Monopoly 2 lesson 7 a

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Monopoly 2 lesson 7 a

  1. 1. MONOPOLY 2 [email_address]
  2. 2. MONOPOLY ECONOMIES OF SCALE <ul><li>In spite of the undesirable economic effect of a monopoly in general, a monopoly may in certain circumstances generate substantial economies of scale, which can be passed on to society in a lower price. </li></ul><ul><li>The small firms of perfect competition are not large enough to bring about the economies of scale. Such economies of scale are to be found primarily in natural monopolies. Some economists have questioned the existence of this beneficial economic effect. </li></ul>
  3. 3. MONOPOLY TECHNOLOGICAL PROGRESS <ul><li>Another potential benefit to society from monopoly type firms is that profits are often the motivation for technological progress and investment in new technology is made possible by the presence of these profits. </li></ul><ul><li>However, monopolies well protected by entry barriers will not need to seek new technology, and if they do, their goal may be to lower costs for additional profits and new entry barriers. </li></ul>
  4. 4. PRICE DISCRIMINATION <ul><li>Price discrimination exists whenever different prices are charged for the same product and the difference in price cannot be explained by costs. </li></ul>
  5. 5. PRICE DISCRIMINATION CONDITIONS <ul><li>In order for the price discrimination to be possible, a firm must; - be a monopoly or have some power over price, - be able to segment its market, and - be able to prevent cross selling from one market segment to another. Generally, the market segments will have different elasticity's. </li></ul>
  6. 6. PRICE DISCRIMINATION EFFECTS <ul><li>The purpose of price discrimination is to increase the profit of the monopolist. This is achieved by charging a higher price to those customers who are more inelastic. </li></ul><ul><li>Price discrimination is generally considered harmful to society and an unfair practice. </li></ul><ul><li>Price discrimination is, nevertheless, tolerated in many instances, in part, because it may result in larger overall output, and is occasionally a form of income redistribution. </li></ul>
  7. 7. NATURAL MONOPOLY <ul><li>Natural monopolies are said to exist in industries where competition is unworkable and would result in costly duplication of fixed capital. Most natural monopolies are public utilities. These are regulated by the government. </li></ul>
  8. 8. REGULATED MONOPOLY <ul><li>The major task of the government regulating a natural monopoly is to set the price (or rate) that the utility is allowed to charge. One method is the fair-return pricing method. </li></ul><ul><li>The price is set at the point where it is equal to average total cost. The average total cost is allowed to include a market rate of return to make sure that new funds can be attracted for expansion. This practice often results in cost padding by utilities. </li></ul>
  9. 9. REGULATED MONOPOLY SUBSIDY <ul><li>In a few cases of natural monopolies, a price below average cost is imposed on a utility to require a large output from the firm. </li></ul><ul><li>The loss incurred by the firm is then offset with a subsidy. This is most often present in transportation companies. </li></ul>
  10. 10. Monopoly Model Assumptions <ul><li>Pure monopoly is rare and even rarer in the new global economy. </li></ul><ul><li>Circumvent patents </li></ul><ul><li>Monopolies may be the most efficient allocation of resources. </li></ul><ul><li>Least cost, lowest price </li></ul>
  11. 11. Nature of Monopolist Revenue <ul><li>Marginal Revenue is < price. </li></ul><ul><li>In order to increase sales must lower price. </li></ul><ul><li>TR increases at a decreasing rate. </li></ul><ul><li>Monopolist is price maker. </li></ul><ul><li>Controls price through control of quantity. </li></ul><ul><li>But Elasticity of demand controls monopolist. </li></ul>
  12. 12. Societal Evaluation of Monopoly <ul><li>Higher prices, lower output, allocative inefficiency. </li></ul><ul><li>Unequal income distribution. </li></ul><ul><li>Since monopolists do not face competition they tend to become inefficient. </li></ul><ul><li>Little incentive for R & D unless R & D is the source of the monopolists barrier to entry. (Microsoft) </li></ul>
  13. 13. Thank You!

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