MonopolyManagerial Economics Presentation

Presented by:

Agha NawazishAmna HasanFaiza ZiaShaharyar 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 loyalty.

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 low-cost productive technique

• Ownership of unique resources may also be a lasting basis for maintaining a monopoly

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 largest firm

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 profit-maximizing 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