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Monopoly
Defining monopoly Only one seller Barriers to entry
economies of scale product differentiation and brand loyalty lower costs for an established firm ownership/control of key factors or
outlets legal protection mergers and takeovers aggressive tactics
Monopoly: Why? Natural monopoly (increasing
returns to scale). Artificial monopoly
a patent sole ownership of a resource formation of a cartel; e.g. OPEC
Monopoly: Assumptions
Many buyers Only one seller i.e. price-maker Homogeneous product Perfect information Restricted entry and possibly
exit
Monopoly: Features
The monopolist’s demand curve is the (downward sloping) market demand curve
The monopolist can alter the market price by adjusting its output level.
Monopoly The monopolist's demand curve
downward sloping MR below AR
Equilibrium price and output MC = MR
Monopoly The monopolist's demand curve
downward sloping MR below AR
Equilibrium price and output MC = MR measuring level of supernormal profit
Price Discrimination
Why do business week offer bargain rates to students?
PRICE DISCRIMINATION Charging different prices for a
product when the price differences are not justified by cost differences.
Objective of the firm is to attain higher profits than would be available otherwise.
Monopoly - Price Discrimination Different prices at different
markets Personal, Local or Trade use
First degree Charge maximum from able and willing
to Pay Second Degree
Buyers divided into groups, based on demand
Third Degree Entire market divided into submarkets
Price Discrimination
Firm must be an imperfect competitor (a price maker)
Price elasticity must differ for units ofthe product sold at different prices
Firm must be able to segment themarket and prevent resale of units across market segments
First-Degree Price Discrimination
Each unit is sold at the highest possible price
Firm extracts all of the consumers’ surplus
Firm maximizes total revenue and profit from any quantity sold
Second-Degree Price Discrimination
Charging a uniform price per unit for a specific quantity, a lower price per unit for an additional quantity, and so on
Firm extracts part, but not all, of the consumers’ surplus
First- and Second-Degree Price Discrimination
In the absence of price discrimination, a firm that charges Rs.2 and sells 40 units will have total revenue equal to Rs.80.
First- and Second-Degree Price Discrimination
In the absence of price discrimination, a firm that charges Rs.2 and sells 40 units will have total revenue equal to Rs.80.
Consumers will have consumers’ surplus equal to Rs.80.
First- and Second-Degree Price Discrimination
If a firm that practices first-degree price discrimination charges Rs.6 and sells 40 units, then total revenue will be equal to Rs.160 and consumers’ surplus will be zero.
First- and Second-Degree Price Discrimination
If a firm that practices second-degree price discrimination charges Rs.4 per unit for the first 20 units and Rs.2 per unit for the next 20 units, then total revenue will be equal to Rs.120 and consumers’ surplus will be Rs.40.
Third-Degree Price Discrimination
Charging different prices for the same product sold in different markets
Firm maximizes profits by selling a quantity on each market such that the marginal revenue on each market is equal to the marginal cost of production
Monopoly
The monopolist's demand curve downward sloping MR below AR
Equilibrium price and output MC = MR measuring level of supernormal profit Price Discrimination
Comparing monopoly with perfect competition
Monopoly The monopolist's demand curve
downward sloping MR below AR
Equilibrium price and output MC = MR measuring level of supernormal profit
Comparing monopoly with perfect competition lower output at a higher price
O
P1
MC1
MC = MSC
Q1
MRAR = MSB
Q2
P2 = MSB
= MSC
Q
A monopolist producing less than the social optimum
Monopoly outputPerfectly competitive output
Monopsony
Monopoly: the only ‘seller. Monopsony: the only ‘buyer’,
chooses a price-quantity combination on the industry supply curve that max its profit
it exercises its’ market power by buying at a price below the price that competitive buyers would pay
Monopsony
Demand for labour
Supply
L, Workers per day
6020 30
ME, Marginal expenditure
wm = 20
wc = 30ec
em
ME = 40
60
0
w, per
work
er
Suppose a firm is the sole employer in a town, and the firm uses one factor, labour, to produce a final good
Average expenditure the monopsony pays to hire a certain number of workers
When supply curve linear and upward sloping, the marginal expenditure curve is twice as steep as the supply curve
Monopsony
Demand for labour
Supply
L, Workers per day
6020 30
ME, Marginal expenditure
wm = 20
20wc = 30ec
em
ME = 40
60
0
w, R
s. p
er w
ork
er
Monopsonist values labour at Rs.40, but it pays only Rs.20Monopsonist hires fewer workers and pays a lower wage
Monopsony power (ME –w)/w = 1/
If the market for labour were perfectly competitive and the firm faced a horizontal supply curve, than the equilibrium would be at ec
Remember a firm will hire workers up to the point where the marginal value of the last unit of the worker = the marginal cost to the firm
ie where the demand (for labour) curve = ME curve
Bilateral Monopoly
Uncontrolled monopoly gets higher than competitive market prices.
Uncontrolled monopsony gets lower than competitive market prices.
Monopoly/monopsony confrontation breeds compromise.
One buyer : One seller
Bilateral Monopoly
D
ME
MC
MR
e1
x
y
ox1
P2
x2
P1
P*
X*
a
b
Monopoly Equilibrium
Monopsony Equilibrium
Bilateral Monopoly Equilibrium