Monopoly

Monopo Managerial Economics Presentation

Presented by:

Agha Nawazish Amna Hasan Faiza Zia Shaharyar Zafar

Monopoly: What It Is and What It Isn’t • A monopoly is a single supplier to a market • It is a firm that may produce at any point on the market demand curve • The reason a monopoly exists is that other firms find it unprofitable or impossible to enter the market • A monopoly is often confused as monopsony and also mistaken to be a cartel

Types of Monopolies: There are four different types of monopolies: • Natural Monopoly • Geographic Monopoly • Technological Monopoly • Government Monopoly

Barriers To Entry: • Barriers To Entry are the source of all monopoly power • When monopolies occur there are usually barriers to entry other the high profits would attract competitors -Examples of Barriers to Entry: • • • •

Economies of scale or Sunk Costs Patents or licenses Cost advantages Consumer switching costs create product

Technical Barriers To Entry:

• Production of a good may exhibit decreasing marginal and average costs over a wide range of output levels • Another technical basis of monopoly is special knowledge of a lowcost productive technique

Sony Ericssons Technical barriers example here shows that they might limit the possibilities to further increase levels by introducing digital power management – systems will use energy more efficiently, resulting in less power consumption

Legal Barriers and Natural Barriers to Entry: Legal Barriers • Situation where a law prevents other firms from entering the market to sell a product • Example : only USPS can deliver first class mail, so this would be a legal barrier to entry.

Natural Barriers • Other firms cannot enter the market because either the startup costs are too high • Most public utilities would fall into this category • The cost structure of the market gives an advantage to the

Causes of Monopolies: • By developing or acquiring control over a unique product • By having a lower production cost than competitors • By using various legal and/or illegal tactics • By controlling a platform and using vendor lock-in • By receiving a government grant of monopoly status

Benefits Of Monopolies: • Can actually generate a net benefit for society • Ability to attain lower costs of production than would be possible with competitive firms • Government-granted monopolies can provide financial incentives to others to innovate and produce creative work

How Monopolies Can Be Harmful: • Substantially higher prices and lower levels of output • A lower level of quality than would otherwise exist • A slower advance in the development and application of new technology • The abuse of monopoly power clearly can be harmful to an economy

Profit Maximization: • To Maximize profits, a monopolist will choose to produce that output level for which marginal revenue is equal to marginal cost • Since MR = MC at the profitmaximizing output and P> MR for a monopolist, the monopolist will set a price greater than marginal cost

Monopoly Profits: • Will be positive as long as P > AC • Can continue into the long run because entry is not possible • Size in the long run will depend on the relationship between average costs and market demand for the product

Economies of Scale:

A monopolist might be better positioned to exploit economies of scale leasing to an equilibrium which gives a higher output and a lower price than under competitive conditions

No Monopoly Supply Curve : • With a fixed market demand curve, the supply “curve” for a monopolist will only be one point. (MR=MC) • If the demand curve shifts, the marginal revenue curve shifts and a new profit maximizing output will be chosen

Monopoly and Resource Allocation:

Price Discrimination: • A monopoly engages in price discrimination if it is able to sell otherwise identical units of output at different prices • Whether a price discrimination strategy is feasible depends on the inability of buyers to practice arbitrage

Perfect Price Discrimination: If this monopolist wishes to practice perfect price discrimination, he will want to produce the quantity for which the marginal buyer pays a price exactly equal to the marginal cost

Market Separation: • Perfect price discrimination requires the monopolist to know the demand function for each potential buyer • A less stringent requirement would be to assume that the monopoly can separate its buyers into a few identifiable markets • All the monopolist needs to know in this case is the price elasticities of demand for each market

Market Separation: • The profit-maximizing price will be higher in markets where demand is less elastic