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  1. 1. Monopoly And Monopolistic Competition
  2. 2. Characteristics <ul><li>Single seller:  In a monopoly there is one seller of the good who produces all the output. Therefore, the whole market is being served by a single firm, and for practical purposes, the firm is the same as the industry. </li></ul><ul><li>Market power :  . A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers. </li></ul><ul><li>Firm and industry : In a monopoly, market, a firm is itself an industry. Therefore, there is no distinction between a firm and an industry in such a market. </li></ul><ul><li>Price Discrimination : A monopolist can change the price and quality of the product. He sells more quantities charging less price against the product in a highly elastic market and sells less quantities charging high price in a less elastic market. </li></ul>
  3. 4. Marginal Revenue: Competition firm Monopoly Average Revenue and MR with one more unit Q Q P P
  4. 5. Maximizing Profit: Revenue Maxi Profit Maxi Rev. Profit Q P AVC AC MC Q
  5. 6. AVC AC MC Q AVC AC MC Q Welfare Effect Of Monopoly: P P
  6. 7. Monopoly versus competitive markets <ul><li>1. Market Power  - </li></ul><ul><li>market power is the ability to raise the product's price above marginal cost and not lose all your customers. Specifically market power is the ability to raise prices without losing all one's customers to competitors. </li></ul><ul><li>Perfectly competitive (PC) firms have zero market power when it comes to setting prices. All firms in a PC market are price takers </li></ul><ul><li>A monopoly is a price maker. The monopoly is the market and prices are set by the monopolist based on his circumstances and not the interaction of demand and supply </li></ul>
  7. 8. Monopoly versus competitive markets <ul><li>2. Price   </li></ul><ul><li>In a perfectly competitive market price equals marginal cost. In a monopolistic market price is greater than marginal cost. </li></ul><ul><li>3. Marginal revenue and price </li></ul><ul><li>In a perfectly competitive market marginal revenue equals price. In a monopolistic market marginal revenue is less than price </li></ul><ul><li>4. Product differentiation: </li></ul><ul><li>There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute. </li></ul><ul><li>With a monopoly there is high to absolute product differentiation in the sense that there is no available substitute for a monopolized good </li></ul>
  8. 9. Monopolistic Competition
  9. 10. Major characteristics <ul><li>There are six characteristics of monopolistic competition (MC): </li></ul><ul><li>product differentiation </li></ul><ul><li>many firms </li></ul><ul><li>free entry and exit in long run </li></ul><ul><li>Independent decision making </li></ul><ul><li>Market Power </li></ul><ul><li>Buyers and Sellers have perfect information </li></ul>
  10. 11. Short Run: S.R equilibrium of the firm under monopolistic competition. The firm maximizes its profits and produces a quantity where the firm's marginal revenue (MR) is equal to its marginal cost (MC). The firm is able to collect a price based on the average revenue (AR) curve. The difference between the firms average revenue and average cost gives it a profit.
  11. 12. Long Run: Long-run equilibrium of the firm under monopolistic competition. The firm still produces where marginal cost and marginal revenue are equal; however, the demand curve (and AR) has shifted as other firms entered the market and increased competition. The firm no longer sells its goods above average cost and can no longer claim an economic profit
  12. 13. Market Structure comparison Price setter MR=MC No Yes Absolute (across industries) Relatively inelastic High One Monopoly Price setter MR=MC No [ Yes/No (Short/Long)  High Highly elastic (long run) Low Many Monopolistic competition Price taker P=MR=MC Yes No None Perfectly elastic None Infinite Perfect Competition Pricing power Profit maximization Efficiency Excess profits Product differentiation Elasticity of demand Market power Number of firms
  13. 14. <ul><li>The Key characteristics of an Oligopolistic Market  are as follows: - </li></ul><ul><li>It is a market dominated by a small number of participants who are able to collectively exert control over supply and market prices. </li></ul><ul><li>Few firms sell branded products which are close substitutes of each other. </li></ul><ul><li>Entry barriers for the other firms are high; the barriers can be due to patents, copyrights, government rules / regulations or ownership of scare resources. </li></ul><ul><li>Firms are interdependent for decision making. </li></ul>Oligopoly
  14. 15. Oligopoly <ul><li>Products can be homogenous (standardized) or heterogeneous (differentiated). </li></ul><ul><li>The sellers are the price makers and not price takers, since the few sellers mutually dominate the pricing decisions. </li></ul><ul><li>The sellers can achieve supernormal profits in the long run. </li></ul><ul><li>The sellers can achieve economies of scale; since for the large producers as the level of production rises, the cost per unit of products decreases; thus ensuring higher profits. </li></ul><ul><li>There is high degree of market concentration, since the four-firm concentration ratio is often used, where the market shares of four largest firms are measured (as a percentage) since they form the major portion of the market share. </li></ul>