Micro Unit 4 - Monopoly

Characteristics of Monopoly (4)

• One large firm → The firm is the market

• Unique product → No close substitutes

• High barriers of entry due to economies of scale 

  • Firms can not enter the industry

• Monopolies are price setters

General Misconceptions About a Monopoly

• All Monopolies Make a Profit

• Monopolies are usually efficient

• All monopolies are bad for the economy

• All monopolies are illegal

• Monopolies charge the highest price possible

• The government never prevents monopolies from forming

Can a monopoly be good for the economy?

• Economies of scale can make it impractical to have smaller firms → Monopoly sometimes good for the economy

Natural Monopoly

Industry where a single firm can produce at a lower cost than 2 or more competing firms

• ONE firm can produce at the socially optimal quantity and lowest cost due to economies of scale

• Better to have only ONE firm because ATC is falling at socially optimal quantity

Where do you produce in a monopoly?

Always Maximize Profit → MR=MC

If a monopoly wants to sell more units you need to ___

Lower the price

What is the main difference between a Monopoly and Perfect Competition

Marginal Revenue is ALWAYS LESS than demand

Where is Demand Elastic/ Inelastic?

Inelastic where price causes TR to increase

Elastic if price causes TR to decrease

Where is a price set in a monopoly?

Price is set at Demand → Produces at MR=MC but sells at the price where it intercepts with D

When do you shutdown in monopoly?

Shutdown when the PRICE SOLD (D) is below AVC

Monopoly Efficiency

• Monopolies are INNEFICIENT because they 

  • Charge a higher price

  • Don’t produce enough (Not Allocatively Efficient)

  • Produce at higher cost (Not productively efficient)

• Monopolies produce less and charge higher price

Where is CS and PS for a monopoly?

Economies of Scale role in Monopoly

• Economies of Scale make it impractical to have smaller firms 

  • Having one big company can keep costs low

Why/ how regulate monopolies?

• Keeps prices low and tries to keep monopolies efficient

Regulates by using price controls → Price Ceiling (Max Price)

Socially Optimal Price

Where Demand = Marginal Cost → Place to set price ceiling

No deadweightloss but NOT PROFITABLE

Typically requires government subsidy

Fair Return Price (Break-Even)

• Set at ATC=D (Normal Profit)

• Firms breakeven but not at socially optimal price/ quantity 

Price Discrimination

• Practise of selling the same product to different buyers at different prices

  • EG. CHILD & ADULT MOVIE TICKETS, BUSINESS DISCOUNT

What are requirements of Price Discrimination

• Having monopoly power, being able to segregate the market and consumers can NOT RESELL PRODUCT

Result of Price Discrimination

Results in MORE profit, MANY prices, and NO CONSUMER SURPLUS

Monopolistic Competition

• Large numbers of sellers

• SOME control over price 

• Different products

• Low barriers to entry/ exit

• A lot of ADVERTISING

Monopolistic Competition VS Perfect Competition

Monopolistic	Perfect Competition
Control over price of own good  Demand is GREATER than MR Not efficient	Larger number of small firms Easy entry and exit ZERO ECONOMIC PROFIT in LR

Differentiated Products

• Goods are not identical and firms want to capture marketshare

Since the products have substitutes firms use non-price competition

Non-Price Competition

• Competition within a market that is driven by things other than price

  • Brand Names/ Packaging, Product Quality/ Attributes, Service, Location and ADVERTISING

  • Advertising aims to Increase demand and make demand more ELASTIC 

Monopolistic Competition Graph in Short Run

• Same as a monopoly firm making profit → MR > D (SEE GRAPH)

  • Produce at D=MC and ATC Is below

Monopolistic Competition Graph in Long Run

• Firms will enter the market and drives down CURRENT FIRM DEMAND for firms ALREADY IN MARKET 

  • Demand will continue to fall until there is NO ECONOMIC PROFIT

  • Produce at D=MC and ATC also is that point 

Monopolistic Competition Long Run Equilibrium

• Quantity where MR=MC Moves up to P=ATC

• D&MR CURVE ARE THE ONES THAT SHIFT NOT ATC → Shift up and down

Shifting Demand in Monopolistic Competition with PROFIT

• New firms enter, and more firms = more close substitute and less market share

• Demand for each firm decreases

Shifting Demand in Monopolistic Competition with LOSSES

• Firms will exit → Less substitutes → More market share

• Demand for each firm rises

Excess Capacity

•  Given current resources, the firm CAN produce at lowest costs but they decide not to 

  • Gap between Minimum ATC and MR=MC is the excess capacity

  • Firms hold back production to maximize profit 

Why is Monoplistic Competition NOT Productivley Efficient?

Typically produce at MR=MC and sell at MR=D

BUT it is not at the lowest ATC so its not efficient

Characteristics of Oligopolies

• Few Large Producers (less than 10)

• Both identical OR differentiated products

• High barriers to entry 

• Control over price (Price Maker)

• Mutual Interdependence → Firms use strategic Pricing

What are the 3 Barriers to Entry for Oligopoly?

• Economies of Scale → Hard to make cars bc only big firms make cheap cars

  • If others join, you lower price so you fuck them in the arse

• High start-up costs (factory, infrastructure)

• Ownership of raw materials → Control over raw materials

Game Theory

Study of how people behave in strategic situations

• Helps oligopoly maximize profit

Interdependence (Oligopoly)

Oligopolies are interdependent since they compete with only a few other firms

• Pricing and output decisions must be strategic to avoid economic loss

• Game theory helps us analyze their strategies

Dominant Strategy

• Best move to make regardless of what your opponent oes

  • You benefit no matter what your opponent does → Whatever opponent does, do same shit

Nash Equilibrium

• Optimal outcome that occurs when both firms make decisions simultaneously with no incentive to change

  • If they change their strategy they will be worse off

Dominant Strategy (On Matrix)

Nash Equilibrium (On Matrix)

3 types of oligopolies

price leadership - no graph

Colluding - monopoly geaph

non colluding - kinked deamdn