Market Structures: A Monopoly (Chapter 14)

Market Structures: A Monopoly (Chapter 14)

1. Imperfect Competition

   • Imperfect Competition - where firms are able to differentiate their product in some way and so can have some influence over price
   • Market Share - the proportion of total shares in a market accounted for by a particular firm
   • Market Power - where a firm is able to raise the price of its product and not lose all it sales to rivals

2. Why Monopoly's Arise

   • Monopoly- a firm that is the sole seller of a product without close substitutes
   • Barriers to Entry - anything which prevents a firm from entering a market or industry
   • Barriers to Entry have 4 Main Sources:
     • 1. A key resource is owned by a single firm
     • 2. The government gives a single firm exclusive rights to produce a good/service
     • 3. The costs of production make one producer more effiecient
     • 4. One firm is able to gain control of other firms in the market, growing in size
   • Patent - the right conferred on the owner to prevent anyone else making or using an invention or manufacturing process without permission
   • Copyright - the right of an individual or organisation to own things they create in the same way as a physical object to prevent others from copying or reproducing the creation
   • Natural Monopoly - a monopoly that arises because a single firm can supply services/goods to an entire monopoly at a smaller cost than two or more firms could

3. Pricing and Production Decisions

   • Monopoly vs Competition - the key difference is the ability to influence the price of a product
   • The Output Effect - more output is sold, so Q is higher, which tends to increase total revenue
   • The Price Effect - the price falls, so P is lower, which tends to decrease total revenue
   • For a competitive firm: P = MR = MC
   • For a monopoly firm: P > MR = MC
   • A Monopoly's Profit
     • π = TR - TC
     • π = (TR/Q - TC/Q) x Q
     • π = (P - ATC) x Q

4. Price Discrimination

   • Price Discrimination - the business practice of selling the same good at different pirces to different customers
   • Arbitrage - the prcess of buying a good in one market at a low price and selling it in another market at a higher price in order to profit from the price difference
   • Perfect Price Discrimination - a situation in which the monopolist knows exactly the willingness of each customer and can charge each customer at that different price

5. Public Policy

   • Four ways:
     • 1. Try to increase competition
     • 2. Regulate behaviour of Monopolies
     • 3. Turning some private monopolies into publuc enterprises
     • 4. Doing nothing at all
   • 3 Main Areas of Legislation:
     • 1. Acting against cartels where they are preventing free rrade
     • 2. Banning pricing stratigies which are anti-competitive eg price fixing
     • 3. Monitoring and supervising joint ventures
   • Synergies - where the percieved benefits of the conbined operations of a merged organisation are greater than those which would arise if the firms stayed separate

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