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S13 ME Monopoly

This document discusses monopoly market structure. It provides three key points: 1) A monopoly is a market with a single seller and no close substitutes for the product. This gives the seller market power to set prices. 2) Sources of monopoly power can include economies of scale, economies of scope, cost complementarities, and legal barriers like patents. 3) A profit-maximizing monopolist will produce at the quantity where marginal revenue equals marginal cost and charge a price determined by the demand curve. This may result in deadweight loss.

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77 views10 pages

S13 ME Monopoly

This document discusses monopoly market structure. It provides three key points: 1) A monopoly is a market with a single seller and no close substitutes for the product. This gives the seller market power to set prices. 2) Sources of monopoly power can include economies of scale, economies of scope, cost complementarities, and legal barriers like patents. 3) A profit-maximizing monopolist will produce at the quantity where marginal revenue equals marginal cost and charge a price determined by the demand curve. This may result in deadweight loss.

Uploaded by

Fun Toosh345
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MONOPOLY

VAIBHAV BHAMORIYA
SESSION 13, MANAGERIAL ECONOMICS
IIM KASHIPUR, EPGP 2018-19
MONOPOLY POWER

• A monopoly is a market structure in which only one seller supplies to all the consumer

• Local monopoly …e,g, basic amenity utilities


• Both big and small monopolies
• Market power – control on pricing – not unlimited power
• No close substitutes of product
• Market demand curve (DM) = Firm’s Demand curve (Df)
• Free to charge any price ----- but can it ?
• Given the price set by the monopolist , consumers decide how much to purchase
• The monopolist is restricted by the consumers to choose only these price quantity combinations along the market demand curve

• Monopolist can choose either a price or quantity but not both


SOURCES OF MONOPOLY POWER

• Economies of scale :- range over which ATC is decreasing


• If PM> ATC(QM) -- the firm makes a profit
• If a second firm enters economies of scale are lost and ATC of each firm is above P M leading to loss to both

• Economies of Scope : - when total cost of producing two products within the same firm is lower than when they are produced
separately
• Tends to encourage larger firms – smaller firms have greater problems obtaining funds

• Cost Complementarity
• In a multi product cost function when the MC of producing one output is reduced when output of another product is increased – in extreme
cases monopoly power results

• Patents and other legal barriers


• Govt. granted rights may lead to monopoly
• Patents rarely lead to absolute monopoly due to disclosure
MAXIMIZATION OF PROFITS

• A linear demand curve is elastic at high prices and inelastic at lower prices
• MR= P {(1+E)/E}
• When demand is elastic MR is positive
• When demand is unitary elastic MR is zero
• When demand is inelastic MR is negative

• The monopolist can sell one more unit only by lowering price
• Inverse Demand Function : P(Q) = a + bQ
THE OUTPUT DECISION

• When MR > MC expand output - increase profits


• When MC > MR reduce output – reduce losses
• When MR = MC maximised profits
• Profits = {PM – ATC (QM) } X QM
• Absence of a Supply curve
• Inverse demand function + no way to express different quantities for different prices
• Also true for monopolistic competition where firms have market power
DEADWEIGHT LOSS IN A MONOPOLY

• PM > MC
• Society is willing to pay more than the cost of production
but monopolist does not do so because it would reduce the
firms profit as in this range MR < MC
MULTIPLANT DECISIONS

• How much to produce at each plant to maximise profit?


• Produce output in one plant such that marginal cost of producing in each plant equals the marginal
revenue of total output
• Q=Q1+Q2

• MR(Q) = MC1(Q1)

• MR(Q) = MC2(Q2)

• MCI(Q1) = MC2(Q2)
ENTRY BARRIERS

• Prevents other firms from entering business and reaping positive economic profits
• Presence of monopoly power does not imply economic profit – depends solely on where
the demand curve lies in relation to the average cost curve
MEASURING MONOPOLY POWER

•  Lerner’s degree of monopoly power

• For a Perfectly Competitive firm,


GOVT. POLICY TOWARDS MONOPOLY

• Antitrust Laws
• Merger Evaluations
• Price Regulations
• Example: The Death of Google Reader Paves The Way For Real RSS Businesses

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