3.4.5 Monopoly
PURE MONOPOLY
when there is one seller in the market. (closest example is google who have 88% of the market).
CHARACTERISTICS OF MONOPOLY
High barriers to entry
Unique products
Price makers
Firms make supernormal profit in the long run.
MONOPOLY PRODUCE MC=MR
MONOPOLIES CAUSE A WELFARE LOSS TO SOCIETY
PRICE DISCRIMINATION
This is when a monopolist charges a different price to a different firm in a different market for the same good.
CONDITIONS:
-Demand for good must have different elasticities
-Firms must have price making ability
-Must be able to prevent arbritrage
-Must have information to separate the market.
COSTS AND BENEFITS OF PRICE DISCRIMINATION
COSTS
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-Allocative inefficiency and consumers get exploited
-Inequalities
-Anti-competitive pricing (as prices are lower in the elastic market this could drive out other firms out of the market giving them more power).
Benefits
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-Increases profits for firms as they can have two profit maximising eq rather than 1, DYNAMIC EFFICIENCY
-Consumers in the elastic market benefit from a lower price, due to the cross subsidisation. However, this could increase inequality. SOME CONSUMERS BENEFIT.
-Consumers lose consumer surplus to producers
-CROSS subsidisation potential, high profits that they make could be used to cross-subsidise loss making goods/ services.
1st and 2nd degree price discrmination
1st degree is when consumer surplus is eroded from the market as they are charged the price they are willing to pay
2nd degree is when prices change with different quanitites.
NATURAL MONOPOLIES
This is a market where economies of scale are too large for one firm to exploit.
Rational for 1 firm to supply. Any entrant firm will not be able to reach the economies of scale of the incumbent firm.
LRAC FOR NATURAL MONOPOLY IS DOWNWARD SLOPING FOR HIGH QUANTITIES
-AR and MR as normal but AC is above MC and they both continue to slope down.
EFFICIENCIES
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-Not productively efficient, since they do not produce at MC=AC.
They are also not allocative efficient as P>MC/
-They are likely to be dynamically efficient as supernormal profits allow it.
However, there is no incentive to invest due to low competition.
-Monopolists may be x-inefficient due to low competition.
CREATIVE DESTRUCTION
-Monopolies are not permanent as they give incentives for other firms to break down the monopoly through a process of creative destruction.
COSTS AND BENEFITS OF MONOPOLIES
FIRMS
CONSUMERS
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-Potential for huge profits for their shareholders through profit max
-Firms with monopoly power can compete with overseas organisations
-Large firms will be able to exploit economies of scale and reduce LRAC further
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-Consumers are better off in natural monopolies
-Monopolist may offer a higher range of goods due to cross-subsidisation
-The use of price discrimination can allow for the survival of another product
-Consumers may pay higher price for poorer service due to low competition
-There is less choice for consumers.