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Pure Monopoly
Pure Monopoly
CHAPTER –ONE
1. MONOPOLY MARKET STRUCTURE
Chapter Objective
1.1 Definition and Reason for existence of monopoly
1.2 Demand & Review of monopoly firm
1.3 Equilibrium of monopoly
1.4 The Multiplan firm
1.5 Price discrimination
Introduction
barriers to entry, the more complete the monopoly will be. Barriers take
various forms, legal and illegal, and some of these major
2. Government License
Some businesses are illegal unless a government license has been granted.
Television. Telephone, and electricity are some of the examples of businesses
that in most countries require government permission. These services, in
country for example, are monopolized by the government and no one is entity
to provide them unless licensed
3. Natural monopolies
This situation is likely to occur either when the market is small or when fixed
costs are necessarily very large. For example, if market for a given product is
very restricted in a small town with small population size, having two suppliers
of a given product may not be profitable. A good example where high fixed costs
exist is for railways or water works. Hence, it would seem to be absurd to have
two railways alongside each other or to have two sets of water pipe running
into your home.
5. Internal Growth
Companies can also grow without merging, and they do this by raising money
to finance the growth. Sources of money are from retained profits, bank loans,
and issues of new shares. This will help companies to be financially strong
which in turn helps them to monopolize the market.
6. Aggressive Tactics
Aggressive tactics are just tricks, where a seller sells its products below the
prevailing market price usually less than its cost of production. What do you
think is the purpose of doing this?
A business that sells its product for less than costs of production is said to be
engaging in predatory pricing. The aim of predatory pricing is usually to force
another firm out of business before raising profits.
Consider the possibility of one firm owning the entire supply of a raw material
input that is essential to the production of a particular commodity. The
exclusive ownership of such a strategic resource serves as a barrier to entry
until an alternative source of the raw material input is found or an alternative
technology not requiring the raw material in question is developed.
Based on the about figure, determine the range in which profit is negative
and positive
- When the output is at a and at b profit is zero
- When the output is below a & above profit is negative
- When the output is within the ranges between a to b the profit is
positive
At point Q the two curves are equal and 1t brings us to the condition of
profit maximization.
At point
Mc= MR- means the slop of cost curve is the same as the slope of
revenue curve.
The slope of Mc is greater than the slope of MR. This means mc curve
cuts MR curve from below
At point E
- MR= MC and MC cuts MR from below
- Point “E” equilibrium point for monopolist
To determine monopoly price, Trace up through equilibrium point to AR line
to point G. Therefore the monopolist price is Pm
In monopolist market
Revenue R= P x Q= area of rectangle OQM GPM
Cost C = Ac x Q = area of rectangle OQM HA
TL = R- C the area of rectangle AHGPM
Therefore In monopolist can’t decide on both price charge and level of sales
it will achieve the market
- Monopolist constrained by demand curve & he or she can decide the
price or quantity not both
- In monopolistic the decision on price or output is interdependent by
interaction of MC and MR which will be sold at corresponding price.
-it is also possible that the monopolist neither makes abnormal profit or incurs
loss, but this only when the short run AC curve of monopolist tangent to AR or
demand curve and the same time MC curve cuts the me curve from below.
II. At Optimal Scale: - This is at minimum point of LRAC curve. Here, the
market size is just large enough to permit to monopolist to build the optimal
plant and use at full capacity
III. Surpass the Optimal Scale- It is beyond the minimum point of LRAC
- The Size of the market is so large that the monopolist in order to maximize
his output
- The plant must build than optimal and over utilize it.
It considers a monopolist with two plants each with different cost structure at
two different locations.
That means we have two different marginal cost where the total marginal cost
is equal to the horizontal summations of individual marginal cost. The
monopolist now is expected to make two decisions.
MC1 = MC2 = MR
Means:- If MC1 is less than MC2, the monopolist would increase his profit by
increase the production in plant 1 and decrease it in plant2, until the
condition of MC1= MC2= MR is satisfied
Example – Assume that the demand equation of the multi plant monopolist is
given as Q=200-2P (P = 100- 0.5Q) and cost of the two plants are given as C 1
=10Q1 and C2 = 0.25Q22. Find equilibrium level of price and maximum level of
profit
First, calculate marginal Revenue (MR) & marginal cost (mC1 MC2)
R = PQ
= (100-0.5Q)Q
= 100Q-0.5Q2
MR = d(c)
d(Q)
=d (100Q -0.5Q2)
= 100-Q
A Seller with the degree of monopoly power and any time that faces dawn
weld sloping demand cone has a power of price
The reason for the Monopolist to apply price discrimination is to obtain
an increase in his total revenue and profit
The Increase in total Revenue is archived by taking away part of the
consumer’s Surplus. Depending on the amount of consumer’
I. First degree Price discrimination
- This involves changing different price for every sola.
- The aim of first-degree Price discrimination for to time is to appreciate
the entire consumer Surprise.
- In this degree the producer Charges the highest price that the
consumer is willing to pay for each unit sold.
It’s the limited case in which the monopolist negotiates individually with
each buyers. Also called Perfect price discrimination or “take-it- or
Leave it” Price discrimination.
Firm’s revenue
Q Q
No discrimination 1st degree price description
P1 ---- A
P2 -------------C
P3 --------------------- E
D1
Q1 Q2 Q3
Second-degree price discrimination
With Out the 2nd degree price discrimination The revenue earned
given by the area OP3EQ3 at price of Op3, which is, Less than
revenue under discrimination
R R
Solution
R1=P1Q1 R2=P2Q2
= (80-2.5Q1)Q = (180-10Q2)Q
= 80Q,-2.5Q2) =(180Q-10Q22)
d(02)
d(Q)
MC=d(50+4Qc) = MC= 40
d(Q )
Mc=MR1 MC=MR2
5 5 26 20
Q1=8 Q2= 7
= (430+770)-650
= 1250-650 600
Elasticity= (E1&E2)
dp1 Q1 dp2 Q2
d(P1) 8 d(P2) 7
3 7
E1 = 3 E2 =1.57
Mc =MR1=MR2
40=80-5Q1=180-20Q2
40 = 40 = 40