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Monopoly.ppt.( Business environment )...
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- 2. Barriers to Entry 2 A monopoly is the sole supplier of a product with no close substitutes The most important characteristic of a monopolized market is barriers to entry new firms cannot profitably enter the market Barriers to entry are restrictions on the entry of new firms into an industry Legal restrictions Economies of scale Control of an essential resource
- 3. Legal Restrictions 3 Oneway to prevent new firms from entering a market is to make entry illegal Patents, licenses, and other legal restrictions imposed by the government provide some producers with legal protection against competition
- 4. Patent and InventionIncentives 4 A patent awards an inventor the exclusive right to produce a good or service for fixed number of years Patent laws Encourage inventors to invest the time and money required to discover and develop new products and processes Also provide the stimulus to turn an invention into a marketable product, a process called innovation
- 5. Licenses and otherEntry Restrictions 5 Governments often confer monopoly status by awarding a single firm the exclusive right to supply a particular good or service Broadcast TV and radio rights State licensing of hospitals Cable TV and electricity on local level
- 6. Economies of Scale 6 A monopoly sometimes emerges naturally when a firm experiences economies of scale as reflected by the downward- sloping, long-run average cost curve In these situations, a single firm can sometimes supply market demand at a lower average cost per unit than could two or more firms at smaller rates of output
- 7. Natural Monopoly 7 Becausesuch a monopoly emerges from the nature of costs, it is called a natural monopoly A new entrant cannot sell enough output to experience the economies of scale enjoyed by an established natural monopolist entry into the market is naturally blocked
- 8. Control of EssentialResources 8 Another source of monopoly power is a firm’s control over some nonreproducible resource critical to production Professional sports teams try to block the formation of competing leagues by signing the best athletes to long-term contracts Alcoa was the sole U.S. maker of aluminum for a long period of time because it controlled the supply of bauxite China is the monopoly supplier of pandas DeBeers controls the world’s diamond trade
- 9. Local Monopolies 9 Localmonopolies are more common than national or international monopolies However, as a rule long-lasting monopolies are rare because, as we will see, a profitable monopoly attracts competitors
- 10. Revenue for theMonopolist 10 Because a monopoly, by definition, supplies the entire market, the demand for goods or services produced by a monopolist is also the market demand The demand curve for the monopolist’s output therefore slopes downward, reflecting the law of demand As seen in the following discussion this has important implications for revenues
- 11. Firm’s Costs andProfit Maximization 11 The monopolist can choose either the price or the quantity, but choosing one determines the other Because the monopolist can select the price that maximizes profit, we say the monopolist is a price maker More generally, any firm that has some control over what price to charge is a price maker
- 12. Short-Run Losses andthe Shutdown Decision 12 A monopolist is not assured of profit The demand for the monopolists good or service may not be great enough to generate economic profit in either the short run or the long run In the short run, the loss-minimizing monopolist must decide whether to produce or to shut down If the price covers average variable cost, the firm will produce If not, the firm will shut down, at least in the short run
- 13. Monopolist’s Supply Curve 13 The intersection of a monopolist’s marginal revenue and marginal cost curve identifies the profit maximizing quantity, but the price is found on the demand curve Thus, there is no curve that shows both price and quantity supplied there is no monopolist supply curve
- 14. Long-Run Profit Maximization 14 For a monopoly, the distinction between the long and short run is not as important If a monopoly is insulated from competition by high barriers that block new entry, economic profit can persist in the long run However, short-run profit is no guarantee of long-run profit
- 15. Long-Run Profit Maximization 15 A monopolist that earns economic profit in the short-run may find that profit can be increased in the long run by adjusting the scale of the firm Conversely, a monopoly that suffers a loss in the short run may be able to eliminate that loss in the long run by adjusting to a more efficient size
- 16. Price and OutputComparison 16 Purpose here is to compare monopoly using the benchmark established in our discussion of perfect competition When there is only one firm in the industry, the industry demand curve becomes the monopolist’s demand curve the price the monopolist charges determines how much gets sold Exhibit 8 provides our comparison
- 17. Why the WelfareLoss Might Be Lower 17 If economies of scale are extensive enough, a monopolist may be able to produce output at a lower cost per unit than could competitive firms If this is true, the price or at least the cost of production could be lower under monopoly than under competition
- 18. Why the WelfareLoss Might Be Lower 18 The welfare loss is lower because the monopoly may also overstate the true cost of monopoly because monopolists may, in response to public scrutiny and political pressure, keep prices below what the market could bear Finally, a monopolist may keep the price below the profit maximizing level to avoid attracting new competitors
- 19. Why the WelfareLoss Might Be Higher 19 Another line of thought suggests that the welfare loss of monopoly may, in fact, be greater If resources must be devoted to securing and maintaining a monopoly position, monopolies may involve more of a welfare loss
- 20. Why the WelfareLoss Might Be Higher 20 Consider, for example, radio and TV broadcasting rights confer on the recipient the exclusive right to use a particular band of the scarce broadcast spectrum In the past, these rights have been given away by government agencies to the applicants deemed most deserving
- 21. Why the WelfareLoss Might Be Higher 21 Because these rights are so valuable, numerous applicants spend millions on lawyers’ fees, lobbying expenses, and other costs associated with making themselves appear the most deserving The efforts devoted to securing and maintaining a monopoly position are largely a social waste because they use up scarce resources but add not unit to output
- 22. Price Discrimination 22 Amonopolist can sometimes increase economic profit by charging higher prices to customers who value the product more The practice of charging difference prices to different customers when the price differences are not justified by differences in cost is called price discrimination
- 23. Conditions for Price Discrimination 23 Conditions The demand curve for the firm’s product must slope downward the firm has some market power and control over price There are at least two groups of consumers for the product, each with a different price elasticity of demand The producer must be able, at little cost, to charge each group a different price for essentially the same product The producer must be able to prevent those who pay the lower price from reselling the product to those who pay the higher price
- 24. Examples of Price Discrimination 24 Like faces of Businessmen unpredictable yet urgent demands for travel and communication, and because employers pay such expenses, businesspeople are less sensitive to price than householders Telephone companies are able to sort out their customers by charging different rates based on the time of day