Market StructuresMarket Structures

MonopolyMonopoly

Monopoly

Defining monopoly Only one seller Barriers to entry

economies of scale product differentiation and brand loyalty lower costs for an established firm ownership/control of key factors or

outlets legal protection mergers and takeovers aggressive tactics

Monopoly: Why? Natural monopoly (increasing

returns to scale). Artificial monopoly

a patent sole ownership of a resource formation of a cartel; e.g. OPEC

Monopoly: Assumptions

Many buyers Only one seller i.e. price-maker Homogeneous product Perfect information Restricted entry and possibly

exit

Monopoly: Features

The monopolist’s demand curve is the (downward sloping) market demand curve

The monopolist can alter the market price by adjusting its output level.

Monopoly The monopolist's demand curve

downward sloping MR below AR

Equilibrium price and output MC = MR

Profit maximising under monopolyP/R

Q O

MC

Qm

MR

Profit maximising under monopolyP/R

Q O

MC

AR

Qm

MR

AR

a

Monopoly The monopolist's demand curve

downward sloping MR below AR

Equilibrium price and output MC = MR measuring level of supernormal profit

Profit maximising under monopolyP/R

Q O

AC MC

AR

AC

Qm

MR

AR

a

b

P/R

Q O

AC MC

AR

AC

Qm

MR

AR

Profit maximising under monopoly

Price Discrimination

Why do business week offer bargain rates to students?

PRICE DISCRIMINATION Charging different prices for a

product when the price differences are not justified by cost differences.

Objective of the firm is to attain higher profits than would be available otherwise.

Monopoly - Price Discrimination Different prices at different

markets Personal, Local or Trade use

First degree Charge maximum from able and willing

to Pay Second Degree

Buyers divided into groups, based on demand

Third Degree Entire market divided into submarkets

Price Discrimination

Firm must be an imperfect competitor (a price maker)

Price elasticity must differ for units ofthe product sold at different prices

Firm must be able to segment themarket and prevent resale of units across market segments

First-Degree Price Discrimination

Each unit is sold at the highest possible price

Firm extracts all of the consumers’ surplus

Firm maximizes total revenue and profit from any quantity sold

Second-Degree Price Discrimination

Charging a uniform price per unit for a specific quantity, a lower price per unit for an additional quantity, and so on

Firm extracts part, but not all, of the consumers’ surplus

First- and Second-Degree Price Discrimination

In the absence of price discrimination, a firm that charges Rs.2 and sells 40 units will have total revenue equal to Rs.80.

First- and Second-Degree Price Discrimination

In the absence of price discrimination, a firm that charges Rs.2 and sells 40 units will have total revenue equal to Rs.80.

Consumers will have consumers’ surplus equal to Rs.80.

First- and Second-Degree Price Discrimination

If a firm that practices first-degree price discrimination charges Rs.6 and sells 40 units, then total revenue will be equal to Rs.160 and consumers’ surplus will be zero.

First- and Second-Degree Price Discrimination

If a firm that practices second-degree price discrimination charges Rs.4 per unit for the first 20 units and Rs.2 per unit for the next 20 units, then total revenue will be equal to Rs.120 and consumers’ surplus will be Rs.40.

Third-Degree Price Discrimination

Charging different prices for the same product sold in different markets

Firm maximizes profits by selling a quantity on each market such that the marginal revenue on each market is equal to the marginal cost of production

Third-Degree Price Discrimination

Monopoly

The monopolist's demand curve downward sloping MR below AR

Equilibrium price and output MC = MR measuring level of supernormal profit Price Discrimination

Comparing monopoly with perfect competition

Monopoly The monopolist's demand curve

downward sloping MR below AR

Equilibrium price and output MC = MR measuring level of supernormal profit

Comparing monopoly with perfect competition lower output at a higher price

O

P1

MC1

MC = MSC

Q1

MRAR = MSB

Q2

P2 = MSB

= MSC

Q

A monopolist producing less than the social optimum

Monopoly outputPerfectly competitive output

Monopsony

Monopoly: the only ‘seller. Monopsony: the only ‘buyer’,

chooses a price-quantity combination on the industry supply curve that max its profit

it exercises its’ market power by buying at a price below the price that competitive buyers would pay

Monopsony

Demand for labour

Supply

L, Workers per day

6020 30

ME, Marginal expenditure

wm = 20

wc = 30ec

em

ME = 40

60

0

w, per

work

er

Suppose a firm is the sole employer in a town, and the firm uses one factor, labour, to produce a final good

Average expenditure the monopsony pays to hire a certain number of workers

When supply curve linear and upward sloping, the marginal expenditure curve is twice as steep as the supply curve

Monopsony

Demand for labour

Supply

L, Workers per day

6020 30

ME, Marginal expenditure

wm = 20

20wc = 30ec

em

ME = 40

60

0

w, R

s. p

er w

ork

er

Monopsonist values labour at Rs.40, but it pays only Rs.20Monopsonist hires fewer workers and pays a lower wage

Monopsony power (ME –w)/w = 1/

If the market for labour were perfectly competitive and the firm faced a horizontal supply curve, than the equilibrium would be at ec

Remember a firm will hire workers up to the point where the marginal value of the last unit of the worker = the marginal cost to the firm

ie where the demand (for labour) curve = ME curve

Bilateral Monopoly

Uncontrolled monopoly gets higher than competitive market prices.

Uncontrolled monopsony gets lower than competitive market prices.

Monopoly/monopsony confrontation breeds compromise.

One buyer : One seller

Bilateral Monopoly

D

ME

MC

MR

e1

x

y

ox1

P2

x2

P1

P*

X*

a

b

Monopoly Equilibrium

Monopsony Equilibrium

Bilateral Monopoly Equilibrium

Thank you……………