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5 Characteristics of a Monopoly
1) Single Seller
2) Unique good with no close substitute
3) "Price Maker"
4) High Barriers to Entry
5) Some "Nonprice" Competition
Single Seller (1)
-one firm controls the vast majority of a market
-firm=industry
"Price Maker" (3)
-firm can manipulate price by changing the quantity produced (ie. shifting supply to the left)
High Barriers to Entry (4)
-new firms CANNOT enter market
-no immediate competitors
-firms can make profit in the long-run
Some "Nonprice" Competition (5)
-monopolies still advertise their products in an effort to increase demand
Four Origins of Monopolies (Barriers to Entry)
1) Geography
2) Government
3) Technology or Common Use
4)Mass Production and Low Costs
Main difference between Monopolies and Perfect Competition
MARGINAL REVENUE DOES NOT EQUAL PRICE (MR LESS THAN PRICE)
-monopolies (and all imperfectly competitive firms) have downward sloping demand curve
How does a firm sell more in a monopoly?
A firm must lower its price
Total Revenue Test
If price falls and TR increases, then demand is elastic;
If price falls and TR falls, then demand is inelastic
(A monopoly will only produce in the elastic range)
Where do monopolists produce?
Where MR=MC, but it charges the price consumers are willing to pay identified by the demand curve
Are monopolies efficient?
No, monopolies under-produce and overcharge
What happens to CS and PS for a monopoly?
CS decreases
PS increases
Total Surplus decreases
There is now DWL
Are monopolies productively efficient?
No, they are not producing at the lowest cost (minimum ATC). Instead, they will maximize profit by finding MR=MC
Are monopolies allocatively efficient?
No, price is greater and the monopoly is under producing
Why are monopolies inefficient?
1) Charge a higher price
2) Don't produce enough (Not allocatively efficient)
3) Produce at higher costs (Not productively efficient)
4) Have little incentive to innovate (little external pressure to be efficient)
Natural Monopoly
One firm can produce the socially optimal quantity at the lowest cost due to economies of scale
-It is better to have only one firm because ATC is falling at socially optimal quantity
socially optimal quantity
What society wants, or where supply (MC) meets demand
Lump Sum
Does not change output, does not change MC
Why would the government regulate a monopoly?
1) To keep prices low
2) To make monopolies efficient
How does the government regulate monopolies?
Use Price Controls: Price Ceilings
Why don't taxes work for regulating monopolies?
Taxes reduce supply and that is the problem-monopolies are already unde-rproducing to begin with
Socially Optimal Price
P=MC (Allocative Efficiency)
Fair-Return Price (Break-Even)
P=ATC (Normal Profit, no economic profit)
Where should the government place the price ceiling in a monopoly?
Socially Optimal Price
-what society wants-using all resources
What happens if the government sets a price ceiling to get the socially optimal quantity in a natural monopoly?
The firm would make a loss and would require a subsidy
Price Discrimination (definition)
Practice of selling the same product to different buyers at different prices
Ex: Airline Tickets, Movie Theaters, Coupons, GBHS Football Games
Price Discrimination (concept)
-Seeks to charge each consumer what they are willing to pay in an effort to increase profits
-Those with inelastic demand are charges more than those with elastic
-Socially optimal quantity is higher
WHEN PRICE DISCRIMINATION, MR=D
Requirements for Price Discrimination
1) Must have monopoly power
2) Must be able to segregate the market
3) Consumer must NOT be able to resell product
Price for Discriminating Monopoly
range, no set price; monopolies will still accept the price until it hits minimum ATC because there is still a profit
What happens to profit, CS, and DWL in a price discriminating monopoly?
-more profit
-no CS; everyone is paying what they are willing to pay
-DWL is gone
What happens if the government sets a price ceiling to get the socially optimal quantity in a natural monopoly?
The firm would make a loss and would require a subsidy
Monopolistic Qualities
-control over price of own good due to differentiated product
-D greater than MR
-plenty of advertising
-not efficient
Perfect Competition Qualities
-large number of smaller firms
-relatively easy entry and exit
-zero economic profit in long-run since firms can enter
Monopolistic Competition Characteristics
-relatively large number of sellers
-differentiated products
-some control over price
-easy of entry and exit (low barriers)
-a lot of non-price competition (advertising)
Differentiated Products
-goods are NOT identical
-firms seek to capture a piece of the market by making unique goods
-firms use NON-PRICE Competition because these products have substitutes
Non-Price Competition
-brand names and packaging
-product attributes
-service
-location
-advertising
Two Goals to Advertising
1. Increase Demand
2. Make demand more INELASTIC
What does the short-run in monopolistic competition look like?
Monopolistic Competition is made up of price makers, so MR is less than demand and it is the same graph as a monopoly making profit
What happens to monopolistic competition in the long-run?
New firms will enter, driving down the DEMAND for firms already in the market until there is no economic profit; price and quantity falls and TR=TC
Long-run Equilibrium for Monopolistic Competition
Quantity where MR=MC up to Price=ATC
What happens when short-run profits are made in monopolistic competition?
-new firms enter
-more close substitutes and less market share for each existing firm
-demand for each firm falls
What happens when short-run losses are made in monopolistic competition?
-firms exit
-less substitutes and more market shares for remaining firms
-demand for each firm rises
What happens when there is a loss in monopolistic competition?
In the short-run, the graph is the same as a monopoly making a loss; in the long-run, firms will leave, driving up the DEMAND for firms already in the market
Are monopolistically competitive firms efficient?
No; not allocatively efficient because P≠MC and not productively efficient because it isn't producing at minimum ATC
Excess Capacity
-given current resources, the firm CAN produce at the lowest costs (minimum ATC) but they decide not to
-it is the gap between the minimum ATC output and the profit maximizing output, not the amount underproduced
Excess Capacity (reason)
The firm can produce at a lower cost but it holds back production to maximize profit
Advantages of Monopolistic Competition
-large number of firms and product variation meets society's needs
-Non-price Competition (product differentiation and advertising) may result in sustained profits for some firms
Ex: Nike, Apple might continue to make above normal profit because they are well-known
Characteristics of Oligopolies
-few large producers (less than 10)
-identical or differentiated products
-high barriers to entry
-control over price (price maker)
-mutual interdependence (firms use strategic pricing)
Ex: cereal companies, car producers
oligopoly
occurs when only a few large firms start to control an industry
-must use strategic pricing
-have a tendency to collude to gain profit
-collusion=incentive to cheat
-makes informed decisions based on their dominant strategies
collusion
the act of cooperating with rivals in order to "rig" a situation
Barriers to Entry for Oligopolies
1. Economies of Scale
2. High Start-up Costs
3. Ownership of Raw Materials
Game Theory
the study of how people behave in strategic situations
