Monopoly

Monopoly

1. single seller

   • output large => enjoys substantial EOS

2. unique product

   • no close subs => DD is price inelastic => DD curve is steep

3. high BTE

   • natural/artificial BTE => continues to earn superN profits

4. monopoly power

   • complete control over the supply of good => has power to influence price of good => price setter & quantity adjuster

5. maximising profits (MC = MR)

   • SR
     • superN (TR > TC)
     • normal (TR= TC)
     • subnormal (TR < TC)
   • LR
     • superN
     • normal

6. PD: practice of selling the same g/s at different prices to different groups of consumers OR charging the same consumer different prices for different units of g/s sold for reasons unrelated to costs

   • 1st degree: charges buyer maximum amount that he/she will pay rather than do without the specified quantity of the commodity being offered
     • theoretical
     • firm captures entire consumer surplus
     • condition: firm has knowledge of price that consumers willing to pay
   • 2nd degree: charges different prices for different quantities of good bought, charged at declining rate
     • part of consumer surplus taken away
     • condition: knowledge of quantity bulk to be bought & price consumers willing to pay on average
     • induces greater consumption
   • 3rd degree: firm groups consumers into different markets and charges different prices to different markets but same price for all within same market
     • conditions
       • segmentation of market
       • PED differs in different markets
         • PED < 1 => price higher
         • PED > 1 => price lower
       • resale is impossible => able to maintain monopoly status

7. efficiency

   • allocatively inefficient => does not produce at P = MC => incurs DWL
   • productively efficient => produces at lowest possible cost
     • HOWEVER, due to lack of competitors => may not opt for lowest COP => X-inefficiency (produces above LRAC)

8. impacts

   • consumers
     • +ve: goods may improve due to incentive to conduct R&D; monopolist could produce goods that would have never been produced before if practising 1st degree PD. -ve: may exploit consumers of high prices due to lack of competition; provide poor g/s to cut cost; consumer surplus not maximised (ZERO CS if practising 1st degree PD)
   • producers
     • +ve: superN profits in LR => conduct R&D => better quality of goods => consumers buy more => increase TR. -ve: profit maxi firms not producing at min point of LRAC
   • society
     • +ve: due to lack of competition, firm reduces wastage of resources; natural monopoly is the most efficient under circumstances; welfare maxi firms produce at P = MC. -ve: profit and revenue maxi firms produce at P > MC => allocatively inefficient => have DWL; imperfect info lead to wastage of resources when firm does advertising
   • govt
     • +ve: firms earn superN profit => can collect large tax revenues => govt spends on welfare schemes for the poor. -ve: govt needs to intervene when there are several serious repercussions on consumers, potential producers and society => incur high admin costs