MONOPOLY
GROUP 3 PRESENTATION
MONOPOLY
MONOPOLY DEFINED
A pure monopoly is an industry which
where is only one supplier of a product for
which there are no close substitutes and in
which it is very difficult or impossible for
another firm to coexist.
MONOPOLY
Sources of
Monopoly: Barriers
to Entry and Cost
Advantages
Barriers to entry are attributes
of a market that make it more
difficult or expensive for a new
firm to open for business that it
was for the firms already
present in that market.
Economists call such
impediments barriers to entry.
Here are some examples on
the next slides.
1
LEGAL RESTRICTIONS
Private companies that may want to
compete with the postal service directly in
those services are prohibited from doing so
by law.
3
Control of a Scarce
Resource or Input
If a certain commodity can be produced
only by using a rare input, a company that
gains control of the source of that input
can establish a monopoly position for
itself.
2
PATENTS
A priviledge granted to an inventor, wether
an individual or a firm, that for a specified
period of time prohibites anyone else from
producing or using that invention without
the permission of the holder of the patent.
4
Deliberately Erected
Entry Barriers
A firm may deliberately attempt to make
entry into the industry difficult for others.
5
Large Sunk Cost
Entry into an industry will, obviously, be
very risky if it requires a large investment,
especially if that investment is sunk–
meaning that it cannot be recouped for a
considerable period of time, if at all.
7
6
Technical Superiority
A firm whose technological expertise
vastly exceeds that of any potential
competitor can, for a period of time,
maintain a monopoly position.
Economies of Scale
If mere sizes give a large firm a cost
advantage over a small rival, it is likely to
be impossible for anyone to compete with
the largest firm in the industry.
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NATURAL MONOPOLY
It is an industry in which the advantages
of large-scale production make it possible
for a single firm to produce the entire output
of the market at lower average cost than a
number of firms each producing a smaller
quantity.
MONOPOLY
MONOPOLY
A monopoly firm does not have a ”supply curve”, as we
usually defined the term. Unlike a firm operating under
perfect competition, a monopoly is not at the mercy of
the market, the firm does not have to accept the
market’s price as beyond its control and adjust its
output level to that externally fixed price, as the supply
curve assumes. Instead, it has the power to set the
price, or rather to select the price-quantity
combination on the demand curve that suits its
interests best.
Put differently, a monopolist is not a price taker that
must simply respond to whatever price the forces of
supply and demand decree. Rather, a monopolist is a
price maker that can, if so inclined, choose its product
price.
The Monopolist’s
Supply Decision
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MONOPOLY
Like any other firms, the monopoly maximizes its profits by
selecting the quantity at which marginal revenue (MR) is
equal to marginal cost (MC).
Determining the
Monopolist’s
Profit-Maximizing
Output Price
To study the decisions of a profit-maximizing
monopolist:
1. Find the output at which MR equals to MC to
select the profit-maximizing output level.
2. Find the height of the demand curve at that
level of output to determine the corresponding
price.
3. Compare the height of the demand curve with
the height of the AC curve at that output to see
wether the net result is an economic profit or a
loss.
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MONOPOLY
Before making our comparison, we must note that
under monopoly, the firm and the industry are exactly
the same entity, while under perfect competition, any
one firm is just a small portion of the industry. It is selfevident and not very interesting to observe that the
output of the monopolist is virtually certain to be larger
than that of a tiny competitive firm.
The interesting issue is how much the entire industry
gets into the hands of consumers under the two
market forms—that is, how much output is produced
by a monopoly as compared with the quantity
provided by a similar competitive industry. So when we
compare the performance of monopoly against that
of perfect competition, we must compare the
monopoly with the entire competitive industry, not with
an individual competitive firm.
Comparing
Monopoly and
Perfect
Competition
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1
3
Monopoly Restricts Output
to Raise Short-Run Price.
2
Monopoly Restricts Output
to Raise Long-Run Price
The monopolist produces less than the
competitive market in the short run, and
charges a higher price than the
competitive price.
The monopolist produces less and
charges a higher price than the
competitive market in the long run as well.
(We can observe in the Figure 3.)
A monopolist’s Profit
Persists
Monopoly Leads to
Inefficience Resource
Allocation
Monopolist can earn an on going
economic profit.
4
Competitive markets apportion resources
to produce an efficience allocation. So a
monopolist that produces less than the
competitive equilibrium quantity must be
producing too little.
MONOPOLY
The deadweight loss (efficiency loss) of monopoly is the lost
producer and consumer surplus that occurs when a monopolist
produces less than the efficient quantity of a product.
Because it is protected from entry, a monopoly may earn
positive economic profits: that is, profits is excess of the opportunity
cost of capital. At the same time, monopoly causes inefficiency in
resource allocation by producing too little output and charging too
high a price. For these reasons, some of the benefits of the free
market disappear if industries become monopolized.
MONOPOLY
Monopoly May
Shift Demand or
Cost Curves
The demand curve will be the same if the monopoly firm
does nothing to expand its market, but a monopolist may
spend more on advertising than its competitive
replacements.
The higher demand curve for the monopoly’s product may
induce it to expand production and therefore reduce the
difference between the competitive and the monopolistic
output levels (indicated in Figure 3)
The advent of a monopoly also may shift the average and
marginal cost curves.
At the same time, a monopolist may be able to eliminate
certain types of duplication that are unavoidable for a
number of small, independent firms.
If the consolidation achieved by a monopoly does shift the
marginal cost curve downward, monopoly output will tend
to move up closer to the competitive level. The monopoly
price will then tend to move down closer to the competitive
price.
MONOPOLY
CAN ANYTHING GOOD BE SAID IN
MONOPOLY?
Monopolies enjoy economies of scale, often able to
produce mass quantities at lower costs per unit.
Standing alone as a monopoly allows a company to
securely
invest
in
innovation
without
fear
of
competition.
A market structure characterized by a single seller,
selling a unique product in the market. In a monopoly
market, the seller faces no competition, as he is the
sole seller of goods with no close substitute.
MONOPOLY
Some economists have emphasized
that it is misleading to compare the
cost curves of a monopoly and a
competitive industry at a single point in
time. Because it is protected from rivals
and, therefore, sure to capture the
benefits from any cost-saving methods
and new products it can invent, a
monopoly has particularly strong
motivation to invest in research, there
economists argue.
Monopoly
May Aid
Innovation
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Natural Monopoly: Where Single-Firm
Production is Cheapest
The monopoly depicted in Figure 2 & 3 is not a
natural monopoly, because its average cost increase
rather than decrease when its output expands. However,
some of the monopolies you find in the real world are
“natural” ones. When a monopoly is natural, costs of
production would, by definition, be higher—possibly
much higher—if the single large firm were broken up into
many smaller firms.
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Price Discrimination
Under Monopoly
The demand curve will be the same if the monopoly firm
does nothing to expand its market, but a monopolist may
spend more on advertising than its competitive
replacements.
The higher demand curve for the monopoly’s product may
induce it to expand production and therefore reduce the
difference between the competitive and the monopolistic
output levels (indicated in Figure 3)
The advent of a monopoly also may shift the average and
marginal cost curves.
At the same time, a monopolist may be able to eliminate
certain types of duplication that are unavoidable for a
number of small, independent firms.
If the consolidation achieved by a monopoly does shift the
marginal cost curve downward, monopoly output will tend
to move up closer to the competitive level. The monopoly
price will then tend to move down closer to the competitive
price.
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MONOPOLY
Although the word discrimination is generally
used to refer to reprehensible practices, price
discrimination may not always be bad. Other
reason, in addition to some standard of
fairness or justice, may provide a defense for
price discrimination in certain cases. One
such case arises when it is impossible without
price discrimination for a private firm to
supply a product that customers want. It is
even possible that price discrimination can
make a product cheaper than it would
otherwise be for all customers, even those
who pay the higher discriminatory prices.
Is Price
Discrimination
Always
Undesirable?
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Monopsony: The Case of a Single
Buyer
A monopsony is an industry in which there is only
one buyer of an input that has little or no other use, and
in which it is very difficult or impossible for another
buyer to coexist.
The comparison between monopsony and perfect
competition closely resembles the comparison between
monopoly and perfect competition.
MONOPOLY
MEMBERS
Dela Cruz, Jasmine
Bufete, Samantha Nicole
Cabalquinto, Rica Mae
Cadag, Janilla
Caudilla, Jerome
Cedron, Princess Paulaine
Combo, Juvy
De la Cruz, Dian
Delima, Kyla
Dulfo, Lovely