2. Quick Quiz
Illustrate the movement from short- run loss to long run normal profit under perfect competition

3. GUESS WHO?

4. Monopoly

5. Monopoly Pure Monopoly- only one firm in the industry
Working Monopoly- 25% + market share
A monopolist has the power to determine either:
The price at which they sells his product;
The quantity they wishes to sell
The monopolist cannot determine both as they cannot determine
Demand
What determines monopoly power?
the availability of close substitutes from rival industries
ability to maintain barriers to entry

6. Key Features of Monopoly
There is one firm, which is also the industry
It produces a unique good/ service
There are complete barriers to entry and exit from the industry.
Customers have only 1 firm to buy from, as there are no direct substitutes- Limited Choice
The Firm is a ‘Price Maker’
The Firm has the ability to earn abnormal profits in the long run
Low levels of economic efficiency- productive and allocative efficiency not achieved
Discuss elasticity – when dealing with Oligopoly. There needs to be a break away from the basic tendency to draw perfectly inelastic demand curves when inelasticity is mentioned! 6

7. Short- run and long run abnormal profits under Monopoly
Cost/ Price
Output MC
Rectangle Pabc= Abnormal Profit AC a P b c
D= AR Q MR

8. Long run equilibrium
The monopolist can maintain abnormal profits in the long run if :
There are barriers to entry and exit.
These may be
- artificial (e.g. patent, brand loyalty) or
- natural (e.g. economies of scale)

9. Barriers To Entry Economies of scale and High sunk costs
A clearly differentiated product with brand loyalty
Brand proliferation: In many industries multi-product firms engaging in brand proliferation can give a false appearance of competition to the consumer. This is common in markets such as detergents, confectionery and household goods – it is non-price competition.
Legal/ regulatory barriers eg Patents are legal property rights to prevent the entry of rivals. They are generally valid for years and give the owner an exclusive right to prevent others from using patented products, inventions, or processes. The owners of patents can sell licences to other businesses/. Statutory monopolies- those granted legal protection from competition eg Post Office in UK. In the past companies such as the Hudson’s Bay Company and the East India Company were granted the sole right to trade in certain areas. Many public utility companies providing water, gas and electricity have been granted local monopoly powers, but are subject to some regulation.
Make sure notes include elaboration. 9

10. Ownership/control of key factors of production- Until recently, DeBeers controlled the world’s supply of uncut diamonds, and there was no way that new firms could enter the market because of the agreements that DeBeers had with mining companies and governments in those parts of the world where diamonds are mined. The monopoly has lasted for many years, and is only now starting to break down
Other barriers- aggressive trading tactics- eg. Limit pricing (predatory pricing), the threat of aggressive merger and takeover, ownership/control of retail outlets and intimidation.

11. Monopoly Cont. Tues 6th March

12. Efficiency and Monopoly
Recall output levels for
Productive Efficiency?
Allocative Efficiency?
Draw the monopoly diagram and label 3 output levels

13. Output and Efficiency under Monopoly
Rectangle Pabc= Abnormal Profit
Cost/ Price
Output MC AC a P b Qa c Qp
D= AR Q MR

14. Monopoly and elasticity
Monopolist will always operate on the elastic section of a demand curve where MR is positive.
PED = >1
PCR
PED = 1 (TR unchanged) MR
AR = D
QUANTITY

15. Comparing PC and Monopoly
Efficiency

16. Allocative efficiency
P = MC
i.e the price a consumer is prepared to pay = cost to society of producing an additional unit, assuming no external costs
Under PC, P = MC
Under monopoly, P > MC

17. Productive Efficiency
Firms are productively efficient if they are producing at the lowest point on their lowest possible AC (ATC) curve.
Looking at the l/r AC curve firms are producing at their MES
Under PC firm is operating at min ATC
Under monopoly, firm operating at > min ATC

18. A Comparison between Pure Monopoly and Perfect Competition
Price/ Revenue/ Cost
Loss of consumer surplus- PcPmac
Deadweight welfare loss abc a Pm c b Pc
AC =MC
Assume- constant costs for both industries AC=MC= Industry Supply Curve
Assume- constant costs for both industries AC=MC= Industry Supply Curve.
L/r PC produce where AR=AC= MC. P=MC thus allocatively efficient
AR=D MR Qm Qc
Output

19. A Comparison between Pure Monopoly and Perfect Competition
Price/ Revenue/ Cost
EoS moves monopoly onto AC1, output= Q1 and P=P1
Consumers benefit from monopoly compared to PC a Pm c b Pc
AC =MC P1
Assume- constant costs for both industries AC=MC= Industry Supply Curve.
L/r PC produce where AR=AC= MC. P=MC thus allocatively efficient
AC1 =MC1
AR=D MR Qm Qc Q1
Output

20. Profits Under PC, (AR =) P = AC i.e. long run normal profit is made
Under monopoly (because of barriers to entry) P>AC (AR> AC) i.e. Long run abnormal profits can be made

21. Does the consumer always lose from monopoly?
If a monopolist faces identical costs to a perfectly competitive industry, and can prevent entry, a monopoly will result in
Higher prices
Lower output
See Section 9-8 in the main text.

22. ‘Advantages’ of monopoly
Supernormal profits provide an incentive and a source of funds for process and product innovation:
New technologies that may reduce costs i.e. LRAC under monopoly < LRAC under perfect competition.
New products increase consumer choice
E of S can lead to greater output and lower prices than under PC

23. Natural Monopoly
A natural monopoly is characterised by increasing returns to scale at all levels of output. Thus the LRACs continue to fall as output expands.
Due to high sunk costs and economies of scale it is not efficient to have more than one firm providing goods or services in this market.
Some examples of industries that are close to being natural monopolies are BT, Royal Mail, Camelot and the National Grid. 

24. Natural Monopoly
Price/ costs/ revenue PE MR AC
AR = D MC QE
Output

25. Monopoly and Efficiency
Using the article ‘Monopoly’ ET Jan 2005
Add to your notes on the advantages and disadvantages on monopoly.
Ensure you have explained the concepts of static and dynamic efficiency

26. Output and Efficiency under Monopoly
Rectangle Pabc= Abnormal Profit
Cost/ Price
Output MC AC a P b Qa c Qp
D= AR Q MR

27. Price Discrimination

28. Examples of Price Discrimination?

29. Price Discrimination
First Degree- a firm charges each consumer for each unit the maximum price they are prepared to pay for that unit (eg. stall- holders in street markets?)
Second Degree- a firm charges customers different prices according to how much the purchase. It may charge a high price for the first x units, a lower price for the next number units and a lower price for the next number of units (eg electric companies in some countries charge a high price for first so many kw then a lower price for additional kw)
Third degree- where consumers are grouped into 2 or more independent markets and a separate price is charged in each market eg. Bus fares

30. Conditions necessary for price discrimination
Firms must be price makers
Markets must be separable- consumers must not be able to buy in low price market and re- sell in high price market
PED must differ in each market

31. Diagram for Price discrimination

32. Market A Market B Total MarketPa MR
Market A
Market B
Total Market
Output O T
AR = D MR MC AC Pb AR MR AR O QA QB
(if MR higher in market A, for example, the firm could increase TR by increasing output in market A and reducing output in market B, MR will rise in market B as the price falls as they sell less, MR in market A falls as more output to sell reduces the price, this will continue until MR is equal in both markets)
Assume costs of production are identical for both markets
The firm needs to allocate production so that MR is identical for each market if it is to maximise profit
The profit maximising monopolist will produce at where MC=MR across the whole market, at output level 0T
This output is then split across 2 markets, so that MR is equal in both markets
In each market a price will be charged based on the AR curve
Abnormal profit earned from splitting the market is higher than it would have been if the market had not been split.

33. Handout
Who Gains from Price Discrimination?
ET Sept 2005

34. Price Discrimination and the Public Interest
Price discrimination is likely to increase output and make the product available to more people.
Distribution- those paying the higher price may feel it is unfair, those paying the lower price will have a higher consumer surplus than the otherwise would have had, they are able to consumer more and some may be able to obtain a good or service that they could otherwise not afford.

35. Competition- A firm may use price discrimination to drive competitors out of business- predatory pricing (pricing below AC), eg. Cross- subsidising bus routes. On the other hand, a firm may use profits from high priced market to break into new markets and withstand a possible price war, thus competition is increased.
Profits- higher profits and prices could be seen as an undesirable re-distribution of income in society, however, higher profits could be re- invested= innovation or lower cost in future (maybe leading to lower prices?)

36. handout
P209
Price discrimination in the cinema

37. Alternative Objectives of the Firm
Profit Maximisation
Optimum Output (productively efficient level of output due to Govt intervention?)
Socially Optimum output (allocatively efficient due to Govt intervention?)
Normal Profit (Gov intervention?)
Predatory Pricing Output (above normal profit below profit max
Sales Revenue Maximisation (when is sales revenue (total revenue maximised?)
Sales Maximisation
Profit Satisficing
P192 Stanlake and Grant

38. Sales Revenue Maximisation
High sales revenue – increase market share, easier to borrow money, increased market power
Output should be where MR=0, where TR will be at a peak
Output likely to be greater than Profit Max point
Extra sales after the unit where MR=0 contribute nothing to TR, therefore it is the sales revenue maximisation output

39. Sales Maximisation Maximises volume of sales rather than revenue
Unlikely to increase output beyond a point where TC=TR (don’t want to make a loss)
Growth of the firm
May be the objective for managers (pay rise and other benefits)
Could conflict with shareholder objectives – want larger dividends, managers want to re-invest profits into the firm
Long run- both parties may be happy if sales maximisation policies have increased market share and raised long-run profits

40. Profit Satisficing
Managers aim for a level of profit that will keep shareholders happy
Managers may be unwilling to accept extra responsibility and pressure for more competitive policies
May also wish to satisfy other stakeholders

41. Sales Revenue Maximisation
Costs/ Revenue
Output TC TR
Profit Maximisation
Profit Satisficing
Min p
Total p q1 qp qr q3

42. Handout-Profit maximisation
Question

43. Contestable Markets
: a market is perfectly contestable if
1. the cost of entry and exit by potential rivals are zero
2. entry can be made very rapidly
A market is less contestable if there are:
Economies of Scale if market demand is =/> MES, then the firm is likely to be a natural monopoly
Sunk Costs: a firm’s investment e.g. specific capital, cannot be employed in alternative uses

44. PC and Contestable Markets
ET Nov 2005 Q4