MONOPOLYMONOPOLY

Monopoly: Why?

Ownership of strategic raw material Patent right for product Government licensing Size of the market may not support more

than one plant Exclusive Knowledge of production

technique

Monopoly: Characteristics Many buyers

Only one seller i.e. Product produced has no competition

Barriers of entry of new firm

Firm has to determine the price

Firm has to determine the level of output it would produce

Monopolist can sell two different levels of output at one price

Monopolist can sell a particular level of output at two different price.

There is no unique supply curve for the monopolist

Monopoly: Features

The monopolist’s demand curve (market demand curve) is the downward sloping demand curve.

Monopolist can reduce the price and sell more or can raise the price and still retain the customers.

MR curve lies below the AR curve and the slope of MR is twice that of AR.

Monopoly: Market Behaviour

y = Q

p(y)Higher output y causes alower market price, p(y).

D

Monopoly: Market Behaviour

At the profit-maximizing output level, the slopes of the revenue and total cost curves are equal, i.e.

MR(y*) = MC(y*)

Marginal Revenue: Examplep = a – bq (inverse demand curve)

TR = pq (total revenue) TR = aq - bq2

Therefore,

MR(q) = a - 2bq < a - bq = p for q > 0

Marginal Revenue: Example

P = a - bqa

qa/b

MR = a - 2bqa/2b

P

MR= a - 2bq < a - bq = p

for q > 0

Monopoly: Equilibrium

Q

P

MR AR

Monopoly: Equilibrium

y

P

MC

MR Demand

Monopoly: Equilibrium

y

P AC

MC

MR Demand

Monopoly: Equilibrium

y

P AC

MC

MR

Output Decision

MC = MR

ym Demand

Monopoly: Equilibrium

y

P AC

MC

MR Demand

Pm = the price

ym

Pm

Monopoly: Equilibrium

y

P AC

MC

MR Demand

The shaded area is the excess profit

ym

Pm

Long Run Equilibrium under Monopoly

Price Discrimination

Charging different price from different customers for the same product is know as price discrimination.

Reason of PD – to obtain increase in total revenue by taking away part of consumer’s surplus

Necessary conditions for Price discrimination to be

possible Different markets must be separable for a

seller Elasticity of demand must be different in

different markets. There must be effective separation of sub

markets so that no reselling can take place from a lower price market to a higher price market.

Degrees of Price Discrimination

Third degree Price Discrimination

Second Degree Price Discrimination

First Degree Price Discrimination

Monopolistic Competition

Large number of sellers Free entry and free exit Perfect factor mobility Complete dissemination of market information Differentiated product, yet close substitutes of

one another The prices of factor and technology are given

Product Differentiation` Product differentiation is intended to

differentiate the product of one producer from that of another producer in the industry.

Can be real- when inherent characteristics of the product are different

Or fancied - when products are basically the same ,yet consumer is persuaded via advertising and selling techniques that the products are different.

Effect of product differentiation

Producer has some discretion in determination of price (monopoly power)

However faces competition of close substitutes

Monopoly + Competition

Product Differentiation creates brand loyalty of consumers. This gives the seller an opportunity to increase the price and still retain the customers.

This results in downward sloping demand curve.

Monopolistic competition – Short Run

Monopolistic Competition – Long Run

Model 1 : equilibrium with new firms entering the industry

Model 2: Equilibrium with price competition

Model 3: Equilibrium with Non Price Competition

Critical Appraisal of Monopolistic Model

Assumption that monopolistic competitors act independently and their price changes are unnoticed by rival firm is questionable

In monopolistic competition firms are naïve, they do not learn from their past experiences.

Heroic assumption of identical cost and revenue curves are questionable.

Chamberlin’s assumption of free entry is considered to be incompatible with product differentiation. Product differentiation and brand loyalty act as a barriers to entry.