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. MONOPOLY 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 MONOPOLY 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. MONOPOLY 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 MONOPOLY 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 MONOPOLY 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. MONOPOLY 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. MONOPOLY 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? MONOPOLY 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
