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Dr.Sunitha.S

Assistant Professor,

School of Management Studies

National Institute of Technology Calicut

Markets: Part 2Monopoly,Monopolistic Competition

&Oligopoly

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Total, Marginal& Average Revenue

Price Quantity TotalRevenue

MarginalRevenue

AverageRevenue

Rs6 0 0 -

5 1 5 5 5

4 2 8 3 4

3 3 9 1 32 4 8 -1 2

1 5 5 -3

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Rs

Quantity

P*

1 5 10

Monopolists Demand Curve

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Rs

Quantity

P*

D or AR

1 5 10

Monopolists Demand Curve

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Monopoly Price, Quantity, and

Revenue Schedules

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Rs

Quantity

1 5 10

22

1814

10

62

Monopoly

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Rs

Quantity

AR or D

1 5 10

22

1814

10

62

Monopoly

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Monopoly

The monopolist's demand curve

downward sloping

the greater the market power, the less elastic the demand

curve(Average Revenue)

MRbelowAR ((Demand)

Equilibrium price and output

Equilibrium output, where MC = MR

Equilibrium price, found from Dcurve

Profit

Measuring profit

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Rs

Quantity

D or AR

1 5 10

22

1814

10

62 MR

Monopoly

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Rs

Quantity

AR

1 5 10

22

1814

10

62 MR

MC

Monopoly

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Rs

Quantity

AR

1 5 10

22

1814

10

62 MR

MC

ATC

Monopoly

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Monopoly

Costs / Revenue

Output / Sales

AC

MC

ARMR

AR (D) curve for a monopolist

likely to be relatively price

inelastic. Output assumed to

be at profit maximising output

(note caution herenot all

monopolists may aim for

profit maximisation!)

Q1

Rs7

Rs 3

MonopolyProfit

Given the barriers to entry,

the monopolist will be able to

exploit abnormal profits in the

long run as entry to the

market is restricted.

This is both the short run and

long run equilibrium position

for a monopoly

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Rs

Quantity

AR

1 5 10

22

1814

10

62 MR

MC

ATC

Monopoly

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Monopoly

Pure monopolywhere only one producerexists in the industry

In reality, rarely existsalways some form of

substitute available! Monopoly exists therefore where one firm

dominates the market

Use term monopoly power with care!

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Price Discrimination

Act of charging different prices for the same orslightly differentiated products

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Price discrimination.

Types of price discrimination

First-degree: the firm is aware of each buyers

demand curve

Second-degree: the firm charges a different price,

depending on the quantity each buyer purchases

Third-degree: the firm breaks buyers into groupsbased upon their price elasticity of demand

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First Degree Price Discrimination

(Perfect Price Discrimination)

Each consumer is charged the price he/she is willing to

pay.

Producer takes all the consumer surplus

Price discrimination.

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2nd Degree Price Discrimination(non-linear pricing)

Different price is charged for a differentquantity bought (but not acrossconsumers).

set one price for a 1st bundle, a lowerprice for a 2nd bundle, ....

extract some, but not all of consumersurplus

Note:In 1st deg case: different prices charged fordifferent consumers

In 2nd deg case: different prices charged fordifferent quantities (for same consumer)

Price discrimination.

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2nd Degree Price Discrimination(non-linear pricing)

Examples:

Telephone companies charging different prices for

different quantities

A single pack of t shirt may cause you 100, but a pack of

three would cost you only 175.

Price discrimination.

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3rdDegree Price Discrimination

Practice of dividing consumers into two or moregroups with separate demand curves and

charging different prices to each group

Eg: regular versus special airline fares, premium

versus non premium brands of liquor, cannedfood or frozen vegetables, discounts to senior

citizens & students

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Monopolistic Competition

Large no: of buyers & sellers

Differentiated products

Relevance of Advertisement/selling costs

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Rs

Quantity

AR

1 5 10

Monopolistic Competitor Demand

Curve

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Rs

Quantity

AR

1 5 10

22

1814

10

62

Monopolistically Competitive SR

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Rs

Quantity

AR

1 5 10

22

1814

10

62

MR

Monopolistically Competitive SR

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Rs

Quantity

AR

1 5 10

22

1814

10

62

MR

MC

Monopolistically Competitive SR

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Rs

Quantity

AR

1 5 10

22

1814

10

62

MR

MC

ATC

Monopolistically Competitive SR

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Rs

Quantity

AR

1 5 10

22

1814

10

62

MR

MC

ATC

Monopolistically Competitive SR

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Rs

Quantity

AR

1 5 10

22

1814

10

62

MR

MC

ATC

Monopolistically Competitive SR

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Rs

Quantity

AR

1 5 10

22

1814

10

62

MR

MC

ATC

Monopolistically Competitive SR

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Long Run

Monopolistically Competitive

Firms Price, Quantity, and Profit

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Rs

Quantity1 5 10

22

1814

10

62

Monopolistically Competitive LR

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Rs

Quantity

AR

1 5 10

22

1814

10

62

Monopolistically Competitive LR

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Rs

Quantity

AR

1 5 10

22

1814

10

62 MR

Monopolistically Competitive LR

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Rs

Quantity

AR

1 5 10

22

1814

10

62 MR

MC

Monopolistically Competitive LR

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Rs

Quantity

AR

1 5 10

22

1814

10

62 MR

MCATC

Monopolistically Competitive LR

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Rs

Quantity

AR

1 5 10

22

1814

10

62 MR

MCATC

Monopolistically Competitive LR

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Oligopoly Markets

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CHARACTERISTICS OF OLIGOPOLY

A Few Large Producers

Homogeneous or Differentiated Products

Control over Price, but Mutual Interdependence

Entry Barriers

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Oligopoly

Price war Price rigidity

Kinked demand curve

Price signaling Price leadership

Collusion-Cartels

OPECoil cartel, CIPEC-copper cartel

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Oligopoly Factors favouring collusion

Few firms

Open with each other

Similar production methods and average costs

Similar products

Dominant firm

Significant entry barriers

Stable market

No government measures to curb collusion

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Features of the four market structures

Type of

market

Number

of firms

Freedom of

entry

Nature of

product

Examples Implications for

demand curve

faced by firm

Perfect

competition

Very

many UnrestrictedHomogeneous

(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:

firm is a price taker

Monopolistic competition Many /several Unrestricted Differentiated Builders,restaurants

Downward sloping,

but relatively elastic

Oligopoly Few Restricted

Undifferentiated

or differentiated

Cement

cars, electrical

appliances

Downward sloping.

Relatively inelastic

(shape depends on

reactions of rivals)

Monopoly One Restricted or

completely

blocked

Unique

Local water

company, train

operators (over

particular routes)

Downward sloping:more inelastic than

oligopoly. Firm has

considerable

control over price

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Features of the four market structures

Type of

market

Number

of firms

Freedom of

entry

Nature of

product

Examples Implications for

demand curve

faced by firm

Perfect

competition

Very

many UnrestrictedHomogeneous

(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:

firm is a price taker

Monopolistic

competition

Many /

several Unrestricted DifferentiatedBuilders,

restaurants

Downward sloping,

but relatively elastic

Oligopoly Few Restricted

Undifferentiated

or differentiated

Cement

cars, electrical

appliances

Downward sloping.

Relatively inelastic

(shape depends on

reactions of rivals)

Monopoly One Restricted or

completely

blocked

Unique

Local water

company, train

operators (over

particular routes)

Downward sloping:more inelastic than

oligopoly. Firm has

considerable

control over price

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Features of the four market structures

Type of

market

Number

of firms

Freedom of

entry

Nature of

product

Examples Implications for

demand curve

faced by firm

Perfect

competition

Very

many UnrestrictedHomogeneous

(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:

firm is a price taker

Monopolistic

competition

Many /

several Unrestricted DifferentiatedBuilders,

restaurants

Downward sloping,

but relatively elastic

Oligopoly Few Restricted

Undifferentiated

or differentiated

Cement

cars, electrical

appliances

Downward sloping.

Relatively inelastic

(shape depends on

reactions of rivals)

Monopoly One Restricted or

completely

blocked

Unique

Local water

company, train

operators (over

particular routes)

Downward sloping:more inelastic than

oligopoly. Firm has

considerable

control over price

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Features of the four market structures

Type of

market

Number

of firms

Freedom of

entry

Nature of

product

Examples Implications for

demand curve

faced by firm

Perfect

competition

Very

many UnrestrictedHomogeneous

(undifferentiated)

Cabbages, carrots

(approximately)

Horizontal:

firm is a price taker

Monopolistic

competition

Many /

several Unrestricted DifferentiatedBuilders,

restaurants

Downward sloping,

but relatively elastic

Oligopoly Few Restricted

Undifferentiated

or differentiated

Cement

cars, electrical

appliances

Downward sloping.

Relatively inelastic

(shape depends on

reactions of rivals)

Monopoly One Restricted or

completely

blocked

Unique

Local water

company, train

operators (over

particular routes)

Downward sloping:more inelastic than

oligopoly. Firm has

considerable

control over price

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Features of the four market structures

Type of

market

Number

of firms

Freedom of

entry

Nature of

product

Examples Implications for

demand curvefaced by firm

Perfect

competition

Very

many UnrestrictedHomogeneous

(undifferentiated)

Vegetables& other

farm products

(approximately)

Horizontal:

firm is a price taker

Monopolistic

competition

Many /

several

Unrestricted Differentiated Builders,

restaurants

Downward sloping,

but relatively

elastic

Oligopoly Few Restricted

Undifferentiated

or differentiated

Cement

cars, electrical

appliances

Downward sloping.

Relatively inelastic

(shape depends on

reactions of rivals)

Monopoly One Restricted or

completely

blocked

Uniquetrain operators,

public utilities

Downward sloping:more inelastic than

oligopoly. Firm has

considerable

control over price

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Features of the four market structures

Type of

market

Number

of firms

Freedom of

entry

Nature of

product

Examples Implications for

demand curvefaced by firm

Perfect

competition

Very

many UnrestrictedHomogeneous

(undifferentiated)

Farm Outputs

(approximately)

Horizontal:

firm is a price taker

Monopolistic

competition

Many /

several

Unrestricted Differentiated Builders,

restaurants

Downward sloping,

but relatively elastic

Oligopoly Few Restricted

Undifferentiated

or differentiated

Cement

cars, Telecom, Oil

producers

Downward sloping.

Relatively inelastic

(shape depends on

reactions of rivals)

Monopoly One Restricted orcompletely

blocked

Unique

Electricity, Water,

train operators

Downward sloping:

more inelastic than

oligopoly. Firm has

considerable

control over price