Monopoly Single seller – 100% of the market (may exert same market power with >25%) Barriers to entry keep competition to a minimum Firms control price (price setter) and earn super-normal profits Natural monopoly may exist in some industries Firm practise price discrimination

1.High Start-Up Costs 2.Economies of Scale 3.Limit Pricing 4.Control of Outlets or Suppliers 5.Brand Loyalty – sunk costs 6.Patents, Copyrights, Licensing 7.Natural monopoly characteristics (enormous infrastructure) Barriers to Entry (a reminder):

Monopoly – The Curves! Price £ Quantity AC MC AR = D MR Q profit max AC P profit max Profit maximising output is where MC = MR (once output is set, P determined by the demand curve) AC < AR (P) at profit maximising output Therefore, supernormal profits exist (however losses are possible if demand falls or costs rise)

Monopoly Efficiency Allocative Efficiency  Since P ≠ MC; (P>MC) Productive Efficiency  Q is not at min AC.

Natural Monopoly Price £ Quantity AR = D MR Q profit max AC P profit max AC MC AC falls constantly (constant increasing returns to scale due to high sunk costs) Profit max. output where MR = MC At Q profit max, P is determined by the demand curve P (AR) > AC, therefore supernormal profits

Price Discrimination Firms charge different prices to different groups of consumers for the same product (Eg. peak/off peak train fares, same clothes/different shop) Monopoly power must be great enough to not risk being undercut by rivals Must be able to prevent re-selling of product in 2 nd hand market (arbitrage) Groups must have different elasticities of demand (the more inelastic, the higher the price)

Price Discrimination – The Curves Price Quantity MC MR Q profit max Market A Market B AR A MR A AR B MR B PAPA PBPB P in each market is determined by the demand curve Q in each market is determined by where MC = MR Firms try to capture all the consumer surplus, turning it into producer surplus QBQB QAQA AC Whole Mkt

Monopoly BadMonopoly Good Consumers face higher prices & less choice ( ↓ consumer surplus & ↓ consumer welfare) Lower income consumers may be priced into the market by price discrimination Firms may have no incentive to innovate or become more efficient Large firms may be able to take advantage of Economies of Scale New market entrants may be stifled by monopoly power, reducing long-term progress Large firms may be more internationally competitive improving exports for the country

A note about shifting cost curves… Since MC is only related to variable costs, MC will only shift if VCs change So… -If Fixed Costs change, shift only the AC curve -If Variable Costs change, shift both AC and MC curves