1. Market Structures Monopoly

2. Monopoly  Defining monopoly  Only one seller  Barriers to entry  economies of scale  product differentiation and brand loyalty  lower costs for an established firm  ownership/control of key factors or outlets  legal protection  mergers and takeovers  aggressive tactics

3. Monopoly: Why?  Natural monopoly (increasing returns to scale).  Artificial monopoly  a patent  sole ownership of a resource  formation of a cartel; e.g. OPEC

4. Monopoly: Assumptions  Many buyers  Only one seller i.e. price-maker  Homogeneous product  Perfect information  Restricted entry and possibly exit

5. Monopoly: Features  The monopolist’s demand curve is the (downward sloping) market demand curve  The monopolist can alter the market price by adjusting its output level.

6. Monopoly  The monopolist's demand curve  downward sloping  MR below AR  Equilibrium price and output  MC = MR

7. Profit maximising under monopoly P/R Q O MC QmQm MR

8. Profit maximising under monopoly P/R Q O MC AR QmQm MR AR a

9. Monopoly  The monopolist's demand curve  downward sloping  MR below AR  Equilibrium price and output  MC = MR  measuring level of supernormal profit

10. Profit maximising under monopoly P/R Q O AC MC AR AC QmQm MR AR a b

11. P/R Q O AC MC AR AC QmQm MR AR Profit maximising under monopoly

12. Price Discrimination  Why do business week offer bargain rates to students?  PRICE DISCRIMINATION  Charging different prices for a product when the price differences are not justified by cost differences. Objective of the firm is to attain higher profits than would be available otherwise.

13. Monopoly - Price Discrimination  Different prices at different markets  Personal, Local or Trade use  First degree  Charge maximum from able and willing to Pay  Second Degree  Buyers divided into groups, based on demand  Third Degree  Entire market divided into submarkets

14. Price Discrimination  Firm must be an imperfect competitor (a price maker) ‏  Price elasticity must differ for units of the product sold at different prices  Firm must be able to segment themarket and prevent resale of units across market segments

15. First-Degree Price Discrimination  Each unit is sold at the highest possible price  Firm extracts all of the consumers’ surplus  Firm maximizes total revenue and profit from any quantity sold

16. Second-Degree Price Discrimination  Charging a uniform price per unit for a specific quantity, a lower price per unit for an additional quantity, and so on  Firm extracts part, but not all, of the consumers’ surplus

17. First- and Second-Degree Price Discrimination In the absence of price discrimination, a firm that charges Rs.2 and sells 40 units will have total revenue equal to Rs. 80.

18. First- and Second-Degree Price Discrimination In the absence of price discrimination, a firm that charges Rs. 2 and sells 40 units will have total revenue equal to Rs. 80. Consumers will have consumers’ surplus equal to Rs. 80.

19. First- and Second-Degree Price Discrimination If a firm that practices first- degree price discrimination charges Rs. 6 and sells 40 units, then total revenue will be equal to Rs. 160 and consumers’ surplus will be zero.

20. First- and Second-Degree Price Discrimination If a firm that practices second- degree price discrimination charges Rs. 4 per unit for the first 20 units and Rs. 2 per unit for the next 20 units, then total revenue will be equal to Rs. 120 and consumers’ surplus will be Rs. 40.

21. Third-Degree Price Discrimination  Charging different prices for the same product sold in different markets  Firm maximizes profits by selling a quantity on each market such that the marginal revenue on each market is equal to the marginal cost of production

22. Third-Degree Price Discrimination

23. Monopoly  The monopolist's demand curve  downward sloping  MR below AR  Equilibrium price and output  MC = MR  measuring level of supernormal profit  Price Discrimination  Comparing monopoly with perfect competition

24. Monopoly  The monopolist's demand curve  downward sloping  MR below AR  Equilibrium price and output  MC = MR  measuring level of supernormal profit  Comparing monopoly with perfect competition  lower output at a higher price

25. O P1P1 MC 1 MC = MSC Q1Q1 MR AR = MSB Q2Q2 P 2 = MSB = MSC Q A monopolist producing less than the social optimum Monopoly output Perfectly competitive output

26. Monopsony  Monopoly: the only ‘seller.  Monopsony: the only ‘buyer’, chooses a price-quantity combination on the industry supply curve that max its profit  it exercises its’ market power by buying at a price below the price that competitive buyers would pay

27. Monopsony Demand for labour Supply L, Workers per day 60 20 30 ME, Marginal expenditure w m = 20 w c = 30 e c e m ME = 40 60 0 w, per worker Suppose a firm is the sole employer in a town, and the firm uses one factor, labour, to produce a final good Average expenditure the monopsony pays to hire a certain number of workers When supply curve linear and upward sloping, the marginal expenditure curve is twice as steep as the supply curve

28. Monopsony Demand for labour Supply L, Workers per day 602030 ME, Marginal expenditure w m = 20 20 w c = 30 e c e m ME = 40 60 0 w, Rs. per worker Monopsonist values labour at Rs.40, but it pays only Rs.20 Monopsonist hires fewer workers and pays a lower wage Monopsony power (ME –w)/w = 1/  If the market for labour were perfectly competitive and the firm faced a horizontal supply curve, than the equilibrium would be at e c Remember a firm will hire workers up to the point where the marginal value of the last unit of the worker = the marginal cost to the firm ie where the demand (for labour) curve = ME curve

29. Bilateral Monopoly  Uncontrolled monopoly gets higher than competitive market prices.  Uncontrolled monopsony gets lower than competitive market prices.  Monopoly/monopsony confrontation breeds compromise.  One buyer : One seller

30. Bilateral Monopoly D ME MC MR e1e1 x y o x1x1 P2P2 x2x2 P1P1 P*P* X*X* a b Monopoly Equilibrium Monopsony Equilibrium Bilateral Monopoly Equilibrium

31.  Thank you……………