Monopoly

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Monopoly

  1. 1. Prepared By ›› Mayur Ashar ›› Vishal Katarmal ›› Dipti Hirpara ›› Dhara Nakhva ›› Sejal Raval Guided By : Kunal Sir Bhuva
  2. 2. MONOPOLY
  3. 3. What Is Monopoly ? <ul><li>MONO = means “ ONE ” </li></ul><ul><li>+ </li></ul><ul><li>POLY = means “ SELL ” </li></ul><ul><li>= </li></ul><ul><li>ONE SELLER or ONE PRODUCER </li></ul>
  4. 4. Conditions <ul><li>There are three conditions to be fulfilled in case of monopoly : </li></ul><ul><li>There is a single seller or producer of the product. </li></ul><ul><li>There are no close substitutes for the product. </li></ul><ul><li>There are strong barriers to the entry of new firms. </li></ul>
  5. 5. Why Monopoly Arises ? <ul><li>A key resource owned by a single firm. </li></ul><ul><li>The govt. gives a single firm exclusive right to produce the product or service. </li></ul><ul><li>The costs of production of a single producer makes him more efficient then other producers. </li></ul>
  6. 6. Causes Or Sources Of Monopoly <ul><li>There are two causes or sources of monopoly : </li></ul><ul><li>Government causes. </li></ul><ul><li>Natural causes. </li></ul>
  7. 7. <ul><li>Patents & Copyrights. </li></ul><ul><li>Control over the essential raw materials. </li></ul><ul><li>Grant of Franchise by the government. </li></ul><ul><li>Economies of scale. </li></ul><ul><li>Advertising & Brand loyalties of established firms. </li></ul>Examples
  8. 8. Monopoly v/s Perfect Competition <ul><li>Monopoly </li></ul><ul><li>Perfect Competition </li></ul><ul><li>Is the sole producer </li></ul><ul><li>In a monopoly they </li></ul><ul><li>are price maker. </li></ul><ul><li>Reduce price to increase </li></ul><ul><li>the sales. </li></ul><ul><li>Has a downward </li></ul><ul><li>sloping demand curve. </li></ul><ul><li>Is one of many producers </li></ul><ul><li>Is a price taker. </li></ul><ul><li>Sales as much or as little </li></ul><ul><li>at same price. </li></ul><ul><li>Has horizontal demand </li></ul><ul><li>curve </li></ul>
  9. 9. MONOPOLY V/S PERFECT COMPETITION
  10. 10. Perfect Competitive Market
  11. 11. Perfect Competitive Market <ul><li>In Perfect competition all the sellers will decide price. </li></ul><ul><li>Substitute product are also available in the market. </li></ul><ul><li>e.g.: Tea or coffee </li></ul><ul><li>Horizontal demand curve. </li></ul>
  12. 12. Monopoly Market <ul><li>MONOPOLY </li></ul><ul><li>Only one seller will decide the price. </li></ul><ul><li>No substitute are available in the market </li></ul><ul><li>To earn a maximum profit. </li></ul><ul><li>If price increase Quantity of output decrease. </li></ul><ul><li>Always downward demand curve. </li></ul>
  13. 13. WELFARE COST OF MONOPOLY
  14. 14. Is Monopoly a Good way to Organize a Market? <ul><li>A monopoly, in contrast to a competitive firm, change the price above the marginal cost. </li></ul><ul><li>From the standpoint of consumers, This high price makes monopoly undesirable. </li></ul><ul><li>From the standpoint of the owners of the firm, the high price makes the monopoly very desirable. </li></ul><ul><li>Now We can understand it by tools of welfare economics..... </li></ul>
  15. 15. Tools Of Welfare Economics <ul><li>Total surplus = Consumer surplus and producer surplus </li></ul><ul><li>The equilibrium of supply and demand in a competitive market is desirable one. It leads to allocation of resources that makes total surplus as large as it can be. </li></ul><ul><li>And finally, because monopoly leads to an allocation of resources different from that in competitive market, it fails to maximize total economic well-being. </li></ul>
  16. 16. Public Policy towards Monopoly
  17. 17. Why Public Policy is required? <ul><li>To prevent monopoly in the market </li></ul><ul><li>To Protect consumer’s interest </li></ul>
  18. 18. Policy makers can respond to the Problem of Monopoly in One of four ways: <ul><li>(1)By increasing Competition with Antitrust Laws. </li></ul><ul><li>(2)By regulating the behavior of Monopolies. </li></ul><ul><li>(3)By Public Ownership. </li></ul><ul><li>(4)By Doing nothing. </li></ul>
  19. 19. (1) Increasing Competition with Antitrust Laws: <ul><li>Antitrust Laws try to make the monopolized Industries more Competitive. </li></ul><ul><li>The main function of Antitrust Laws is to prevent the Mergers of two companies. </li></ul><ul><li>For e.g. Coca-Cola & PepsiCo </li></ul>
  20. 20. <ul><li>Moreover, the Antitrust laws break up the giant companies. </li></ul><ul><li>For e.g. AT & T –The largest Telecommunication Co. was divided into eight smaller companies. </li></ul>
  21. 21. (2)Regulating the Behavior of Monopolies: <ul><li>The Government agencies will regulate the price. </li></ul><ul><li>HOW GOVT. WILL REGULATE THE MONOPOLIES ? </li></ul><ul><li>Subsidize the Monopolist. </li></ul><ul><li>No incentive to reduce the Cost of Production. </li></ul>
  22. 22. (3)Public Ownership: <ul><li>The Government will turn some Private Monopolies into Public Enterprise. </li></ul><ul><li>This can be applied in Natural Monopolies. </li></ul>
  23. 23. (4)Doing Nothing: <ul><li>Let the Situation be as it is. </li></ul><ul><li>After a stipulated time period the public will switch on to the other Alternative & will break the Monopoly. </li></ul>
  24. 24. Price Discrimination Under Monopoly
  25. 25. <ul><li>Meaning </li></ul><ul><li>Motives </li></ul><ul><li>Necessary Conditions </li></ul><ul><li>Examples </li></ul><ul><li>Benefits </li></ul><ul><li>Limitations </li></ul>Price Discrimination Under Monopoly Content :
  26. 26. Meaning of price discrimination <ul><li>Practice of selling goods or services at different prices to different buyers, even though sales costs are the same for all the transactions. Buyers may be discriminated against on the basis of income, age, or geographic location. </li></ul>
  27. 27. Motives of price discrimination To acquire maximum consumer surplus To gain market power
  28. 28. Necessary Conditions for price discrimination <ul><li>The Seller Must be the Monopolist </li></ul><ul><li>Differences in price elasticity of demand between markets </li></ul><ul><li>Buyers must Remain Different </li></ul>
  29. 29. Examples of price discrimination <ul><li>Movie Tickets </li></ul><ul><li>Airline Prices </li></ul><ul><li>Discount Coupons </li></ul><ul><li>Financial Aid </li></ul><ul><li>Quantity Discounts </li></ul>
  30. 30. Benefits of price discrimination <ul><li>Allows an unprofitable business to avoid going bankrupt </li></ul><ul><li>Some groups benefits from cheaper price </li></ul><ul><li>Avoid congestion </li></ul>
  31. 31. Limitations of price discrimination <ul><li>High administration cost </li></ul><ul><li>Higher price to some consumers </li></ul><ul><li>Injustice </li></ul>
  32. 33. Case At A Glance <ul><ul><li>The Case is all about the monopoly of </li></ul></ul><ul><ul><li>DeBeers Diamond company. </li></ul></ul><ul><ul><li>DeBeers is having 80 % of the market power </li></ul></ul><ul><ul><li>so it charges high price from the consumers </li></ul></ul><ul><ul><li>and enjoying the monopoly. </li></ul></ul><ul><ul><li>Whenever A person thinks about the purchase </li></ul></ul><ul><ul><li>of diamond ,only DeBeers comes into mind. </li></ul></ul><ul><ul><li>Thus, DeBeers have created such an impact in </li></ul></ul><ul><ul><li>the minds of consumers. </li></ul></ul>
  33. 34. DeBeers Diamond Co.-Classic Example of Monopoly
  34. 35. <ul><li>DeBeers is the South African Co. having Monopoly in the Production of Diamond. </li></ul><ul><li>Cecil Rhodes , the English Businessman merged two of the biggest mines. </li></ul><ul><li>Today DeBeers controls 80% of the world’s production of Diamond. </li></ul><ul><li>It is Large enough to exert substantial influence over the market price of Diamonds. </li></ul>
  35. 36. How much market power does DeBeers have? <ul><li>The answer depends on the customer's </li></ul><ul><li>view : </li></ul><ul><li>If people view emeralds, rubies & sapphires as substitute for Diamonds, DeBeers will have LESS MARKET POWER. </li></ul><ul><li>If People view other products are different from Diamond, DeBeers can have MORE MARKET POWER. </li></ul>
  36. 37. <ul><li>It is surprising that DeBeers pays large amount on advertisement. </li></ul><ul><li>If a monopoly is sole sever at its product, why does it need to advertise ??? </li></ul><ul><li>One goal of the DeBeers ads is to differentiate Diamonds from other gems in the mind of customers. </li></ul>
  37. 38. <ul><li>Though emeralds, rubies & sapphires are more precious DeBeers Diamond is Forever………. </li></ul>
  38. 39. Any Question… ???

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