MONOPOLIES

Single seller (pure monopoly) – industry with only one dominant company

Cartel agreement – group of producers who enter a collusive agreement to restrict output in order to raise prices and profits

Concentration ratio – degree of measuring monopoly in industry: percentage of output from largest firms (above 60%)

High barriers of entry and exit◦ Legal barriers – patents, copyrights, trademarks ◦ State control over industry ◦ Economies of scale – firm is producing large quantities

that other firms cannot compete with◦ Natural monopolies: only enough economies of scale

available in the market to support one firm◦ Brand loyalty◦ Anti-competitive behaviour ◦ Sunk costs

Producer sovereignty Form of market failure (forces of supply and

demand do not control the market) Monopsony: one buyer/few large buyers (such as

the government)

Price Discrimination

Q1

P1

D1

MR0

MC

-Units of products that cost the same to produce are sold for different prices to different consumers

-One condition for price discrimination is that the supplier must have some monopoly power

-Gas, electricity, telephone services, rail travel

Consumer Surplus

Large economies of scale (more output and lower prices)

Research and development – leads to new products

Purchasing Economies Specialization Technical Economies

Charge at higher prices and produce at lower outputs

Absence of competition – inefficiency Control supply and don’t control demand

◦ Quantity sold determined by demand curve◦ Still have greatest producer sovereignty

Demand curve in a monopolistic market structure is the demand curve of the whole industry

Monopolist has to reduce price to sell more of the product (downward sloping demand curve)

Price-maker: can change price by alternating supply

Monopoly: Price and Marginal Revenue

(-)

(+)

Q1 Q2

P1

P2

D1

-To sell one more unit, the monopolist has to lower the price from P1 to P2

-Marginal Revenue = 1 x P2, which is less than P1: this explains that MR < P

-Loss of revenue on 0Q1 for each unit sold

-Marginal Revenue = 1 x (P2 – 0Q1) x fall in price

MR0

Price Effect

D

A

B

MR

Quantity demanded

Price

P

Q1 Q2

P1

P2 C

Q3

Quantity Effect

Total Revenue

Quantity of airport goods/services demanded

Quantity effect dominates price effect

Price effect dominates quantity effect

TR TRTR

Quantity Demanded

Monopoly: Marginal Cost

Q1

P1

D1

MR0

MC -Since MR will always be less than D, and the monopolist will want to produce where MC=MR, MC < D.

-Since the MC curve is below demand, this indicates that the industry can expand

Supernormal Profit

P1

D=AR

MR

MC

0

AC

SNP

-The firm will produce at PQ and will earn a total revenue of P x Q. Whatever is below the AC curve will cover both accounting costs and accounting profits, and whatever is above the AC curve and below the demand curve will be the firm’s SNP.

-This shows resource allocation inefficiency.

Q

Monopoly ProfitMonopoly Profit

D

MC

Price

Quantity

P

CS

Deadweight loss

MR

Deadweight loss (loss of mutually beneficial transactions that could have occurred had a monopoly not dominated the industry) and little consumer surplus

Argues that it is the threat of competition rather than actual competition which determines a monopoly’s price and output.

Monopoly’s are aware of other potential competition when they are making too much SNP, so in theory, they lower their prices to make the market unattractive to potential rivals resulting in more efficient production

If a firm is under the impression that a market is perfectly contestable, it will lower its price to P2.

With low prices,

efficiency, and the possibility of improvement, another firm will not be able to enter and take over the market

P1

D=AR

0

LRAC

SNP

Q Q1

P2

Normal Profit

P1

D=AR

MR

MC

0

AC

Q

-The firm will continue to produce at P x Q, but here TR = total profit, so the firm only makes normal profit, allowing it to continue business.

-There is more efficiency at this stage

Loss

P1

D=AR

MR

MC

0

AC

Q

-Firm would not produce here because it would always be making losses (AC>AR)