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Information about Monopoly

Published on December 19, 2009

Author: malikhayat


Monopoly : Monopoly Malik Qamar Hayat BEM – 1050 Managerial Economics Biztek Market Structure : Perfect competition Oligopoly The firm in competitive markets Monopoly Non-perfect competition Monopolistic competition Market Structure Introduction : Introduction Economists assume that there are a number of different buyers and sellers in the marketplace. This means that we have competition in the market, which allows price to change in response to changes in supply and demand. Furthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price. In some industries, there are no substitutes and here is no competition. In a market that has only one or few suppliers of a good or service, the producer's) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods. Monopoly : Monopoly In economics, situation in which only a single seller or producer supplies a commodity or a service. For a monopoly to be effective there must be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller to control the price. Examples of Monopoly Electricity utilities, Gas, Water,Telecommunications A monopoly must be distinguished from monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies can form naturally or through vertical or horizontal mergers Characteristics : Characteristics There is only one firm which supply the entire market and many buyers & consumers The firm sells a unique product, which has no close substitutes. The firm has market power (that is it can control its price) Profit-maximiser Entry into the market is restricted, e.g. due to high costs and some special barriers to entry. A social, political or economic impediment that prevent firms from entering a market. Kinds of Monopolies : Kinds of Monopolies A Natural Monopoly Pure monopolies—only a single firm in an industry—is rare in most economies, except among the public utilities. These industries produce goods and provide services vital to the public well-being, including such essentials as water, power, transport, and communications. Although such monopolies often seem to be the most effective way to supply vital public services, they must be regulated when privately owned or else be owned and operated by a public body. B Trusts This is a device by which the real control of a company is transferred to an individual or small group by an exchange of shares of stock for trust certificates, which are issued by the individuals seeking control. A similar device is the holding company, which issues its own stock shares for sale to the public and “holds” or controls other companies by owning their shares. Such an arrangement is not necessarily illegal, unless created specifically to monopolize commerce in trade. Kinds of Monopolies Cont… : Kinds of Monopolies Cont… C Cartels Perhaps the best known form of combination is the cartel, due to the high profile of OPEC. A cartel is an organization formed by producers whose purpose is to allocate market shares, control production, and regulate prices. OPEC has done all these things in the petroleum industry, but its most highly publicized acts have been to set petroleum’s world price. D Mergers Efforts to organize an industry in order to achieve practical monopoly control take different forms. Any combination of firms that reduces competition may be of a vertical, horizontal, or conglomerate character. A vertical combination involves merging firms at different stages of the production process into a single unit. Some of the petroleum companies, for example, own oil fields, refineries, transport systems, and retail outlets. All mergers and combinations have the potential for eliminating competition and creating monopoly. Slide 8: Profit Maximization in Monopoly Markets Price/Output Decisions A monopoly firm is the market. Market and firm demand curve slopes downward. Monopoly demand curve is always above the marginal revenue curve, P = AR > MR. Monopoly position allows above-normal profits. P > AC in long-run equilibrium. Set Mπ = MR - MC = 0 to maximize profits. MR=MC at optimal output. Slide 9: Monopoly versus Perfect Competition The monopoly will have greater control over the price it charges for its product, although this control is never absolute. The monopoly firm thus has more freedom than the competitive firm to adjust price as well as production as it strives to achieve a maximum profit. . Assuming that the monopolist seeks to maximize profits and that they take the whole of the market demand curve, then the price under monopoly will be higher and the output lower than the competitive market equilibrium. This leads to a deadweight loss of consumer surplus and therefore a loss of static economic efficiency. Conclusion : Conclusion Market Structure with one producer. Entry of Firm is ban Unique product or No close substitute Firm is price maker The monopolist can take the market demand curve as its own demand curve. A monopolist therefore faces a downward sloping AR curve with a MR curve with twice the gradient of AR

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