Monopolies

Monopolies

1. Revenue of a monopoly

   • The D curve is the AR curve in monopolies
   • When MR < AR , the average falls, since the monopolist AR falls as output and sales rise MR must be below AR
   • MR and AR share the same intercept point on the y-axis
   • MR curve is twice a steep as AR=D
   • MR is zero on the x-axis, this is the max point on the total revenue
   • Where MR is +ve and total revenue is increasing , demand is price elastic
   • Where MR is -ve and total revenue decreasing , demand is price inelastic
   • When Total revenue is maximised and MR=0 , the elasticity of demand is unitary

2. A form of market structure in which there is only one seller of a good or service

   • Ways monopolies can be developed
     • Horizontal Integration
     • Vertical Integration
     • Statutory monopoly
     • Licenses
     • Internal Expansion
   • Natural Monopoly - occurs in an industry where LRAC fall over a wide range of output levels

3. Main Assumptions

   • Only one firm
   • High Barriers to entry
   • No substitutes
   • SR Profit Maximiser

4. Profit Maximisation

   • Achieving the highest possible profit where MC = MR
   • Has a downward sloping AR curve
   • Price Maker
   • MR curve must be below the AR curve
   • Equilibrium set at profit max point (MC=MR)
   • Price is set at P (where profit max point is cared up to meet the AR Curve)
   • A firms profit will continue to rise when MR > MC
   • Total Revenue is defined by OPQ on diagram
   • Total cost is the area OACQ
   • Abnormal Profits = TR-TC
   • Abnormal profit can be made in BOTH the SR and LR due to barriers of entry

5. Price Discrimnation

   • What is Price Discrimination?
     • Occurs when firm charge different price to different consumers for the same good
     • Motive - Reduce consumer welfare and increase profits
     • Can't charge higher prices if there is a substitute
       • Can't occur in perfect comp markets
   • Conditions required for price discrimination
     • Different price elasticity of demand
       • Higher prices to groups with more price inelastic demand
       • Lower prices to groups with more price elastic demand
     • Must prevent market seepage - consumers who purchased at lower price reselling it to consumers who would pay higher
     • The costs of selling to different sub-groups MUST not be prohibitive
     • Monopoly or Monoploy power
   • First Degree
     • Examples - on-line auctions, car boot sales
     • This is where the monopolist charges each customer the MAXIMUM price they're willing to pay
     • This extracts all of the consumer surplus
   • Second Degree
     • Examples - Hotels
     • When a firm sells off any excess capacity that it has at a price that is lower than the normal published price
   • Third Degree
     • Examples - Cinemas/theatres , rail/bus travel
     • The most frequently used method
     • Involves charging different price for the same products to different groups of consumers who are separated into different parts of the same market known as segments
     • Separated by Time, Geography or demographic factors
     • Charging different price due to elasticity of demand
       • Able to earn more revenue hence more profit

6. +ves and -ves to monopolies

   • Positives
     • Dynamic efficiency
       • Research & Development
     • Reinvestment
     • Stops wasteful duplicate
       • Natural monopoly
     • Competitive advantage internationally
   • Negatives
     • Higher prices
       • lowers consumer surplus/welfare
       • Reduce output
     • Inefficient
       • Allocatively
       • Productively
       • X-efficiency
     • Deadweight loss
     • Limited Choice
     • Dynamic efficiency
       • No incentive for R&D due to lack of competition

7. Monopoly Features

   • Higher prices and lower output
   • Abnormal profit in the SR and LR due to barriers of entry
   • A fall in consumer welfare as consumer surplus is decreased causing deadweight welfare loss
   • Limited choice for consumers
   • Low levels of economic efficiency with productive and allocative efficiency not being achieve
   • Enjoy Producer sovereignty rather than consumer sovereignty
     • Producer sovereignty - when firms have the power and ability to influence consumer decisions
     • Consumer sovereignty- the ability and freedom to choose from a range of products
   • X efficiency
     • Managerial slack that results from the absence of competitive pressures
   • Price Discrimination
     • Allows cross-subsidies
       • A decision to fund a loss from one product by raising the price of another

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