IMPERFECT COMPETITION

MONOPOLY

GENERAL DESCRIPTION

firm produces differentiated products č firm can set its price by itself,

the imperfect competitor demand curve slopes downward – in order to be able to sell the additional unit of production, firm is forced to down the price.

Varieties of Imperfect Competition

organizational characteristics of an industry, of which the most important are:

- number and size of the sellers,

- extent of concentration and collusion among the firms,

- degree of homogeneity or heterogeneity of their products

Sources of Market Imperfections

COST CONDITION the existence of

economies of scale of declining average costs represents the main reasons lying behind imperfect competition

BARRIERS TO COMPETITION

Legal restrictions: Patents Entry or exit

restrictions (f. e. tariffs or quotas on foreign producers)

Product Differentiation

Another factors leading to imperfections of market

insufficient information of market participants,

the ownership of an important factor of production by

one firm only,

the state interventions into market mechanism (f. e. price regulation of some products)

political events (f. e. foundation of international trust of oil exporters in sixtieth OPEC).

MEASURING MARKET POWER

Concentration Ratio – the percent of total industry output that is accounted for by the few largest firm

- (doesn’t reflect the difference if the 100 % is divided between four firms equally or if the most part represents only one firm)

The Herfindahl Index - reflect the effect of the size differences equals to the sum of the squared market shares in percentage terms:

H = Σ Si2 = S12 + S2

2 + ...

- when the industry is a pure monopoly, the H = 10 000, while if an industry is perfectly competitive, H = 0.

ANALYSIS OF MONOPOLY

a single seller with complete control over an industry

demand sloping downward č P >MR

the maximum-profit price and quantity of a monopolist comes where its marginal revenue equals its marginal cost:

MR = MC

Graphical Analysis of Monopoly

C, P, R

QAR

MR

MC AC AVC

AFC

Q0 QRZC, P, R

QQ0 QRZ

TZ

TR

TC VC

RZ

RZ

FC

THE COST AND CONTROL OF MONOPOLY

monopoly doesn’t produce output up to the point where the social cost (measured by MC) is equal to the value of the good to consumers (measured by P = MU) because to do so would require lowering P to all consumers, which would lose the monopolist some profit

Social cost of Monopoly

deadweight welfare loss

Consumer surplus

AR = d

MC = AC

P

QQM

INTERVENTION STRATEGIES Taxes – by taxing monopolies, a government can reduce

monopoly profits, thereby softening some of the socially unacceptable effects of monopoly

Price controls – represents centralized way of setting the price

Government ownership – usage of this kind of regulation depends on wider contexts (political system, culture, history, tradition ..)

Antitrust policy – laws that prohibit certain kinds of behaviour (such as firms joining together to fix prices) or curb certain market structures (such as pure monopolies)

Economic regulation – allows specialized regulatory agencies to oversee the prices, outputs, entry and exit of firms in regulated industries

Tasks:

1. Calculate the optimal output of monopoly and the amount of the monopoly

profit knowing:

2. Explain the mistakes in thinking:

a) Monopoly can set the price as high as it wishes,

b)The price control of monopoly leads always to decline in the profit of monopoly.

3. Calculate the Herfindahl index for the market structure, where the market is equally fragmented amongst four companies.

Q 1 2 3 4 5 6 7 8

P 67 59 51 43 35 27 19 11

TC 29 54 89 143 215 305 412 537