Monopoly and

Imperfect Competition

Monopoly

Monopoly: a market structure in which there is only one seller of a good or service that has no close substitutes and entry to the market is completely blocked.

Characteristics of a monopolistic industry

Consists of a single firm

Therefore, market demand = monopolist’s demand  

Downward sloping demand curve

Can fix price at which it sells product

Quantity sold depends on the market demand.

Monopoly or not?

Depends on how narrowly the industry or market is defined.

*Global markets

*National markets

*Regional markets

*Local markets

Services usually have narrower markets – why?

Only a monopolist if entry into the market is blocked.

Profit-maximising position of a monopolist

Produce where MR = MC - profit-maximising rule

Provided that AR > AVC (short run) or AC (long run) - shut-down rule

*Cost structure same as any other firm.

*Revenue structure differs from perfectly competitive firm.

Total, Average and Marginal Revenue Under Monopolistic Conditions

*Monopolist is only supplier of a product

*Demand curve for product = market demand curve for market

*Downward sloping demand curve means additional quantity of output only sold if price lowered

*Lower price applies to all units of output

*Therefore MR from sale of extra unit < price at which all units of the product are sold

MR plotted between unitsMR is lower than AR at all levels of

outputMR lies exactly halfway between

AR and the price axis When MR is positive, TR risesWhen MR = 0, TR reaches a

maximumWhen MR becomes negative, TR

falls

The Short-Run Equilibrium of the Monopolistic Firm

D = ARMR lower than AR, MR

bisects halfway btwn AR & price axis.

MC & AC same as perfect competition.

Profit maximisation occurs where MR = MC

Output < Q1, MR > MCexpand production

At Q1, MR = MCprofit maximised

Output > Q1, MR < MCprofits decline

At what price should that output be sold?

*The price which consumers are willing and able to pay - indicated by the demand curve.

*MR = MC at a price of P1.

Does the monopolist make a profit in equilibrium?

*Compare AC with AR or TC with TR at profit maximising point

*AR > AC at Q1 therefore economic profit earned (C1P1M1K1)

The Long-Run Equilibrium of the Monopolistic Firm*Perfect competition - economic profit

competed away in LR.

*Monopoly - entry blocked economic profits can continue in LR.

*Can achieve economies of scale - ↓ average cost curve

*Firm will produce where MR = long-run MC.

Absence of a Supply Curve Under Monopoly

*Monopolist chooses combination of price/output where profit is maximised.

*Subject to the demand constraint.

*Monopolist is a price maker - does not move along supply curve - price of the product changes.

Price discrimination

*Profitable to sell same product to different consumers at different prices.  

*Only occurs when price differences are based on different buyers’ valuations. NOT based on cost differences.

*Attempts to capture all/part of consumer surplus.

Conditions for Price Discrimination

Firm must be a price maker/setter

*Won’t work in perfect competition

Consumers/markets must be independent

*Consumers in the low-priced market must not be able to resell at higher prices.

*Must be able to divide the market.

*Easier for services.

Varieties of Price Discrimination

1st degree price discrimination (discrimination among units) *Each consumer charged maximum price they are prepared to pay.

*Only done if firm can obtain higher price than equilibrium market price.

*Perfect price discrimination = consumer surplus eliminated.

2nd degree price discrimination (discrimination among quantities)

*Firm charges customers different prices according to how much they purchase.

3rd degree price discrimination (discrimination among buyers)

*2 or more independent markets - separate price charged in each market

*PED must differ between the different markets