What determines the behaviour of firms? 3.14 Operational Strategies: location What determines the behaviour of firms?

3.14 Operational Strategies: location Syllabus Candidates should be able to: Define monopoly and explain the characteristics Analyse diagrammatically and show the profit maximising equilibrium Analyse third degree price discrimination (necessary conditions; diagrammatic analysis; costs and benefits to consumers and producers) Evaluate the costs and benefits of monopoly to firms, consumers, employees and suppliers Explain the concept of a natural monopoly

3.14 Operational Strategies: location Definitions What is a monopoly? This will mean that the demand curve for the monopolist is the _____ as the industry demand curve In practice, in the UK a firm is said to have monopoly power if it has more than ____% of the market share. For example,

3.14 Operational Strategies: location Characteristics Only ______ firm in the market (the monopolist) – they are the __________ producer for a good with no close substitutes High ____________ to entry preventing new firms from entering the market May make ________________ profits The monopolist is a _______ run profit maximiser. What does this mean? barriers, one, short, sole, supernormal

3.14 Operational Strategies: location Examples of monopoly

Sources of monopoly power 3.14 Operational Strategies: location Sources of monopoly power How can a monopoly exist? What are the sources of its power?

Monopoly and abnormal profit diagram 3.14 Operational Strategies: location Monopoly and abnormal profit diagram

Explanation of monopoly diagram 3.14 Operational Strategies: location Explanation of monopoly diagram Why is a monopoly firm the same as the industry? What type of demand curve does a monopoly have? What is the link between MR and AR? MR is the gradient of _______ Total revenue is maximised when MR = _____ What profit will a monopolist make if AR > AC?

3.14 Operational Strategies: location Monopoly – benefits

3.14 Operational Strategies: location Monopoly – drawbacks

3.14 Operational Strategies: location Price discrimination A monopoly may charge _______ price for all buyers. But it may use price discrimination: charging ___________ prices for the _______ good. This will ensure they have even higher _________ (higher producer surplus). Third-degree price discrimination means charging a different __________ to different consumer groups. E.g. different, one, price, profits, same

Price discrimination and monopoly 3.14 Operational Strategies: location Price discrimination and monopoly Draw a diagram, mark on the profit maximising price and quantity and then mark on a higher and a lower price (and the corresponding quantity)

Reasons why buyers might accept price discrimination 3.14 Operational Strategies: location Reasons why buyers might accept price discrimination Price discrimination depends on buyers having different PED and so ______ prices will be charged to customers with high PED.

Conditions required for price discrimination 3.14 Operational Strategies: location Conditions required for price discrimination Firm must have market power, price discrimination can only take place if the firm can ________ the price. The firm must have the information to be able to distinguish between different customers’ willingness to pay and different buyers have different demand curves (and so can be charged different _________) Groups of buyers must be distinct and kept separate e.g. business customers can’t buy student tickets Note that sometimes price discrimination may not work e.g.

Consumers and price discrimination – do they benefit? 3.14 Operational Strategies: location Consumers and price discrimination – do they benefit?

Diagram for price discrimination 3.14 Operational Strategies: location Diagram for price discrimination Draw 3 diagrams with AR and MR; the 1st should show fairly inelastic demand, the 2nd fairly elastic demand and the 3rd combines the two.

Assumptions with price discrimination 3.14 Operational Strategies: location Assumptions with price discrimination The assumption is that there are two markets – one with inelastic demand and one with elastic demand. The ‘total firm’ diagram shows that a profit maximising firm will have price Pt and earn supernormal profit. Where MR=MC in the inelastic demand market this is profit maximising and gives price Pa and profit marked by the shaded area. The elastic demand market sees price Pb and profit marked by the shaded area. Combining these two profits should generate more profit for the firm than profit maximising without price discriminating.

Monopolies and productive efficiency 3.14 Operational Strategies: location Monopolies and productive efficiency A monopoly tends not to be productively efficient. When does productive efficiency occur? What does it mean if a firm is productively efficient? Why does a firm in a monopoly not need to be productively efficient?

Monopolies and allocative efficiency 3.14 Operational Strategies: location Monopolies and allocative efficiency When does allocative efficiency occur? Why might a firm in a monopoly not be allocatively efficient?

3.14 Operational Strategies: location Natural monopolies Natural monopoly occurs where ___________ of scale are so large that the dominant producer will have lower ________ of production so potential competitor can’t compete e.g. water supply or railway track. Utilities have a natural monopoly over pipes – uneconomical/wasteful to have _________ distributers May have monopoly power as there are no real _______________ for their product e.g. water firms A local monopoly describes the only supplier in an area; for example, the only costs, economies, multiple, substitutes

Socially optimum pricing: not on syllabus Socially optimum pricing is also called marginal cost pricing. It occurs when price = MC, in other words ___ = MC What formula is this? The formula for