Chapter 4 - Theory of monopoly

Source of monopoly power
1. Patent laws
2. nationalised industry
3. Incumbent has exploited economies of scale
4. High sunk costs
5. Multiplicity of brands cover all 'gaps in the market'
6. Essential raw material controlled
7. Brand loyalty
8. consumer inertia (do nothing e.g. gas switch)
9. imperfect knowledge
10. high barriers to entry
Monopoly pricing
1. Marginal cost pricing - MC=AR - allocatively efficient
2. Average cost pricing - AC=AR - normal pi
Monopoly
1. 1:100 concentration ratio
2. high barriers to entry
3. Natural
  1. High fixed costs force LRAC to fall continuously
  2. Better in the hands of one firm
  3. high MES
4. Pure
5. The higher the MES, the more likely a Monopoly is
Consumer and producer surplus
1. Monopoly converts some consumer surplus to producer surplus
2. Dead weight loss
Price Discrimination - Different prices for different consumers for reasons other than costs
1. Firms cannot be undercut by other rivals(monopoly)
2. Resale is prevented
3. At least two different elasticities of demand
4. Types
  1. First degree
    1. All consumer surplus turned to pi (need to know every consumers preferences perfectly)
  2. Second degree
    1. Different blocks of consumption receive different prices - bulk buying discount
  3. Third degree
    1. Two markets, elastic D lower price, inelastic D higher price, combined in between
5. LRAC and MC constant in these markets(is ignored)
6. Dimensions of P.D.
  1. Geographical - car prices higher in UK than Europe mainland
  2. Time - peak prices
  3. Age - Child bus tickets cheaper
7. Consequences
  1. price discriminator
    1. Higher output than operating at single price = economies of scale, which leads to lower prices
    2. Previous good/service not able to be provided due to loss can now be provided, show with AC and AR curves
  2. consumer
    1. Some consumers pay less than others. but some pay more
    2. first degree = total loss of consumer surplus/welfare
MARKET FAILURE & EVALUATION
1. market failure as there is a dead weight loss, also called allocative inefficiency
  1. BUT dynamically efficient even though not statically
    1. Dynamic efficiency in monopoly compared with perfect competition - MC falls so price also falls
  2. By restricting output gains from economies of scale are lost
2. consumer faces lack of choice and can be exploited because the firm is a price maker BUT pi can be reinvested to improve quality + lower cost=price
how do small firms survive
1. niche market
2. quality of service
3. innovation
4. internet

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Chapter 4 - Theory of monopoly

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	Created by usman ahmed over 10 years ago