jj, Topic six: monopoly and oligopoly
what is the commerce act
"provides for the regulation of the price and quality of goods or services in markets where there is little or no competition and little or no likelihood of a substantial increase in competition."
what are the two affects that occur as monopolies increase their level of output
- the increase in level of output increases revenue - the decrease in price as output level increases, decreases the revenue
what are the conditions that must be met in order for a carte to be effective in raises prices
1. demand for their product must be inelastic 2. there must be few substitutes 3. members of the cartel must follow the rules of the cartel 4. cartel must restrict output levels
what are the 2 main implication of rent-seeking behaviour
1. the behaviour consumes resources. 2. it introduces a government failure
formulae for maximum amount of profit (for no fixed cost)
= (a-c)^2/4b
where do monopolist maximise profits ?
A monopolist (and oligopolist) maximises its profit by setting a price so that marginal costs = marginal revenue
Monopoly
A monopolist is the sole producer of a good. A monopolist is protected by some form of barrier to entry
what does it mean to say monopolists are price-setters.
If the firm changes the price, it will still be able to sell something. Being the sole producer, means that the monopolist faces the market demand curve.
graphically what is the shape of the of the TR curve?
MR
when the demand curve is a straight line and quantity is continuous, when does the MR curve bisect the quantity axis
MR bisects the the quantity axis between thee origin and the point where the demand curve hits the quantity axis. demand and MR curve have the same y-intercept.
what the relationship between the demand curves x-axis intercept and marginal revenue curve x-axis intercept
MR curve cuts the (quantity) x-axis halfway between the org and the demand curve intersection
what is the profit maximising level of output for a monopolist
MR=MC (but P is bigger)
what changes the marker power a firm has
Market structure
formula for P* (for no fixed cost)
P*= (a+c)/2
MR =
P+(change in P/change in Q) x Q
when demand is straight what is the equation for profit
P= a-bQ
price formula for monopolists (for no fixed cost)
P=a-bQ (a= y-intercept )(-b = gradient of slope aka change in P/ change in Q) (Q = quantity)
formula for Q* (for no fixed cost)
Q*= (a-c)/2b
market structure
The nature and degree of competition among firms operating in the same industry.
what is a patent
a barrier to entry that grants exclusive use of the patented product or process to the inventor
what does the downsloppiing demand curve tell us about the marginal revenue of a monopolist
a downsloping demand curve means that is gradient is negative, when we put the negative slope in the MR equation, and price must be above MR
for a competitive firm, if they increase their level of output it has no effect on the price. but for a monopolist what effect does an output increase cause
a fall in price, which leads to a negative effect on MR
what is price leadership
a form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy
cartel
a group of firms that get together and make joint price and output decisions too maximise joint profits
natural monopolies
a market that runs most efficiently when one large firm supplies all of the output. When economies of scale is relative to the size of the market. Costs are minimised with only 1 firm in the industry
five force model
a model developed by Micheal partner that helps us understand the five competitive forces that determine the level of competition and profitability ini an industry
what is a duopoly
a two firm oligopoly
where does the final price set by a monopolist lie
above the marginal cost
rent-seeking behaviour
action taken by households or firms to preserve economic profits
what condition must be occurring for a profit-maximising firm to raise its production
added revenue from the increase must outweigh the added cost
what is aggressive price strategy and when is it used in the price-leadership model?
aggressive price setting it when the dominate firm sets the price lower even their own cost to create such enormous losses that the smaller firms leave. its used when dominant firms have been incentives to remove the smaller firms.
Lobbying
attempting to influence policy makers
why do monopolists have the same long-run average cost curve
because it can use any or all if its plants to produce at this cost
why does MC increase after a certain point ?
because of decreasing marginal productivity
why do monopolists impose large deadweight loses in markets with elastic demands?
because under these circumstances the higher price causes more changes in consumer behaviour
Marginal cost (MC) =
change in total cost (TC) for each additional unit sold/produced
Marginal revenue (MR) =
change in total revenue (TR) for each additional unit sold/produced
barriers to entry
factors that prevent new firms for entering and competition ini imperfectly competitive industries
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if monoplies produced where P=MC and there was no profit. explain what would happen to the consumer and producers surplus and whether or not it is efficient
if P=MC, consumer surplus would be larger than the reduction in producer surplus. the difference between the producer and consumer surplus is deadweight loss. there is an inefficient level of production
what would lead monopolies to be inefficient?
if they are sustainedly rent seeking behaviour such as lobbying and if the lack of competition leads to less innovation
if one firm in a duopoly reduces their level of output what does this incentives the other firm to do?
increase their level of output
Oligopoly
is an industry with a few producers (e.g. a duopoly, an industry with two firms)
market power
is the ability to raise the price without losing all of the quantity demanded for a product.
what does the five force model help us explain
it helps explain the relative profitability of an industry and identity in which area firm rivalry is likely to be most intense
what does the availability of substitutes outside the market do to an oligopoly
it limits the ability of firms to earn high profits
if one firm in a duopoly produces more products what effect does this have on the other firm
it reduces the remaining market left for the other firm, they choose to produce at the output level which will maximise its profit based on the remaining market
what does the output level of a monopolist demand on
its marginal cost curve and the shape of the demand curve. a monopolists supply curve is its MR curve. a monopolist has no supply curve which is independent from the demand curve for its product
monopolist are the only firms producing a good, but what market are they apart of where they are not the only one
its one among many other firms buying factors of production in the input market
What is a patent?
its the exclusive right to make and sell product. having a patent gives a firm monopoly power, which may appear inefficient in the short run
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what is the pattern we see with marginal revenue and quantity in monopolist markets
marginal revenue decreases as output increases.
contestable markets
markets in which entry and exit are easy enough that existing firms in the oligopoly market behave as if they are in a competitive market and hold prices
Barriers to entry in a monopoly
monopoly resources, government regulation, production process
imperfect competition
occurs in markets that have few sellers or products that are not standardized
what its government failure
occurs when the government becomes the tool of the rent seeker and the allocation of resources is made even less efficient by intervention of government.
Network externalities as a barrier of entry
other firms cannot enter because the product is only useful if many people use it (e.g. Facebook)
Resource control for barrier to entry
other firms don't have access to the necessary resources (DeBeers own most diamond mines)
examples of barriers to entry
patents, government rules, lacking ownership of a scarce resource of production, network effects
where do oligobopolies produce and where do they set their prices
produce where MC=MR and set price above MC
what are a dominants firms ability to maximise profits constrained to in price leadership
profit maximisation of dominant firms in price leadership is constrained by the market demand and subject to the behaviour of the smaller competitive firms
what is Q*
profit maximising quantity
why do monoplies typically only persist in the long run if there are barriers to entry?
profit would sully attract new firms to the market
If the demand curve is linear what shape is the price-total revenue graph
reversed-u-shape
monopolist cannot price discriminate, what is price discrimination
selling the same product to different consumers or groups of consumers at different prices
what could the government do to regulate a natural monopoly?
set P = LRAC. Allow monopolist to charge a two-part tariff. P = LRMC + fixed fee to cover the loss. Set P = LRMC + provide subside to cover the loss
in price-leadership models, smaller firms constrain the behaviour of the dominant firm, what does the suggest?
that the firm might have an incentive to try and push the smaller firms out of the marker by buying/merging with them.
what happens as a result of the absence of externalities
the MC of production tells us the social opportunity cost of a product. The monopolist ability to raise its price above MC means that some transactions that would have had societal advantageous have not been made.
what does a large MES indicate?
the MES might be so large that 1 or 2 firms producing at lowest cost would satisfy market demand
what happens to a cartel if there are many substitutes
the cartel's price increase may become self-defeating as buyers switch to substitutes
what does a monopolist MR curve show
the change in total revenue that results as a firm moves along the segment of the demand curve that lies directly above it
where do we read the price on ?
the demand curve.
what is the different between demand in the market and tithe amount suppled by the smaller firms in the price leadership model
the difference in the amount that the dominant firm will produce
if demand is linear what is the is the slope of the MR?
the marginal revenue curve is 2x the slope of the demand curve.
what does market power depend on
the market structure and the availability of substitute products.
what is the best response equilibrium
the point of intersection between the two firms is each firm doing the best they can given the level of output of their rival firm
concentration ratio
the share of industry output n sales or employment accounted for by the top firms
deadweight loss or excess burden of a monopoly is what?
the social cost associated with the distortion in consumption from a monopoly price.
Minimum efficiency scale (MES)
the unit cost is at its lowest possible point while the company is producing its goods effectively
netword externalities
thee value of s product a consumer increases with the number of that product being sold or used in the market
who's behaviour do oligopolies start to resembles then their products become more differentiated
their behaviour becomes more like a monopolist
how do monopolist set their price
their look at the trade offs in between profit earned and selling fewer units
regulatory barrier to entry
ther firms are forbidden to produce this product (e.g. if there is a patent on a drug)
Government rules for barrier to entry
ther firms are not allowed to enter the market (in Sweden, all alcohol has to be sold by one government owned firm)
what are the fixed costs for a monopolist?
there are no fixed costs, they have content marginal costs (TC increases when quantity increases)
what does a small MES indicate?
there could be many firms in the market producing at the lowest costs.
why are the features of natural monopoly fixed costs
they are very high and its impractical to have more then one firm producing the good
relative to a competitive market what does a monopolist do in terms of output level, price and profit
they restrict their output, charge higher prices and earn positive profits
what the are effects of a price decrease for monopolies ?
they will sell more ( increase revenue) and they will earn less per unit sold ( decrease revenue)
what is the goal of a monopolist
to make profit
what is the purpose of the commerce act (part4 )
to regulate natural monopolies, they are price-regulated by the act
P= 6, Q= 5. because monopolies maximise profit by setting a price so that MC=MR
what price does a monopolist chose here?
what is the right output depend on in a duopoly
what the other firm in the duopoly does
when do natural monopolies occur
when an industry realises that there is such a large economy of scale that it is most cost-efficient to have a single firm producing the G/S
when does tacit collusion occur
when firms end up fixing prices without a specific agreement or when the agreement is implicit
when does collusion occur
when price fixing and quantity fixing agreements are explicit
when is the price leadership best applied
when the industry is made up of one large firm and a number of smaller competitive firms
when is it easier for tacit collisions to occur
when there are fewer and more similar firms
