1. 1 Monopoly

2. 2 Monopoly- assumptions  One seller  Many buyers  Entry and exit into the market: very difficult or prohibited  Monopolist usually produce unique product with no close substitute

3. Sources of monopoly  Principal cause of monopoly is barrier to entry.  Barriers to entry may arise from various sources.  When a firm can produce a good at a price lower than any other firm can then monopoly arises. We call this Natural Monopoly.  Monopoly may also arise when a firm has exclusive ownership of a factor of production.  Government may create monopoly through legal system (copyright, patent). 3

4. 4 Shape of the monopoly market demand curve  Downward sloping  Slope of the curve depends on the elasticity of demand for the monopoly product  However, monopoly demand curve is never horizontal

5. 5 Pricing under Monopoly  The basic question is- “can the monopolist charge any price for his product?”  The answer is- “yes, it can.”  But, the point of consideration is- “how much can he sell his product at that price?”  It depends on the elasticity of demand for his product.

6. 6 Note on the relationship between demand and marginal revenue  Marginal revenue and demand are very closely linked. If we look at the marginal revenue, we get an idea about the demand.

7. 7 Demand vs. Marginal Revenue Suppose we have a demand equation: Q = C – a.P Where, Q is quantity demanded, P is price, a and C are parameters. Rearranging the equation we get: P = (C/a) - (1/a).Q Multiplying both sides by Q we get: PQ = (C/a).Q - Q 2 /a TR = (C/a).Q - Q 2 /a So, the marginal revenue is: MR = (C/a) - (2/a).Q The slope of the MR curve is just double of the demand curve. This means the MR curve is twice as steep as the demand curve. This also means that the demand curve will always lie above the MR curve.

8. 8 Demand and MR curves D MR

9. 9 Pricing under monopoly QPTRMRTCACMCProfit 01800 100 -100 1170 155.7155.7055.714.3 2160320150205.6102.8049.9114.4 3150450130253.984.6348.3196.1 4140560110304.876.2050.9255.2 513065090362.572.5057.7287.5 612072070431.271.8768.7288.8 711077050515.173.5983.9254.9 810080030618.477.30103.3181.6 99081010745.382.81126.964.7 1080800-1090090.00154.7-100 1170770-301086.798.79186.7-316.7 1260720-501309.6109.13222.9-589.6

10. 10 The optimum price level for the monopolist D MR Where? MC P* Q*

11. 11 Superiority of Perfect Competition over Monopoly In Perfect Competition-  Consumers maximize surplus  No deadweight loss  More output  No technical inefficiency  No rent-seeking Whereas, in Monopoly all the opposite statements are true.

12. 12 Perfect Comp. vs. Monopoly MR MR=AR D MC Q* QpQp P P* Deadweight loss Consumer’s surplus

13. 13 Task  Suppose the total cost for a monopolist is given by- TC = 500 + 20.Q 2 and Demand equation is given by- P = 400 – 20.Q What are the profit maximizing price and quantity?

14. 14 Solution hints  Profit maximizing happens where MC = MR  To get MR we need to have TR  To get TR multiply P by Q. [TR = P.Q]  Arrange the table to get MC and MR  Find out the desired values from the table

15. 15 Solution QTCTRMCMRProfit 1520380 -140 258072060340140 36801020100300340 48201280140260460 510001500180220500 612201680220180460 714801820260140340 817801920300100140 92120198034060-140 102500200038020-500 1129201980420-20-940

16. 16 Monopolistic Competition Monopoly Perfect Competition

17. 17 Definition  Monopolistic competition is a market structure in which:  Number of buyers and sellers is large  Entry and exit are easy  Products are differentiated  Non-price competition exists

18. 18 Product Differentiation  Product differentiation implies that the products are different enough that the producing firms exercise a “mini-monopoly” over their product.  The firms compete more on product differentiation than on price.  Entering firms produce close substitutes, not an identical or standardized product.

19. 19 Many Sellers  When there are many sellers, they do not take into account rivals’ reactions.  The existence of many sellers makes collusion difficult.  Monopolistically competitive firms act independently.

20. 20 Non-price competition  A key instrument for survival  Indicates competition that do not involve price setting decisions  Examples are: advertising, sells promotion, free gifts  Helps to avoid price war

21. 21 Profit Maximization in a Monopolistic Market MC AC D MR Q P