topic 9 - econ - chapters 8 and 9
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8/12/2019 Topic 9 - ECON - Chapters 8 and 9
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The monopoly market structure• Monopoly is characterised by:
– a single seller in the market – a unique product
– high barriers to entry that make it difficult orimpossible for other firms to enter the market.
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A natural monopoly
• An industry where the LRAC declines along theentire range of output.
• A single firm can supply the entire marketdemand at a lower cost than two or more smallerfirms.
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Price and output decisions for a monopolist
• The major difference between monopoly andperfect competition is the shape of the demandcurve faced by the firm.
• Monopolists are price makers – they face adownward-sloping demand curve for theirproducts.
• This means they can choose between price andoutput combinations.
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The monopolist’s demand curve
• The monopolist’sdemand curveand the industrydemand curve areone and thesame .
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Demand and marginal revenue curves
• If demand is downward sloping, then themonopolist must lower price in order to sell an
extra unit.• This price-cut applies to all units, not just the
last unit. This means marginal revenue isalways less than price .
• The marginal revenue for a monopolistintersects the quantity axis halfway betweenthe origin and the demand curve.
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Profit maximisation
• Economists assume that all firms try to maximiseprofits (or minimise losses).
• Like the perfectly competitive firm, the monopolist
also maximises profit by producing that level ofoutput for which MR = MC .
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Monopoly in the short run
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Monopoly in the long run
• If the factors determining the positions of amonopolist’s demand and cost curves mean itearns an economic profit , and if nothingdisturbs these factors, economic profit willcontinue in the long run.
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Conditions forprice discrimination
• A firm can engage in price discrimination if theseller:
– is a price maker
– can separate consumers into marketsegments (perhaps on the basis of priceelasticity of demand)
– can prevent arbitrage (buying then resellingfor a higher price).
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Price discriminationin practice
• Many firms with a downward-sloping demandcurve (not just monopolists) can practise pricediscrimination: – different fares based on age or status – different seat prices at sporting events – restaurant discounts to senior citizens – discounts for volume purchases.
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Is price discrimination unfair?• Price discrimination allows sellers to charge what
buyers are willing to pay.
• Many buyers benefit from the discrimination by
not being excluded from purchasing a productthey could not otherwise afford.
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Comparing monopoly and perfectcompetition
• Compared to perfect competition, the monopolist: – allocates resources inefficiently – produces less output
– charge a higher price.
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Chapter 9 ImperfectCompetition
Monopolistic competition and oligopoly
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The monopolistic competition marketstructure
• Monopolistic competition features: – many small sellers – differentiated product
– non-price competition – easy entry and exit.
• It is the market structure in which we find more
firms than any other structure.
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Many small sellers
• Each firm is so small, relative to the total market,that each firm’s pricing decisions have anegligible effect on the market price.
• However, monopolistically competitive firms areprice makers ; that is, they have some control overtheir price.
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Product differentiation
• Product differentiation is the key feature ofmonopolistically competitive markets.
• Product differentiation is the process of creating
real or apparent differences between goods andservices.
• Such differences give firms the capacity toincrease their prices .
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Non-price competition
• In monopolistically competitive markets, firmscompete using non-price techniques: – advertising – packaging – product development – better service.
• This avoids having to compete by lowering prices.
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The monopolistic competitor’s demandcurve
• The demand curve for a monopolisticallycompetitive firm is downward sloping .
• It is less elastic than the demand curve for the
perfectly competitive firm.• It is more elastic than a monopolist’s demand
curve.
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Advertising
• Advertising is one of the types of non-pricecompetition used in monopolistic competition.
• Its purpose is to help differentiate the product
from its competitors.• Advertising is probably more effective in the short
run than in the long run.
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Monopolistic competition in the long run
• In the long run, each firm in a monopolisticallycompetitive market will earn normal profit .
• This is because there is relatively easy entry and
exit.• For example, if a restaurant earns a short-run
economic profit, new firms have an incentive toenter the market.
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Benefits ofmonopolistic competition
• Although monopolistic competition fails theefficiency test , the product variety that occursbecause of product differentiation mayoutweigh efficiency loss.
• Differentiated products allow consumer choice (not available in perfect competition).
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The oligopoly market structure• Oligopolistic markets tend to be dominated by afew large firms.
• Oligopolistic markets feature:
– few sellers – homogeneous/differentiated product – difficult market entry.
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Mutual interdependence
• Mutual interdependence is the distinguishingfeature of oligopoly.
• This means a decision by one firm is likely tocause some reaction from other firms in the samemarket, e.g. banks and the fees they charge.
• Interdependence means decisions in oligopolyare more complex than in other market forms.
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Price and outputdecisions for an oligopolist
• Mutual interdependence makes the oligopolymarketplace more difficult to analyse than perfectcompetition, monopolistic competition ormonopoly.
• So the price – output decision also takes intoaccount the possible reactions of other firms.
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Kinked demand curve
• This is one explanation of oligopolistic behaviour.• The firm assumes rivals will ignore a price
increase and match a price cut.
• The demand curves therefore have twosegments , above and below a price point.
• This model suggests prices will be ‘sticky’.
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