Sec4-Pricing and Output Strategies (Monopoly - a market with a single…
Sec4-Pricing and Output Strategies
- a market structure with the highest level of competition. No barriers to to entry or exit.
There is a need for multiple buyers and sellers. The price is determined by market forces of demand and supply
Each firm only has a tiny share of the market and changes in one firm wont affect the entire industry
No barriers to entry or exit
The product must be identical - no advertisement or branding
Symmetry of Information - no exploitation
Firms don't raise prices. They don't have any incentive to cut prices. They are price takers - accept market price
Constantly seeking to gain comparative advantage by improving their product and responding quickly to demand
Free entry and exit.
Long run - enough profit to keep them producing the product.
Normal profit. If demand rises then supernormal profit. Attracts new firms. Supply increases so prices fall and profit returns to normal. If demand falls then loss. Firms exit. Prices rise so back to normal profits.
This market structure is expected to promote effciency
Both an incentive and a threat to produce what the consumers want at the lowest cost possible
Provides consumers with a wider choice. However it isn't certain that the products are the best outcome for the consumers
- a market with a single supplier
!00% market share
high barriers to entry and exit
Its a price maker
Occurrence of Monopolies
Over time by driving out other firms
Mergers and takeovers
May exist from the start because it owns all resources, its government owned, a patent.
Barriers to entry and exit
Legal Barriers to entry such as patents or govt. acts
Scale of Production Barrier - the monopoly would be producing on a large scale and newer industries wouldn't be able to compete
Creation of brand loyalty through branding and advertising using monopoly's access to resources and retail outlets
Barriers to exit like a long term contract also stop new firms from entering the market because they feel reluctant to take up such commitment
Due toeconomies of scale, it may be more efficient
Prevents wasteful duplication of capital equipment. For example, its unsafe and expensive for multiple firms to lay drown rail tracks
High profits may be spent on R&D
Monopoly may restrict supply to increase prices
May produce poor quality products because no substitutes
no response to change in demand
Due to barriers, they can earn supernormal profits in the long run
Monopoly has control over the supply but can influence demand.
If they set the Price then they have to accept level of sales but if they fix the Quantity then consumers decide what price they want to pay