IMPERFECT COMPETITION Unit 4 MONOPOLIES A firm that

IMPERFECT COMPETITION Unit 4

MONOPOLIES A firm that is the only seller of a good or service that does not have a “close substitute”.

Monopolist Characteristics: ■ As the monopolist is the only firm in the market, the market demand = the firm’s demand ■ High barriers to entry – Patents – public franchise – complete control of a key resource – network externalities – a product gains utility as more people use it – Natural monopolies – occur when a company has economies of scale so large they can supply the market better than multiple firms would be able to ■ Price – MAKER – up to the demand curve ■ P > MR because demand is downward sloping ■ MR = MC still equals the profit-maximizing QUANTITY – The demand price at output would be the price – Can make profits ■ Lacks allocative efficiency – Deadweight Loss The Soup Nazi

Graphing a Monopoly *Demand curve for the monopoly is the same as the demand curve for the entire market. * 1. Downward-sloping demand curve 2. Downward sloping marginal revenue 3. Both the MC & ATC have the typical shapes 4. Profit-maximization QUANTITY at MR=MC 5. Follow the quantity up to the demand curve for the price 6. The difference between the ATC and P at the point of output shows the monopolist’s profit.

Price Discrimination Some businesses are able to charge different customers different prices that do not reflect differences in production costs. ■ Why? The firm wants to charge each person THE MOST they will pay! i. e. using consumer surplus to avoid having to lower prices on a unit to sell more. ■ Perfect Price Discrimination = Marginal Revenue = Demand Schedule/Curve 1. The firm must have market power – Perfectly Competitive firms CANNOT price discriminate. 2. The firm must be able to differentiate between differing demand elasticities – Consumers from different places, ages, etc. 3. The firm must be able to prevent resale – If not, those paying the lower price would just resell their goods to those that would have initially paid a higher price to the firm!

Additional Take Aways! ■ Charging a higher price is NOT always more profitable for the monopolist, nor can they charge whatever they want. – Although they are the only provider, demand is still downward sloping. ■ Monopolies, unless able to perfectly price discriminate, will create a deadweight loss. – Reduces the consumer surplus – Increases producer surplus ■ Although there is inefficiency in any type of market that is not perfectly competitive, there are few perfect monopolies so the economic loss is small. ■ Arnold Harberger

Monopolies & the Government ■ Government Anti-Trust and Anit. Collusion legislation has changed throughout US history – Sherman Anti-Trust 1890 – Clayton Act of 1914 – establishes the Federal Trade Commission – The FTC established business merger guidelines in 1982 ■ ■ ■ Market definition Measure of concentration Merger standards ■ If a firm is a natural monopoly, such as a utilities provider, the lack of competition means a price won’t be driven down. ■ As a result, governments often implement regulatory commissions that allow for “fair-return price” where cost and price intersect. – This allows monopolists to break even but does not fully correct the under allocation of resources.

OLIGOPOLIES

Oligopolist Characteristics ■ A few large terms – Generally, the four-firm concentration is above 50%, meaning together they share significant market power. ■ Identical or differentiated products – Oligopolists can either create identical products or varied products. ■ High Barriers to Entry – Barriers (usually high start-up costs) prevent competing firms from opening. ■ Interdependence – An individual firm’s profits are highly dependent on its competitors’ prices.

Oligopoly & Game Theory https: //www. youtube. com/watch? v=Cem. Li. SI 5 ox 8 ■ Remember, these firms have to consider the actions of their rivals! – This is known as interdependence and can impact pricing. – Leads to collusion and even cartels! ■ Game Theory: the strategic decisions of “players” in anticipation of their rivals’ reactions. – Prisoner’s dilemma – Dominant Strategy - one that will have the absolute best effects, no matter what your opponents or partners do. ■ Nash Equilibrium: In the Nash Equilibrium, each player's strategy is optimal when considering the decisions of other players. Every player wins because everyone gets the outcome they desire.

MONOPOLISTIC COMPETITION

Monopolistic Competition ■ Faces some competition, but has some market power due to product differentiation. – They may differentiate themselves through product differences, branding differences, marketing differences, and/or distribution differences. – Dry cleaners – Bars/nightclubs – Coffee shops – Grocery stores – Pharmacies – Gas stations – Hotels – Bookstores

The Difference Between Monopolistic Competition & Oligopoly? ■ Both of these are examples of IMPERFECT COMPETITION! ■ Dominance – Oligopoly – a few major firms (think of oil) – Monopolistic Competition - could be thousands (restaurants, bars, coffee shops) ■ Geography – The size of the town or city could dictate the amount and therefore dominance! ■ Barriers – It is usually more difficult to join an oligopolistic market, there might be government restrictions, resource and start up costs

Monopolistic Competition More competition than a monopoly or oligopoly, but has more market power than perfect competitors ■ Like with perfect competition firms, it is easy to enter this market, so new firms will enter until economic profits are 0. ■ As more firms enter, they will take customers from the competing firms. – This will push existing firms Demand to the LEFT. – This trend will continue until all firms are at 0 economic profits in the long run.

Market Shares ■ The sum of the squares of the market shares of firms in a particular market or industry ■ Purpose: to measure the concentrated power generated by shares of the market ■ Concentration ratio: sum of the market shares of the largest firms in an industry.