MONOPOLY

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What is Monopoly?

Monopoly is a market structure in which: There is only single seller. There are no close substitutes for the product.. Restriction to entry.

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FEATURES

There is only single seller and many buyers. No close substitutes. Barriers to entry. Price Firms and industry.

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SINGLE SELLERS

There is only single seller, he can control the supply of his product. But he cannot control demand for the product, as there are many buyers.

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NO CLOSE SUBSTITUTES

There are no close substitutes for the product. The buyers have no alternatives or choice. Either they have to buy the product or go without it.

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BARRIERS TO ENTRY

There is no freedom to other producers to enter the market as the monopolist is enjoying monopoly power. He erects barriers which are, great and strong. There are legal, technological, economic and natural obstacles, which may block the entry of new producers.

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PRICE

The monopolist has control over the supply so as to increase the price. Sometimes he may adopt price discrimination. He may fix different prices for different sets of consumers. A monopolist can either fix the price or quantity of output, but he cannot do both.

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FIRMS AND INDUSTRY

Under monopoly, there is no difference between a firm and an industry. As there is only one firm, that single firm constitutes the whole industry.

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HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

Monopoly Is the sole producer Is a price maker; i.e. faces a downward-sloping demand curve . Raises price to increase revenue

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DEMAND CURVE FOR MONOPOLY FIRM

Price 0 Quantity of Output

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Demand

A MONOPOLYS REVENUE

Just as in the competitive case, we can define the following definitions. Total Revenue P Q = TR Average Revenue TR/Q = AR = P Marginal Revenue DTR/DQ = MR
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A Monopolys Total, Average, and Marginal Revenue

litres

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Demand and Marginal-Revenue Curves for a Monopoly

Pri ce $ 11 10 9 8 7 6 5 4 3 2 1 0 1 2 3 4

Margi nal reven ue 1 2 3 4 5 6 7

Dema nd (avera ge revenu e) Quantity of 8 Water

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Profit Maximization for a Monopoly

Costs and Reven ue

2. . . . and then the demand curve shows the price consistent with this quantity. B

Monopo ly pri ce

1. The intersection of the marginal-revenue curve and the marginalcost determines curve the profitmaximizing quantity . .. Average total cost

Margin al c o st

Dema nd

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Q M

Marginal revenue

Quanti ty

The Monopolists Profit

Costs Reven and ue MonopolE y pri ce Avera D ge tot co al st B Monopol y prof it C Deman d Q Marginal revenue Quantit Marginal cost Average total cost

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The Inefficiency of Monopoly

Pri ce

Monopo ly pri ce

Deadweig ht l o s s

Marginal cost

Margin al reven ue

Dema nd

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Monopo ly quant ity

Efficie nt quant ity

Quanti ty

MONOPOLISTIC COMPETITION

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What is Monopolistic Competition?

Monopolistic competition is a market structure in which: There are a large number of firms. The products produced by the different firms are differentiated. Entry and exit occur easily.

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FEATURES

Large number of sellers. Product differentiation. Freedom of entry or exit. Non-price competition.

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LARGE NUMBER OF SELLERS

In a monopolistic competitive market, there are a large number of sellers who individually have a small share in the market. Each firm is acting individually without bothering about the reaction of others. Any individual firms action will have little or no effect on other firms.

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Product differentiation is the essence of monopolistic competition. The Product of firms are fairly similar but not the same. Firms compete more on product differentiation than on price.

PRODUCT DIFFERENTIATION

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FREEDOM OF ENTRY OR EXIT

New firms are free to enter in to the market and existing firms are free to quit it. It can produce the commodity under its own brand name.

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NON- PRICE COMPETITION

One dimension of competition is product differentiation. Competitive advertising is another. Others include product development , better service and distribution arrangement.

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PRICE-OUTPUT DETERMINATION UNDER MONOPOLISTIC COMPETITION.

The condition for price-output determination and equilibrum of an individual firm may be stated as follows: MC=MR. MC curve must cut MR curve from below.

MC curve cuts MR curve at E. At E, the equilibrum price is OP1 and equilibrum output OQ1. Since per unit cost is BQ, per unit supernormal profit is AB and total super-normal profit is AP1CB. 5/2/12

A Monopolistically Competitive Firm: Above Normal Profit

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A Monopolistically Competitive Firm: Normal Profit

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AQ1 (per unit cost) is higher than price OP1 of the product of the firm and loss per unit is AB (AQ1-BQ1). Total loss is ACP1B.

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A Monopolistically Competitive Firm: Economic Loss

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Comparing Perfect and Monopolistic Competition

Both the monopolistic competitor and the perfect competitor make zero economic profit in the long run.

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Comparing Monopolistic Competition with Monopoly

It is possible for the monopolist to make economic profit in the long-run. No long-run economic profit is possible in monopolistic competition.

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OLIGOPOLY.

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What is Oligopoly?

An oligopoly is a market structure characterized by: Few firms Either standardized or differentiated products Difficult entry

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CHARACTERISTICS

Interdependence Group behaviour Price rigidity

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INTERDEPENDENCE

A key characteristic of oligopolies is that each firm can affect the market, making each firms choices dependent on the choices of the other firms. They are interdependent.

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GROUP BEHAVIOUR

Firms may realise the importance of mutual co- operation. Then, they will have a tendency of collusion . At the same time, the desire of each firm to earn maximum profit may encourage competitive spirit. Thus, cooperative and collusive trend as well as competitive trend would prevail in an oligopolistic market.

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PRICE RIGIDITY

Price is inflexible. If an oligopolistic firm raises its price, it will lose its customers. If the firm lowers its price, its rivals will be affected. Hence, one firm takes the role of a price leader and fixes the price of the product. The other firms follow the price leader and accept the price fixed by him. Thus the oligopolies avoid price changes.

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KINKED DEMAND CURVE

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The kinked demand model is a model of oligopoly in which the demand curve facing each individual firm has a kink in it. The kink follows from the assumption that competitive firms will follow if a single firm cuts price but will not follow if a single firm raises price. Above P*, an increase in price, which is not followed by competitors, results in a large decrease in the firms quantity demanded (demand is elastic). Below P*, price decreases are followed by competitors so the firm does not gain as much 5/2/12 quantity demanded (demand is inelastic).

DUOPOLY

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What is duopoly?

A Duolopy is a Oligopoly which has two sellers and it is the simplest type of Oligopoly Industry dominated by two large firms Possibility of price leader emerging rival will follow price leaders pricing decisions. High barriers to entry. Abnormal profits likely.

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THANK YOU

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