Lecture Week 10 - Monopoly

MAIN THEMES

• How markets work: supply and demand (Weeks 1 to 5)

• Consumer behaviour (Week 6)

• Costs of firms (Weeks 7 to 8)

• Market Structures (Weeks 9 to 11)

• Labour issues (Week 12)

REGULATION OF AIRPORT PRICING

• Issue raised regarding Dublin Airport's passenger charges

• Impact on consumers and market dynamics

• DAA Chairman comments on pricing incomprehensibility

UNDERSTANDING MONOPOLY: CHAPTER 13

• Definition: A monopoly is a market structure where only one firm exists with no close substitutes.

  • Monopolies can emerge due to various causes, including barriers to market entry.

TOPICS COVERED

• Definition of a monopoly

• Conditions for the emergence of monopolies

• Profit maximization strategies for monopolies

• Price discrimination and public policy issues

USEFUL RESOURCES

• Khan Academy links for further learning on monopolies and market competition: Khan Academy

IMPERFECT COMPETITION

• Definition: A market where firms differentiate their products and have some control over prices.

• Types of imperfect competition:

  • Perfect Competition

  • Monopolistic Competition

  • Oligopoly

  • Monopoly

ANALYSES OF MONOPOLY

• Monopolies vs. Perfect Competition:

  • Monopolies set prices higher compared to competitive firms

  • Monopolies possess price-making abilities rather than price-taking

  • Effects of downward-sloping demand curves for monopolists

BARRIERS TO ENTRY

• Four main sources of barriers to entry:

  • Ownership of a key resource

  • Government-created monopolies (e.g., patents)

  • Natural monopolies where firms can produce at a lower cost

  • Production costs that confer competitive advantages

NATURAL MONOPOLIES

• Definition: A market condition where one firm can supply a product cheaper than multiple firms due to economies of scale.

• Examples: Utilities and transport systems.

ECONOMIES OF SCALE

• Concept: The average total costs decrease as production scales up.

• Network effects are illustrated as a common phenomenon in monopolistic markets, generating a 'winner-takes-all' dynamic.

MONOPOLY DEMAND CURVES

• Unlike competitive firms that face a horizontal demand curve, monopolists face a downward-sloping demand curve.

• Implications for pricing strategies and marginal revenue calculations

PROFIT MAXIMIZATION

• Monopolies maximize profit by producing where marginal cost equals marginal revenue.

• Price is then determined by the demand curve at that quantity.

PUBLIC POLICY STRATEGIES TOWARD MONOPOLIES

• Responses to monopolies might include:

  • Regulating monopoly prices

  • Encouraging competition through antitrust laws

  • Nationalization of certain monopolized industries

  • Passive approach if market failure is minimal

CONCLUSION: MONOPOLY PREVALENCE

• Most firms exercise some pricing power due to product differentiation.

• Rare instances of complete monopolies exist despite the commonality of monopolistic practices in markets.

• Efficiency and welfare implications of monopolies leading to societal costs and deadweight losses.