Monopoly is characterised by: a single seller in the market a unique product high barriers to entry that make it difficult or impossible for other firms to enter the market.
2 Barriers to entry Barriers to entry arise because a firm has: ownership of a vital resource licences and patents that create legal barriers to other entrants economies of scale.
3 4 A natural monopoly An industry where the LRAC declines along the entire range of output. A single firm can supply the entire market demand at a lower cost than two or more smaller firms. 5 Price and output decisions for a monopolist The major difference between monopoly and perfect competition is the shape of the demand curve faced by the firm. Monopolists are price makers they face a downward-sloping demand curve for their products. This means they can choose between price and output combinations. 6 The monopolists demand curve The monopolists demand curve and the industry demand curve are one and the same.
7 Demand and marginal revenue curves If demand is downward sloping, then the monopolist must lower price in order to sell an extra unit. This price-cut applies to all units, not just the last unit. This means marginal revenue is always less than price. The marginal revenue for a monopolist intersects the quantity axis halfway between the origin and the demand curve. 8 Profit maximisation Economists assume that all firms try to maximise profits (or minimise losses). Like the perfectly competitive firm, the monopolist also maximises profit by producing that level of output for which MR = MC.
Monopoly in the short run 9 10 Monopoly in the long run If the factors determining the positions of a monopolists demand and cost curves mean it earns an economic profit, and if nothing disturbs these factors, economic profit will continue in the long run.
11 Price discrimination Price discrimination is a pricing technique that a monopolist can use to maintain an economic profit. Price discrimination is the practice of a seller charging different customers different prices for the same product not justified by cost differences.
12 Conditions for price discrimination A firm can engage in price discrimination if the seller: is a price maker can separate consumers into market segments (perhaps on the basis of price elasticity of demand) can prevent arbitrage (buying then reselling for a higher price). 13 Price discrimination in practice Many firms with a downward-sloping demand curve (not just monopolists) can practise price discrimination: different fares based on age or status different seat prices at sporting events restaurant discounts to senior citizens discounts for volume purchases. 14 Is price discrimination unfair? Price discrimination allows sellers to charge what buyers are willing to pay. Many buyers benefit from the discrimination by not being excluded from purchasing a product they could not otherwise afford.
Comparing monopoly and perfect competition Compared to perfect competition, the monopolist: allocates resources inefficiently produces less output charge a higher price. 15 Chapter
9 Imperfect Competition
Monopolistic competition and oligopoly The monopolistic competition market structure Monopolistic competition features: many small sellers differentiated product non-price competition easy entry and exit. It is the market structure in which we find more firms than any other structure.
17 18 Many small sellers Each firm is so small, relative to the total market, that each firms pricing decisions have a negligible effect on the market price. However, monopolistically competitive firms are price makers; that is, they have some control over their price.
19 Product differentiation Product differentiation is the key feature of monopolistically competitive markets. Product differentiation is the process of creating real or apparent differences between goods and services. Such differences give firms the capacity to increase their prices.
20 Non-price competition In monopolistically competitive markets, firms compete using non-price techniques: advertising packaging product development better service. This avoids having to compete by lowering prices.
21 Entry and exit Monopolistic competition features low barriers to entry. Thus entry for new firms is fairly easy, especially if they can differentiate themselves from competitors. 22 The monopolistic competitors demand curve The demand curve for a monopolistically competitive firm is downward sloping. It is less elastic than the demand curve for the perfectly competitive firm. It is more elastic than a monopolists demand curve. 23 Advertising Advertising is one of the types of non-price competition used in monopolistic competition. Its purpose is to help differentiate the product from its competitors. Advertising is probably more effective in the short run than in the long run. 24 Monopolistic competition in the long run In the long run, each firm in a monopolistically competitive market will earn normal profit. This is because there is relatively easy entry and exit. For example, if a restaurant earns a short-run economic profit, new firms have an incentive to enter the market. 25 Benefits of monopolistic competition Although monopolistic competition fails the efficiency test, the product variety that occurs because of product differentiation may outweigh efficiency loss. Differentiated products allow consumer choice (not available in perfect competition). The oligopoly market structure Oligopolistic markets tend to be dominated by a few large firms. Oligopolistic markets feature: few sellers homogeneous/differentiated product difficult market entry. 26 27 Mutual interdependence Mutual interdependence is the distinguishing feature of oligopoly. This means a decision by one firm is likely to cause some reaction from other firms in the same market, e.g. banks and the fees they charge. Interdependence means decisions in oligopoly are more complex than in other market forms. 28 Price and output decisions for an oligopolist Mutual interdependence makes the oligopoly marketplace more difficult to analyse than perfect competition, monopolistic competition or monopoly. So the priceoutput decision also takes into account the possible reactions of other firms. 29 Kinked demand curve This is one explanation of oligopolistic behaviour. The firm assumes rivals will ignore a price increase and match a price cut. The demand curves therefore have two segments, above and below a price point. This model suggests prices will be sticky. Kinked demand curve 30