPOLY EQUILIBRIUM C/R

MC AC P C

R B A MR AR O Q

OUTPUT

EXPLANATION OF THE DIAGRAMIn the diagram AC and MC are average cost

and marginal cost curves; AR and MR are the average and marginal revenue curves.

Equilibrium of the monopolist takes place at MR=MC, i.e. at the point A.

At the point, average cost is P; and average revenue is R.

There are abnormal profits of PRBC.

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Price Discrimination

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Definition

Selling a good or service at a number of different prices where the price differences do not reflect differences in cost but instead reflect differences in consumers’ price elasticities of demand.

Successful price discrimination requires• Market segmentation—the seller is able to

identify different types of buyers based on differences in their demand elasticities.

• Costly arbitrage—it is costly for one consumer to buy the good at a lower price and resell to another consumer at a higher price

Characteristics of Price Discrimination

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Two types of price discrimination

Discriminating among groups of consumers

Discriminating among units of a good

The seller charges the same prices to all consumers but offers each consumer a lower price for a larger number of units bought—volume discounts, for example.

PRICE DISCRIMINATION R/C

P1 MC AC

P2 E MR AR1 AR

OUTPUT

EXPLANATION OF THE DIAGRAM

In the diagram AC, MC, AR, MR are cost and revenue functions.

Equilibrium is arrived at a point E, where MR=MC

AR1 is the demand function in a different market, which is more elastic.

The monopolist will charge P1 in a AR market and P2 in the AR1 market.

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Effects of Price Discrimination

Price discrimination may

• Increase seller’s profit, at least in the short run

• Enhance economic inefficiency

• Conserve on scarce resources.

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Increases seller’s profits

Reducing price to buyers with elastic demands increases revenues.

Raising price to buyers with inelastic demands also increases revenues.

If total quantity is unchanged, then costs are unchanged but revenues and profits are higher.

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Effects of Price DiscriminationEnhances economic inefficiency

Monopoly is inefficient because of underproduction. Too little of

the good—less than the efficient quantity—is supplied by the

monopolist.

A price-discriminating monopolist is able to sell a larger

quantity than a single-price monopolist by reducing price only

on the additional units sold, not on all units sold.

Because the problem with monopoly is underproduction,

increasing quantity enhances efficiency. The sum of producer

and consumer surplus is higher in a monopoly market with price

discrimination than in a market with a single-price monopolist.

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Conserves on scarce resources

In many markets, demand fluctuates systematically, often by time of day or day of the week or seasonally.

Demand fluctuations result in crowding of facilities during peak periods and excess capacity during off-peak periods.

Price discrimination reallocates demand from peak times to off-peak times. With lower demand during peak times, the capacity of a facility needed to serve the market is smaller and fewer resources are required to satisfy consumer demand.

MONOPOLY CONTROLPOLICIES FOR REGULATING MONOPOLY

Government’s Regulatory Influence on Business

Controls natural monopoliesControls negative externalitiesAchieves social goalsOther reasons

Controls excess profitsControls excessive protection and Controls unethical behaviour.

Reasons for Regulation

Comparison of Economic and Social Regulation

Economic Regulations

Social Regulations

Focus Market conditions;economic variables

People in roles as employees, consumers and citizens

Affected Industries

Selected (railroads, aeronautics, communications)

Virtually all industries

Current Trend

From regulation to deregulation

Stable10-21

Fair treatment of employees

Safer working conditionsSafer productsCleaner air and water

Benefits of Regulation

Costs of RegulationDirect costs--Reduced innovation

Indirect costs--Reduced investment in plant and equipment

Induced costs--Increased pressure on small business

COMPETITION ACT,2002

The Competition (Amendment) Act, 2007

BROAD AIMS OF COMPETITION ACT,2002

An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission:

to prevent practices having adverse effect on competition,

to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other

participants in markets, in India, and for matters connected therewith or incidental thereto. It was enacted by Parliament in the Fifty-third Year of the Republic of India .

PILLARS OF COMPETITION ACT, 2002

Competition Act, 2002 has essentially five compartments:

1. Anti - Competitive Agreements[Section 5]2. Abuse of a Dominant position[Section 6] 3. Combinations Regulation[Section 7] 4. Competition Advocacy [Section 8]5. Enforcement [Section 9]

Monopoly

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