MONOPOLY

VAIBHAV BHAMORIYA
SESSION 13, MANAGERIAL ECONOMICS
IIM KASHIPUR, EPGP 2018-19
MONOPOLY POWER

• A monopoly is a market structure in which only one seller supplies to all the consumer

• Local monopoly …e,g, basic amenity utilities

• Both big and small monopolies
• Market power – control on pricing – not unlimited power
• No close substitutes of product
• Market demand curve (DM) = Firm’s Demand curve (Df)
• Free to charge any price ----- but can it ?
• Given the price set by the monopolist , consumers decide how much to purchase
• The monopolist is restricted by the consumers to choose only these price quantity combinations along the market demand curve

• Monopolist can choose either a price or quantity but not both

SOURCES OF MONOPOLY POWER

• Economies of scale :- range over which ATC is decreasing

• If PM> ATC(QM) -- the firm makes a profit
• If a second firm enters economies of scale are lost and ATC of each firm is above P M leading to loss to both

• Economies of Scope : - when total cost of producing two products within the same firm is lower than when they are produced
separately
• Tends to encourage larger firms – smaller firms have greater problems obtaining funds

• Cost Complementarity
• In a multi product cost function when the MC of producing one output is reduced when output of another product is increased – in extreme
cases monopoly power results

• Patents and other legal barriers

• Govt. granted rights may lead to monopoly
• Patents rarely lead to absolute monopoly due to disclosure
MAXIMIZATION OF PROFITS

• A linear demand curve is elastic at high prices and inelastic at lower prices
• MR= P {(1+E)/E}
• When demand is elastic MR is positive
• When demand is unitary elastic MR is zero
• When demand is inelastic MR is negative

• The monopolist can sell one more unit only by lowering price
• Inverse Demand Function : P(Q) = a + bQ
THE OUTPUT DECISION

• When MR > MC expand output - increase profits

• When MC > MR reduce output – reduce losses
• When MR = MC maximised profits
• Profits = {PM – ATC (QM) } X QM
• Absence of a Supply curve
• Inverse demand function + no way to express different quantities for different prices
• Also true for monopolistic competition where firms have market power
 DEADWEIGHT LOSS IN A MONOPOLY

• PM > MC
• Society is willing to pay more than the cost of production
but monopolist does not do so because it would reduce the
firms profit as in this range MR < MC
MULTIPLANT DECISIONS

• How much to produce at each plant to maximise profit?

• Produce output in one plant such that marginal cost of producing in each plant equals the marginal
revenue of total output
• Q=Q1+Q2

• MR(Q) = MC1(Q1)

• MR(Q) = MC2(Q2)

• MCI(Q1) = MC2(Q2)
ENTRY BARRIERS

• Prevents other firms from entering business and reaping positive economic profits
• Presence of monopoly power does not imply economic profit – depends solely on where
the demand curve lies in relation to the average cost curve
MEASURING MONOPOLY POWER

•  Lerner’s degree of monopoly power

• For a Perfectly Competitive firm,

GOVT. POLICY TOWARDS MONOPOLY

• Antitrust Laws
• Merger Evaluations
• Price Regulations
• Example: The Death of Google Reader Paves The Way For Real RSS Businesses