CriteriaPerfect competition MonopolyOligopoly Number of firms ManyOneFew Nature of product HomogenousUnique productHomogenous or heterogeneous EntryFreeBlockedFree to restricted InformationComplete Incomplete CollusionImpossibleIrrelevantPossible Control of price NoneConsiderableConsiderable, but less than monopoly Economic profit ZeroPositive

Characteristics of a monopoly There is only one seller of the product. There are barriers to entry. These are caused by patents and other forms of intellectual property rights, control over resources, government regulations and decreasing costs. The monopolist is regarded as a price maker since it is able to influence the market price through changing the quantity it supplies to the market. It is also possible for the monopolist to make an economic profit in the long run. This is because it faces no competition from new entrants as a result of the barriers to entry.

The demand curve for a monopolist

If it chooses combination A, where the price level is P 1 and the quantity demanded is Q 2, it means that it cannot ask a price of P 2 and still expect to sell a quantity of Q 2. A monopolist therefore cannot set it sales and its price independently of each other.

Profit maximisation for a monopolist: An example

Profit maximisation of a monopolist The monopolist also wishes to maximise its profits and it will choose that combination of the price and output level where this occurs. Profit maximisation occurs where: marginal revenue = marginal cost MR = MC Marginal revenue is the revenue from selling one additional unit Marginal cost is the cost of producing one additional unit.

The demand curve for a monopolist

Price (R)Quantity (Q)

The marginal revenue curve of a monopolist

Marginal Revenue Is the amount by which total revenue increases if one additional unit is sold Price (R)Quantity (Q)Total revenue (TR) Marginal revenue

Marginal Revenue Is the amount by which total revenue increases if one additional unit is sold Price (R)Quantity (Q)Total revenue (TR) Marginal revenue

Marginal Revenue Is the amount by which total revenue increases if one additional unit is sold Price (R)Quantity (Q)Total revenue (TR) Marginal revenue

Marginal Revenue Is the amount by which total revenue increases if one additional unit is sold Price (R)Quantity (Q)Total revenue (TR) Marginal revenue

Marginal Revenue Is the amount by which total revenue increases if one additional unit is sold Price (R)Quantity (Q)Total revenue (TR) Marginal revenue

Marginal Revenue Is the amount by which total revenue increases if one additional unit is sold Price (R)Quantity (Q)Total revenue (TR) Marginal revenue

Plotting the marginal revenue curve

QuantityMarginal revenue

QuantityMarginal revenue

QuantityMarginal revenue

QuantityMarginal revenue

QuantityMarginal revenue

QuantityMarginal revenue

QuantityMarginal revenue

QuantityMarginal revenue

Adding marginal cost Marginal cost is the cost of producing one additional unit.

QuantityMarginal cost

QuantityMarginal cost

QuantityMarginal cost

QuantityMarginal cost

QuantityMarginal cost

QuantityMarginal cost

QuantityMarginal cost

Profit maximisation MR = MC

QuantityMarginal revenue Marginal cost

QuantityMarginal revenue Marginal cost

QuantityMarginal revenue Marginal cost

What price will the monopolist charge?

How much profit does the monopolist make? Profits = Total revenue minus total cost

What is the total cost of production? Average cost per unit x number of units What is the total revenue? Price x quantity Profits =

What is the total cost of production? Average cost per unit x number of units 60 x 4 = 240 What is the total revenue? Price x quantity Profits

What is the total cost of production? Average cost per unit x number of units 60 x 4 = 240 What is the total revenue? Price x quantity 70 x 4 = 280 Profits

What is the total cost of production? Average cost per unit x number of units 60 x 4 = 240 What is the total revenue? Price x quantity 70 x 4 = 280 Profits = = 40

Activity

Indicate the - profit maximisation position - the total cost of production, - total revenue and - the economic profit of the monopolist

Indicate the - profit maximisation position E 1 - the total cost of production, 0Q 1 bC 1 - total revenue 0Q 1 aP 1 -the economic profit of the monopolist C 1 baP 1

Activity

a)At what point does the monopolist maximise profits? b)At what point does profit maximisation occur in a perfectly competitive market? c)What is the price that the monopolist will charge? R15 d)What is the price under perfect competition? e)What is the quantity supplied by the monopolist? f)What is the quantity supplied under perfect competition? g)What is the average cost of production for the monopolist? h)What is the average cost of production in perfect competition? i)How much economic profit does the monopolist makes? j)How much economic profit is made under perfect competition? k)Use your answers to explain why a monopolist is regarded as inefficient.

a)At what point does the monopolist maximise profits? a b)At what point does profit maximisation occur in a perfectly competitive market? b c)What is the price that the monopolist will charge? R15 d)What is the price under perfect competition? R10 e)What is the quantity supplied by the monopolist? 800 f)What is the quantity supplied under perfect competition? 1000 g)What is the average cost of production for the monopolist? R12 h)What is the average cost of production in perfect competition? R10 i)How much economic profit does the monopolist makes? R2400 j)How much economic profit is made under perfect competition? None k)Use your answers to explain why a monopolist is regarded as inefficient.

Oligopoly “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (Source: Adam Smith, Wealth of Nations)

CriteriaPerfect competition MonopolyOligopoly Number of firms ManyOneFew Nature of product HomogenousUnique productHomogenous or heterogeneous EntryFreeBlockedFree to restricted InformationComplete Incomplete CollusionImpossibleIrrelevantPossible Control of price NoneConsiderableConsiderable, but less than monopoly Economic profit ZeroPositive

Firms either sell identical products (steel and cement) or differentiated products (toothpaste and banking services) and there are significant barriers to entry. This is a common market structure in modern economies.

Each firm is aware of the actions of the other firms in the market, because the market is dominated by a few firms. In other words, firms are watching each other and keeping a close eye on the decisions made by other firms. The decisions of one firm influence, and are influenced by, the decisions of the other firms. As a result, there is a high degree of interdependence between firms in this market. This differs from perfect competition where each individual firm is so small that its decisions have no impact on the other suppliers.

Oligopoly firms also tend not to compete in terms of the price of products. They use a number of non-price measures, such as advertising, product branding and marketing to gain market share. Entry into this market is very difficult as it usually requires large amounts of capital. It might also be difficult to overcome the restrictions and barriers that exist. An important barrier in this market is the consumer preferences for certain brands of products, such as Coca Cola, which were created through advertising and product loyalty.

An important aspect of non-price competition is to build brand loyalty, product recognition and product differentiation. This is done by means of advertising and marketing. As a result, oligopoly firms tend to spend a substantial amount of money on mass advertising and marketing. Other forms of non-price competition include: - extended shopping and business hours (the decision to trade on Sunday is part of non-price competition) - doing business over the internet (banking and shopping) - after-sales services - offering additional services (free travel insurance by banks) - loyalty rewards for customers door-to-door deliveries.

Example of firms making use on non-price competition

Firms tend to collude with one another, because the market is dominated by a few firms. Collusion takes place when rival firms cooperate by raising prices and by restricting production in order to maximise their profits. When there is a formal agreement between firms to collude it is called a cartel. A cartel is a group of producers whose goal it is to fix prices, to limit supply and to limit competition. Cartels are prohibited by antitrust laws in most countries. However, they continue to exist nationally and internationally.producerspricessupply competition antitrustlaws

Collusion is more successful under the following conditions: - When only a small number of number firms are involved, which makes communication more effective - If firms face more or less the same cost of production - If the product is homogeneous - If there are barriers to entry - If the government does not interfere.

The outcome of their pricing and production decisions can be one of the following four possibilities: a) Due to collaboration they determine the price and output levels in the same way as a monopolist does and earn an economic profit. b) They compete in terms of price and the outcome is the same as that for perfect competition. c) They collude in such a way that the price, output and profits levels are between those that apply to a monopoly and those that apply in a competitive market. d) Since it is difficult to build an economic model of the collusion between firms, the outcome could be anything and their behaviour is therefore indeterminate.