MONOPOLY
Dr Vishal Sarin
Monopoly Power in Markets
• A pure monopolist is a single supplier that dominates the
entire market – the market has 100 % concentration.
[Link]
[Link]
Key features
• Price setting or price making power
• A downward sloping AR and MR curve
• Potential of using price discrimination between consumers
• Firm can set price or quantities but not both
• Barriers to entry exist – help to maintain supernormal
profits in the long run
• Imperfect information
• Profit maximization is assumed but the actual conduct of
firms with market power is often different especially in an
oligopoly.
• Prices are higher than under competitive conditions.
• Absence of genuine market competition may lead to
production inefficiencies
• X-inefficiencies such as wasteful production and advertising
spending
• Higher prices can limit the final output in a market and lead to
fewer economies of scale being exploited
• Protected markets – perhaps less drive to innovate
• Monopoly may get too big – diseconomies of scale
Monopoly Profits can be very high
Economic Case against monopoly
X-inefficiencies of Imperfect Competition
X-inefficiencies of Imperfect Competition
Economic Case for Monopoly Power
• High market concentration does not always signal
absence of competition; can reflect the success of firms in
providing better quality products, more efficiently, than
their rivals.
• Key Advantages from Monopoly:
1. Profit used to fund investment and research
2. Natural monopoly – economies of scale
3. Domestic monopoly faces global competition
4. Monopolistic firms can regulated i.e. industry regulator
acting as a proxy consumer
5. Price discrimination may help some consumers.
Economic Case Against Monopoly
1. Service – does not lack of competition affect the quality
of service to consumers?
2. Prices- how high are prices compared to
competitive/contestable market
3. Efficiency – productive, allocative and dynamic.
4. Welfare – what are the overall welfare outcomes? Is
there a net loss of welfare in markets dominated by
businesses with monopoly power?
Monopoly vs Contestable Markets
Price and Output behavior
• Equilibrium conditions
• A monopolist is in equilibrium when he produces the
amount of output which yields him maximum total profit.
• Profit is maximum when
• 1. Marginal cost = Marginal Revenue
• 2. Marginal cost cuts marginal revenue from below under
increasing cost condition.
Equilibrium
Short Run : Super Normal Profit
AR > AC
Super Normal Profit
Short run : Normal Profits
AR = AC
Normal Profit
Short run : Losses
AR < AC
Losses
Price Discrimination
• The act of selling the same article produced under
single control at a different price is known as price
discrimination.
• Price discrimination refers strictly to the practice
by a seller to charging different prices from
different buyers from the same good.
Condition of price discrimination
• Existence of monopoly
• Separation of markets possible i.e. no transfer of
commodity from low priced market to high price
market.
• Different elasticity of demand
• Inelastic demand Higher price per unit.
• Elastic demand Lower price per unit.
Types of price discrimination
• First-degree price discrimination occurs when each unit of
output is sold at a different price such that all consumer
surpluses go to the seller.
• Second-degree price discrimination occurs when the
seller prices the first block of output at a higher price than
subsequent blocks of output
• Third-degree price discrimination occurs when different
prices are charged to groups of buyers in totally separate
markets.
Examples
First Degree price discrimination
• Sometimes known as optimal pricing
• The firm separates the market into each individual
consumer and charges them the price they are willing and
able to pay.
• If successful, the business can extract the entire
consumer surplus that lies underneath the demand
curve and turn it into extra revenue or producer surplus.
First Degree…..
Second degree….
• Second-degree price discrimination means charging a
different price for different quantities, such as quantity
discounts for bulk purchases.
Second degree….
Third degree
• Third-degree price discrimination means charging a
different price to different consumer groups.
• For example, rail and tube travellers can be subdivided
into commuter and casual travellers, and cinema goers
can be subdivide into adults and children.
• Splitting the market into peak and off peak use is very
common and occurs with gas, electricity, and telephone
supply, as well as gym membership and parking charges.
• Third-degree discrimination is the commonest type.
Airtel
Evaluation of price discrimination
• Advantage • Disadvantages
• From Firm’s perspective • Exploitation of captive markets
• Profit maximization • Price discriminate may be
• Economies of Scale
limited
• Efficient Use of Infrastructure
• Better use of space
• Managing the flow customers
• Understanding the market
• From Consumer’s perspective
• Possibility of lower prices
• Benefits to groups of consumers
• Enables flexibility
• Generating positive externalities
• How monopoly works
• [Link]
• Price discrimination
• https://
[Link]/Business_economics/Price_
[Link]
• Above link contains video of price discrimination.
