Presented by,

Stephin Abraham Sabu

Roll No. 15
S1 IEM
 The term monopoly derived from the Greek monos, alone or
one.

 Monopoly is a type of market structure in which there is only

one producer or seller.

 A single producer controls the entire output of a particular

commodity.

 The firm and the industry are one and the same – ESB are
the sole provider of electrical power in Ireland
1. State monopoly: A government may create a statutory or legal monopoly giving a certain body
the sole right to supply a particular good or provide a certain service. The Act which creates the
monopoly places a legal restriction on competition. In Ireland, the government has granted monopolistic
powers to ESB, Telecom Eireann etc, Mobile Phone Licence to Esat Digifone.

2. Control of critical resources: A particular firm may have exclusive access to the only source
of supply of the raw materials necessary for the production of a certain commodity. Mining firms
would be examples of this type of monopoly.

3. Capital intensive monopoly: Certain industries require such a large investment of capital in
plant and equipment that any form of competition from potential rivals is completely discouraged
e.g. aircraft manufacturing, ship-building, steel firms etc.

4. Legal restriction: A firm which develops or invents a new product or process can use the law of
patents, franchise, copyright etc. to obtain the sole right of manufacture of the product or use of
the process. Pfizer – Viagra

5. Trade Agreements: All the firms within a certain industry, may by agreement, adopt completely
uniform policies on price and output. This type of agreement effectively creates a monopoly.
(OPEC on Oil production).
 Assumptions governing a Monopoly
• Price Setter: There is only one firm in the entire industry and it has
complete control over price.

• Barriers to Entry: No other firm can enter the industry even if it wants to
i.e. there is no freedom of entry to the industry- cost being the main
barrier to entry.

• Profit Maximiser: The monopolist aims to maximise profit.

• In a monopoly situation the equilibrium of the individual firm is the

equilibrium of the industry because the entire industry is made up of just
one firm.

• A monopolist can selects either the price or the output but not both
 Price/cost MR = MC MC
AR > AC
P <>AC
Dead weight
P(mon) loss to
AC society

AC not
minimise
d
Super
normal
D=
Profits
q(mon AR
Q - Output
) MR
 Monopolist
Price/cost
Higher prices and lower outputs Lr-MC
Supernormal profits in the L-R
AC not minimised
Lr-AC
P(mon)

P(pc)
P = D = AR =
MR
AC not
minimise
d
Super
normal
D=
Profits
q(mon q(pc) AR
Q - Output
) MR
 When monopoly and perfect competition are compared under the
same conditions, we find that the monopolist, when in equilibrium,
produces a lower and sells it a higher price than the perfectly
competitive firm.
 the perfectly competitive firm produces q(pc) at a price p(pc),
the individual firm is a price taker.
 The monopolist produces q(mon) at p(mon). Thus the monopolist
produces at higher prices and a lower output.
 The monopolist earns supernormal profits earned in the long-
run and in monopoly Average Costs are not minimised.
 Comparing monopoly and perfect competition (video) is unrealistic
because perfect competition in its pure form rarely exists.
  Marginal revenue is a function of price elasticity,

1
MR  P (1  )
Ep
•A profit maximising monopolist produces a quantity where MR =
MC, so by substitution
1
MC  P (1  )
Ep
In monopoly P will be greater than MC. For example if Ep = -2,

1 MC = 0.5P, so P =
MC  P (1  )
2 2MC.

Note: a monopolist will never operate in the area of the demand curve where
demand is price inelastic
 It is the practice of charging different people different prices for the
same goods or services.

 When price discrimination is engaged in for the purpose of

reducing competition, as, for instance, through tying the lower
prices to the purchase of other goods or services, it constitutes a
violation of Antitrust Acts.

 Price discrimination also occurs when it costs more to supply one

customer than it does another, and yet the supplier charges both the
same price.
 There must be some degree of market power
 Separate markets must be identified.
 Consumers should be largely ignorant of any PD.
 There should be a different price elasticity for the same good
among consumers.
 No opportunities for arbitrage - The buyer cannot re-sell.

 This usually entails using one or more means of preventing any

resale, keeping the different price groups separate, making price
comparisons difficult, or restricting pricing information.
 Price discrimination is thus very common in services, where resale
is not possible; an example is student discounts at cinema.
 The degree of PD must be so small that consumers are not
affected by it.
 Geography: when the prices in the Rural and Urban differ.
 Income: when Economic Associations charges more to
professors than students.
 Gender: when jeans for women are priced higher than similar jeans
for men
 Age: when kids get in at lower prices for movies
 Time: when prices differ by day (Reel Cinema have reduces prices
on Mondays) or season (Hotel rates are cheaper in Winter)
 Race: as when shampoos targeted for African-American hair are
priced differently that other shampoos, though technically the
same.
 Language: as when products printed in Spanish are priced
differently than those in English
 Ability to Haggle: when those how ask for a lower price get it
 This type of price discrimination is primarily theoretical because it
requires the seller of a good or service to know the absolute
maximum price that every consumer is willing to pay.

 It is true that consumers have different price elasticities, but the

seller is not concerned with such.

 The seller is concerned with the maximum willingness to pay

(WTP) of each customer.

 By knowing the maximum WTP, the seller is able to absorb the

entire market surplus, thus taking all consumer surplus and
transforming it into revenues.
 Aim: Minimise or eak out CS
Price Consumer
Surplus
p1
MC

Reservation
price= MC

D
Q
 Price varies according to quantity sold.

 Larger quantities are available at a lower unit price.

 This is particularly widespread in sales to industrial customers, where

bulk buyers enjoy higher discounts. Examples, bulk buying, air travel – 1st
class, business class and economy, multipacks of crisps, mars bars etc.,

 Two-part pricing is also an example of second degree PD. There is

one price for the privilege of buying items and a price per item.
Examples: Golf club fees and green fees, cover charges in clubs and pubs,
telephone – standing charge rental plus fee-per-unit, ESB – standing charge and
fee-per-unit.
 Price
The Price depends on the quantity you buy

MC
Standard Price

Reduced Price

Economy Price

1 5 7 units Q
 Price = 0.50 = 4.50-Q
4.50
Q = 4 (pints)
At P = €0.50 you buy 4 pints
Max cover charge = CS
Consumer CS = ½ (4*4) = €8
Surplus MC
Optimal Cover charge = €8

MC = €0.50

4 Pints Q
 The monopolist sells output to different people for different prices.
 Every unit of output sold to a person is the same price. - students, pensioners,
and female concessions.
 Third degree PD is based on the fact that there are different classes of
consumer with different price elasticity of demand, and it is possible to divide
consumers into different classes and charge the different classes different prices.
 The supplier(s) of a market where this type of discrimination is exhibited are
capable of differentiating between consumer classes. Examples of this
differentiation are student or senior "discounts".
 A student or a senior consumer will have a different willingness to pay than an
average consumer, where the WTP is presumably lower because of budget
constraints.
 The supplier sets a lower price for that consumer because the student or senior
has a more elastic price elasticity of demand
 The supplier is once again capable of capturing more market surplus than would
be possible without price discrimination.
 Many cinemas, amusement parks, tourist attractions, and other places have
different admission prices per market segment: typical groupings are Youth,
Student, Adult, and Senior.
 Each of these groups typically have a much different demand curve.
 Children, people living on student wages, and people living on retirement
generally have much less disposable income.
 Women's haircuts are often more expensive than men's haircuts which in past
times could be accounted for as women generally had longer hairstyles whereas
men generally had shorter hairstyles.
 Nowadays men's and women's styles are more varied but the price discrimination
continues.
 Some nightclubs feature a "ladies' night" in which women are offered discount or
free drinks, or are absolved from payment of cover charges.
 This differs from conventional price discrimination in that the primary motive is
not, usually, to increase revenue at the expense of consumer surplus.
 Rather, establishments benefit by maintaining an equitable gender balance; if the
clientele of an establishment is primarily male.
 Domestic + Export
Domestic Export market
market market

Domestic price

Export
price MC

•Different price elasticities of demand exist for Irish butter.

•Higher prices are available in the domestic market as few substitutes are available.
•However, on the export mark lower prices are obtained as we have to compete with our trading
partners on the export market.
•The composite demand curve shows the combined domestic plus export market.
 Inter-temporal Pricing: If at peak rush hour, the toll is higher
than at the off-peak, we are using different prices at different time
periods. The peak toll can encourage shifting travel patterns to
off-peak times or discourage some commuting altogether. Inter-
temporal pricing appears more frequently than one thinks.
Example- night rate electricity is cheaper, peak versus off-peak phone charges.

 Bundling: McDonalds sells Extra Value Meals, as a bundle of

[burger, fries, and a soft drink] for less than it sells them
separately. Selling both bundles and items separately is mixed
bundling.
 If Eugene would pay €3 for a burger and €1 for a soft drink, and if Kate would
pay €2 for a burger and €2 for a soft drink, a bundle of €4 for both a burger and
soda will work for both customers as a bundle. But if the price of a burger
individually were €2.5 and a soft drink €1.50, then Eugene would buy only a
burger and Kate only a soft drink. Not everyone is alike, so mixed bundles
succeeds with more customers.
 Skimming: Price declines over time. Those who wish to get it first pays the
highest price, others are willing to wait. Examples: Hardcover & Paperback Books,
New electrical, computer products, and PDAs, the new Iphone.

 Prestige Pricing: Some products distinguish themselves by being noticeably

expensive. Mercedes, Audi, or BMW, Cartier jewelry. The price is itself a way to
distinguish the product from others Prestige Pricing is the practice of charging a
high price to enhance its perceived value. However, the firms typically have to
spend a great deal in promotional activities to convince customers that the
product is prestigious.
 Most monopolies which existed in Ireland in the past arose as a result of the
establishment of semi-state bodies in those industries in which the Irish
Government felt that such a monopoly was appropriate and in the public
interest.

 In many cases this involved the exploitation of natural resources or the

provision of services which the private sector was reluctant to provide.

 However in recent years the Irish Government, in accordance with EU policy,

has undertaken major market deregulation and liberalisation, and now many
semi-state companies which previously operated as monopolies have been
exposed to competition.

 This has come about either through privatisation (e.g. Eircom, Aer Lingus, Irish
Life) or through the granting of licences to competitors (e.g. TV3).
 Conditions that lead to a monopoly market.
 Long-monopoly equilibrium.
 Difference between prefect competition and monopoly.
 Appreciate the relationship between elasticity and monopoly
 Conditions for the existence of price discrimination.
 Distinguish between the various forms of price discrimination.
 To calculate profit maximizing levels of output and price in
monopoly.
THANKYOU