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MONOPOLY

MONOPOLY. Monopoly: Why?. Ownership of strategic raw material Patent right for product Government licensing Size of the market may not support more than one plant Exclusive Knowledge of production technique. Monopoly: Characteristics. Many buyers

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MONOPOLY

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  1. MONOPOLY

  2. Monopoly: Why? • Ownership of strategic raw material • Patent right for product • Government licensing • Size of the market may not support more than one plant • Exclusive Knowledge of production technique

  3. Monopoly: Characteristics • Many buyers • Only one seller i.e. Product produced has no competition • Barriers of entry of new firm • Firm has to determine the price • Firm has to determine the level of output it would produce • Monopolist can sell two different levels of output at one price • Monopolist can sell a particular level of output at two different price. • There is no unique supply curve for the monopolist

  4. Monopoly: Features • The monopolist’s demand curve (market demand curve) is the downward sloping demand curve. Monopolist can reduce the price and sell more or can raise the price and still retain the customers. • MR curve lies below the AR curve and the slope of MR is twice that of AR.

  5. Monopoly: Market Behaviour p(y) Higher output y causes alower market price, p(y). D y = Q

  6. Monopoly: Market Behaviour At the profit-maximizing output level, the slopes of the revenue and total cost curves are equal, i.e. MR(y*) = MC(y*)

  7. Marginal Revenue: Example p = a – bq (inverse demand curve) TR = pq (total revenue) TR = aq - bq2 Therefore, MR(q) = a - 2bq < a - bq = p for q > 0

  8. Marginal Revenue: Example MR= a - 2bq < a - bq = p for q > 0 P P = a - bq a a/b q a/2b MR = a - 2bq

  9. Monopoly: Equilibrium P AR Q MR

  10. Monopoly: Equilibrium MC P y Demand MR

  11. Monopoly: Equilibrium MC P AC y Demand MR

  12. Monopoly: Equilibrium MC Output Decision MC = MR P AC ym y Demand MR

  13. Monopoly: Equilibrium MC Pm = the price P AC Pm ym y Demand MR

  14. Monopoly: Equilibrium MC The shaded area is the excess profit P AC Pm ym y Demand MR

  15. Long Run Equilibrium under Monopoly

  16. Price Discrimination • Charging different price from different customers for the same product is know as price discrimination. • Reason of PD – to obtain increase in total revenue by taking away part of consumer’s surplus

  17. Necessary conditions for Price discrimination to be possible • Different markets must be separable for a seller • Elasticity of demand must be different in different markets. • There must be effective separation of sub markets so that no reselling can take place from a lower price market to a higher price market.

  18. Degrees of Price Discrimination Third degree Price Discrimination

  19. Second Degree Price Discrimination

  20. First Degree Price Discrimination

  21. Monopolistic Competition • Large number of sellers • Free entry and free exit • Perfect factor mobility • Complete dissemination of market information • Differentiated product, yet close substitutes of one another • The prices of factor and technology are given

  22. Product Differentiation` • Product differentiation is intended to differentiate the product of one producer from that of another producer in the industry. • Can be real- when inherent characteristics of the product are different • Or fancied - when products are basically the same ,yet consumer is persuaded via advertising and selling techniques that the products are different.

  23. Effect of product differentiation Producer has some discretion in determination of price (monopoly power) However faces competition of close substitutes Monopoly + Competition

  24. Product Differentiation creates brand loyalty of consumers. This gives the seller an opportunity to increase the price and still retain the customers. This results in downward sloping demand curve.

  25. Monopolistic competition – Short Run

  26. Monopolistic Competition – Long Run Model 1 : equilibrium with new firms entering the industry

  27. Model 2: Equilibrium with price competition

  28. Model 3: Equilibrium with Non Price Competition

  29. Critical Appraisal of Monopolistic Model • Assumption that monopolistic competitors act independently and their price changes are unnoticed by rival firm is questionable • In monopolistic competition firms are naïve, they do not learn from their past experiences. • Heroic assumption of identical cost and revenue curves are questionable. • Chamberlin’s assumption of free entry is considered to be incompatible with product differentiation. Product differentiation and brand loyalty act as a barriers to entry.

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