Before moving on to the analysis of the economic activity of a monopoly in the market, it should be noted that three types of these structures can be distinguished, which differ in external circumstances that contribute to the fact that this company has become the only producer on the market:
- - closed monopoly;
- - natural monopoly;
- - open monopoly.
Firstly, a firm can become a monopolist if it is protected by law and other competing firms cannot enter this area of activity. In this case, a closed monopoly arises. There are quite a few examples of such situations on the market: postal service, copyright, patent protection. There are fewer closed monopolies over time. Their main “destroyer” is scientific and technological progress: for example, quite recently telephone communications, mail and telegraph were classified as closed monopolies. Currently, the monopolization of these areas of activity has been destroyed due to the advent of mobile communications and the Internet.
Natural monopoly
arises if the minimum long-run average cost is achieved only when the firm serves the entire market. In this situation, the effect of scale of production operates, which does not allow the division of this market between several manufacturers. An example would be the subway in a large city, water supply and sewerage, and gas supply to the population. In some cases, natural monopolies may be based on the ownership of a unique resource.
Open monopoly
It is not protected by any special measures, and arises during competition in the market. As a rule, these are large companies that are currently the only producer of a certain product, which does not exclude the emergence of other companies with similar products sooner or later. They are more sensitive to competition, and their market position is less stable than the first two types of monopolies.
This division of monopolies is very arbitrary, since their position is influenced by various factors, in particular scientific and technological progress. We gave an example with closed monopolies. The same situation can arise with unique natural resources, for example, obtaining gas from biological waste, electricity from the use of solar or wind energy. Therefore, in the long term, all monopolies can be considered open. First, let's look at the general principles of a company's operation in the market under conditions of imperfect competition.
From the previous material it is known that with imperfect competition, the company finds itself in a situation where each subsequent unit of production is sold at a lower price, i.e. price is not a given value. A firm, faced with market demand, realizes that an increase in sales volume leads to a decrease in market price. Therefore, the demand curve for a monopolist has a negative slope.
An extreme case of operating under an imperfect monopoly is a “pure” or absolute monopoly. Such firms appear when they are the only producer of a product that has no close substitutes; access to this industry is difficult for others. Therefore, absolute monopoly coincides with industry.
When considering the issues of price elasticity of demand, we noted the relationship between price and total income (total revenue) when demand changes: if demand is elastic, then a decrease in price causes an increase in income, and vice versa, inelastic demand leads to a fall in income when the price decreases.
Let's connect the graph of demand and marginal revenue of the company with the graph of total income (Fig. 7.16).
If the demand curve looks like a straight line, as in Fig. 7.16, then its upper part (above the point IN) reflects elastic demand, i.e. when the price decreases, the total revenue is 77? growing. At the point IN, which divides the demand line in half, Ep=-1, total revenue takes the maximum value (77? = Р*() 2 or area of a rectangle P 2 V() 2<)), and marginal revenue MY equals 0. Volume of production 2 2 at price R 2 is optimal for this company. The section of the line below the point characterizes inelastic demand, marginal revenue takes a negative value, and total income decreases to 0. In addition, it should be emphasized that marginal revenue is less than the price for any volume of output, so the curve MY always lies below the demand curve.
Let us move on to consider the conditions for maximizing the profit of a monopolist in a short period.
Rice. 7.16.
for a monopolist:
A - relationship between the demand line and the elasticity of demand for a product: b - graphical dependence of total and marginal income on the elasticity of demand for a product
The monopolist must determine the line of its behavior: either limit the volume of sales to maintain a high price, or increase the volume of sales, but at a reduced price. If a monopolist firm sets a price P 1? then she can only sell 0! units of goods (see Fig. 7.16, A), and its total revenue will be an amount equal to the area of the rectangle RI(2]0. With an increase in sales volume, the area of this rectangle, i.e. total revenue, will grow, reach a maximum at volume (2 2 * and then begin to decrease (Fig. 7.16, b), until it becomes equal to zero at volume 0.
It should be noted that total revenue increases as long as the marginal revenue from the sale of an additional unit of output is positive. Obviously, on the graph the marginal revenue line should start at the point (I and go through (22-
Second point - 0, 2 determines the optimal production volume at which total revenue (TK) - maximum. With a further increase in production (more than (2 2), the marginal revenue line goes into the area of negative values, and total revenue increases. With volume (^, total revenue would fall to zero. As in the case of perfect competition, a “pure” monopolist maximizes profit at condition when ML = = MS, those. when marginal (additional) costs equal marginal (additional) revenue. But, at the same time, for the monopolist MY< Р.
The profit maximization condition for a monopoly takes the form MS = = MY< Р. Unlike a perfectly competitive firm, a monopoly stops increasing production before marginal costs equal the market price.
Let us consider the model of behavior of a monopolist firm seeking to maximize its profits. Let's connect the demand line in one figure
monopolist firm sy, marginal revenue ML, marginal cost schedule MS and average total costs ATS(Figure 7.17).
Rice. 7.17.
competition
To find the volume of production at which the company will receive maximum profit, we find the intersection point M.R. And MS(dot E). Perpendicular dropped from a point E on the x-axis, gives us the amount of output that needs to be produced to obtain maximum profit &. Continuation of this perpendicular upward gives the point of intersection L with the demand line del. The projection of this point onto the ordinate axis will make it possible to determine at what price it is possible to sell products in quantity (D. This projection of the point L gives the equilibrium price R e.
The total income of the monopolist firm ( TR) is determined by the product of the equilibrium price and the equilibrium sales volume R e(D, or area of the rectangle P e LQ t , 0. The income from the sale of a particular product hides the firm’s total costs and its profit. Total costs depend on the average cost per unit and quantity. Projection onto the ordinate axis of the point of intersection of the perpendicular OD with the average total costs (Fig. 7.17 point TO) gives the value ATS. Product of average total costs (p x) by the equilibrium volume of output for the monopolist firm (Q,) gives the total cost TS. If we subtract total costs from total revenue, we get the total profit TR G which is graphically measured by the area of the rectangle P (,LKp x .
The question arises: can a monopolist firm, which dictates the rules of conduct for other firms in the market and its own conditions for consumers, suffer losses? The analysis shows that under certain conditions (economic crisis, curtailment of production of traditionally used raw materials and other negative phenomena), even a monopolist can find itself in a difficult situation and suffer losses (Fig. 7.18).
Rice. 7.18.
If the average total costs of a monopoly in the short run are higher than the demand for manufactured products, the firm will begin to operate with negative profits. The company’s task in this case is to reduce them to a minimum. Having chosen the equilibrium situation at the point E()(whenL //? = = MS) and lifting the perpendicular, we get that p" > P 0, i.e. the cost of production is higher than the market price. The monopolist can optimize this situation by using the rule that was established under perfect competition, namely, producing products in volume 0(). Any shift in the quantity of products produced towards an increase or decrease will only increase the company's losses. The further exit from this state depends either on the price situation in the market, or on the ability of the monopoly to reduce costs.
It is known that the monopolistic position of a company in the market will give a number of advantages to the manufacturer, while infringing on the interests of the consumer. What is this and how can it be measured economically?
In Fig. 7.19 reflected ATS And MS, corresponding to the work of two firms: one is a monopolist, and the other, which operates in the market under conditions of perfect competition. For a monopoly, equilibrium is established at the point E ( with a production volume equal to (2 1? and market price R x. Then the profit received by this company will be equal to the area of the rectangle R (AKR ъ. For a competitive firm, the situation will be different: equilibrium will be established at the point E 2, where the production volume will be equal to () 2 * and equilibrium price R 2. The price of a competitive firm will be lower, and the volume of production will be greater than that of a monopolist.
Let us compare the rent of consumers of two firms: for a monopolist firm it will be expressed by the area of the triangle R (RA, and for a competitive firm - P 2 RE 2, and the area of the second triangle is greater than the first. This suggests that by purchasing a product from a perfectly competitive firm, the consumer benefits economically. This is expressed quantitatively by the area of the figure P 2 P^AE 2, which is the sum of the area of the rectangle R 2 RLt, and the area of the triangle tAE 2. Consequently, the reduction in the buyer's rent, in the case of purchasing goods from a monopolist, will be equal to the area of the figure R 2 RLE 2, in this case, the decrease in the producer's rent due to a decrease in production volume in order to maintain a higher price will be equal to E (AE 2> and part of the consumer’s income (area of the figure R 2 R (LE 2) will be redistributed in favor of the monopolist. Therefore, the state uses antitrust laws to protect consumer rights.
Rice. 7.19.
An open monopoly may be threatened by the emergence of new producers in its market. In this case, it must develop a strategy in the long term that would protect it from possible competitors. There are two possible models of behavior here. First, the monopolist can initially set a price so high that it can initially make a very good economic profit. But he must understand that this will attract competitors to this area of production. This will lead to the need to reduce prices and the loss of part of the economic profit, which he will have to come to terms with. In the future, he can use the previously obtained economic profit to develop a new product, and initially bring it to the market again at a high price.
Secondly, the monopolist can introduce a new product at a reasonable price. Then the profit received will be very moderate and less attractive for other companies. This policy is called limiting pricing. It makes it possible to remain the only manufacturer of this product for a long time. A monopolist can use mixed pricing technologies in order to “secure” a given market segment. For example, having initially offered its product at a high price, the company then “slides” down the demand curve, gradually reducing the price, which makes it difficult for competitors to enter this market. If new firms emerge with a similar product, the original monopoly turns into an oligopoly.
The behavior of a monopolist firm is determined not only by consumer demand and marginal revenue, but also by production costs.
A monopolist firm will increase its output to such a volume that marginal revenue (MR) equals marginal cost (MC):
A further increase in output per unit of output will result in additional costs exceeding additional income. If there is a decrease in output by one unit of output in comparison with a given level, then for the monopolist firm this will result in lost income, the extraction of which would probably be from the sale of another additional unit of the good.
A monopolist firm makes maximum profit when the volume of output is such that marginal revenue equals marginal cost and price equals the height of the demand curve for a given level of output (see figure).
Rice. 1. Monopoly price, output and economic profit in the short period
In Fig. Figure 1 shows the short-run average and marginal cost curves of a monopolist firm, as well as the demand for its product and the marginal revenue from the product. A monopoly firm extracts maximum profit by producing the volume of goods corresponding to the point where MR = MC. She then sets the price Pm that is necessary to induce buyers to buy the quantity of goods QM. Given the price and volume of production, the monopolist firm makes a profit per unit of production (Pm - ASM). Total economic profit is equal to (Pm - ASM) x QM.
If demand and marginal revenue from a good supplied by a monopolist firm decrease, then making a profit is impossible. If the price corresponding to the output at which MR = MC falls below average costs, the monopolist firm will suffer losses (Fig. 2).
Rice. 2. Monopoly price, output and short-run losses
When a monopoly firm covers all its costs but does not make a profit, it is at the self-sufficiency level.
In the long run, maximizing profits, the monopoly firm increases its operations until the volume of output corresponding to the equality of marginal revenue and long-run marginal costs (MR = LRMC) is produced. If at this price the monopolist firm makes a profit, then free entry into this market for other firms is excluded, since the emergence of new firms leads to an increase in supply, as a result of which prices drop to a level that provides only normal profits.
When a monopoly firm is profitable, it can expect to make maximum profits in both the short and long run.
A monopolist firm controls both output and price. By raising prices, it reduces production volumes.
In the long run, a monopolist firm maximizes profit by producing and selling a quantity of goods that corresponds to the equality of marginal revenue and marginal costs in the long run.
Monopoly– the exclusive right of production, trade and other activities belonging to one person, a certain group of persons or the state.
Pure monopoly- this is a type of market structure when a company is the only producer of any product that has no analogues.
Characteristics of a pure monopoly:
1) the concepts of “company” and “industry” coincide;
2) buyers have no choice;
3) a pure monopolist, controlling the entire volume of output of goods, is able to control the price and change it in any direction;
4) the demand curve for the monopolist’s products has a classic form and coincides with the market demand curve;
5) a pure monopoly is protected from competition by high entry barriers.
Barriers to entry into the industry- These are obstacles that stand in the way of new firms entering the industry. All barriers are divided into 2 types: natural that arise for economic reasons (economies of scale, control over key resources) and artificial, created by institutional means, for example, as a result of government actions (patents, licenses or dishonest actions of a monopolist).
Pure monopoly is an extreme form of market structure, the opposite of perfect competition.
Maximization arrived And
The output volume (Q m) that maximizes the monopolist's profit is determined by the rule: MR = MS. Then the price (P m) is set.
Graphically it looks like this: the set price (P m) is determined by the height of the demand curve at the release point Q m. This price is always higher than MC. Hence: MC = MR< P – условие равновесия чистого монополиста в SR.
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To determine monopoly profit, it is necessary to know the ratio of price (P m) and average costs (ATC).
If P m > ATS, the monopolist makes a profit (p = (P – ATS)×Q) and maximizes it;
If A.V.C.< Р < ATC – монополист несет убытки и, минимизируя их, продолжает производство;
If P = ATC, the monopolist fully covers economic costs and has zero economic profit.
In the long run, a monopoly firm will ensure equilibrium if it can keep the industry it controls from penetration by other firms. Using entry barriers, a pure monopoly is able to obtain economic profits in the long term.
A pure monopoly does not have a supply curve, because she sets the price herself in accordance with Q m. The monopolist's output decision (Q m) cannot be separated from the demand curve.
20. Price discrimination, regulation of monopolies. What is the “Socially Optimal Price” and “The Price that Ensures a Fair Profit”
In some situations, a pure monopoly can carry out price discrimination - set different prices for goods of the same quality and cost level for different buyers.
Conditions for price discrimination:
1) the impossibility for the consumer to resell the goods purchased from the monopoly;
2) the ability to divide all consumers of a given product into groups in accordance with their willingness to pay.
If a firm knows what the maximum price each buyer is willing to pay for a product, then perfect (or ideal) price discrimination occurs.
Consequences of price discrimination:
1) a larger volume of products is produced;
2) the seller’s profit increases due to consumer surplus;
3) the welfare of society increases, because the product becomes available to more consumers.
Graphical analysis of price discrimination. (provided that MC is const).
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In Fig. 8.1.1 shows that the monopolist’s profit is equal to the area of rectangle I; the shaded triangle is consumer surplus; the area of triangle II is the irrecoverable loss to society due to the monopoly price.
The transition to a policy of price discrimination (Fig. 8.1.2) means that MR = P, and the MR schedule merges with the demand schedule. All consumer surplus goes to the seller, increasing his profit (area of triangle I in Fig. 8.1.2). Irreversible social losses also disappear due to the expansion of the sales market (Q ` m > Q m).
Price discrimination can be systematic or temporary. However, in any case, the monopolist takes into account the elasticity of demand for its product. The objects of price discrimination are mainly low-elastic goods.
Ways to reduce monopoly power:
1) Antimonopoly legislation. Directed against the accumulation by firms of monopoly power that is dangerous to society;
2) Economic regulation of natural monopolies (direct or indirect).
Model of regulated natural monopoly.
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An unregulated monopolist would choose a production volume Q m and set a price P m . Here he would have an economic profit equal to the shaded rectangle.
Under perfect competition, P = MC; such a price (P 2) is optimal from the point of view of society, because ensures the most efficient allocation of resources. If the government sets this price for the monopolist's product, the firm will incur losses. Regulatory agencies may allow a firm fair profit, setting the price P 1 at the level of average costs. Although such a price leads to a reduction in Q compared to the optimal case (Q 1< Q 2), потребители получают все же больше в сравнении со случаем нерегулируемо естественной монополии (Q 1 >Qm).
3) Formation of state property, i.e. Instead of regulating a privately owned natural monopoly, the government becomes the owner of the monopoly. However, as practice has shown, the desire for profit is a more reliable guarantee of professional management of a company than the voting booth
21. Monopolistic competition. Determination of price and volume.
Monopolistic competition- a market structure when several dozen firms in an industry producing a differentiated product compete with each other, while none of them has full power to control the market price.
Monopolistic competition is similar to the situation of “pure monopoly” and at the same time to “perfect competition”.
Demand curve Firms in conditions of monopolistic competition are downward, elastic.
Factors of demand elasticity– number of competitors; degree of product differentiation.
Differentiate the product- this means distinguishing it from other similar goods on some basis: quality, advertising, trademark, terms of sale, packaging, etc.
The additional costs associated with product differentiation can become a barrier to entry for new firms in the industry.
In the short run, each firm in a monopolistic competition market is much like a pure monopoly. It first chooses a quantity of output based on MC = MR, and then uses the demand curve to set the price corresponding to that quantity (P*).
Whether the firm will make a profit or incur a loss depends on the relationship between price and ATC. However, under monopolistic competition, economic profits and losses cannot last long.
In the long run, profits attract competitors into the industry, while losses encourage exit. The process of migration of firms continues until economic profit reaches zero. This situation is similar to perfect competition: no profit, no loss.
Graphically, the long-term equilibrium looks like this:
Point A is the long-term equilibrium point, where p = 0 (p is profit).
Curve "D" is tangent to LAC. Firms earn only normal profits.
Related information.
To maximize profits, a monopolist must first determine both the characteristics of market demand and its costs. Assessing demand and costs is crucial in a firm's economic decision-making process. Having such information, the monopolist must make a decision on production and sales volumes. The unit price received by the monopolist is set depending on the market demand curve (this means that the monopolist can set the price and determine the volume of production according to the nature of the market demand curve).
Demand for a monopolist's product.
If the demand curve for the products of a competitive firm is horizontal (each additional unit of production adds a constant value equal to its price to the firm’s gross income), then the demand curve for the monopolist’s products is different. The demand curve for the output of a monopoly firm coincides with the downward sloping curve of market demand for the product sold by the monopoly (Fig. 1). This allows us to draw three important conclusions.
Rice. 1.
- 1. A pure monopoly can increase its sales only by reducing its price, which directly follows from the downward sloping shape of the curve. This is the reason that the firm's marginal revenue MR (marginal revenue) becomes less than the price P (price) for each output except the first. If the monopolist lowers the price, then this applies to all units of output, which means that marginal revenue - the income from one additional unit of output - will be less.
- 2. A monopolist can set either the price of his product or the quantity offered for sale for any given period of time. And once he has chosen a price, the required quantity of goods will be determined by the demand curve. Similarly, if a monopolist firm chooses as a set parameter the quantity of a good it supplies to the market, then the price that consumers will pay for this quantity of the good will determine the demand for that good.
- 3. Demand will be price elastic (price elasticity of demand is the degree of change in the quantity of demand with a change in the price of a product), if when the price decreases, the quantity of demand increases, and therefore the gross income TR (total revenue). Consequently, a profit-maximizing monopolist will seek to produce the quantity and price that corresponds to the elastic portion of the demand curve D.
A monopolist seeking to maximize profits in the short run will follow the same logic as the owner of a competitive firm. He will produce each subsequent unit of output as long as its sale provides a greater increase in gross income than an increase in gross costs. That is, a monopolist firm will increase production to a volume at which marginal revenue equals marginal costs (MR = MC).
Graphically it looks like this (Fig. 2):
Rice. 2.
Q m is the quantity of products that the monopolist will produce; Р m - monopoly price.
It also shows the marginal revenue curve MR and the average total and marginal cost curves - ATC and MC. Marginal revenue and marginal costs coincide when output volume Q m. Using the demand curve, we can determine the price P m, which corresponds to a given quantity of production Q m.
How can we check that Q m is the profit-maximizing output? Suppose a monopolist produces a smaller quantity of product - Q" and, accordingly, receives a higher price P". As Fig. 2 shows, in this case, the marginal income of the monopolist exceeds the marginal costs, and if he produced more products than Q, he would receive additional profit (MR - MC), i.e., he would increase his total profit. In fact, the monopolist can increase the volume of production, increasing its total profit up to the volume of production Q m, at which the additional profit received from producing one more unit of output is equal to zero. Therefore, a smaller quantity of output Q" does not maximize profit, although it allows the monopolist to establish more. high price. With production volume Q" instead of Q m, the total profit of the monopolist will be less by an amount equal to the shaded area between the MR curve and the MC curve, between Q" and Q m.
In Fig. 2, a larger production volume Q” is also not profit maximizing. For a given volume, marginal cost exceeds marginal revenue, and if the monopolist were to produce less quantity than Q”, he would increase total profit (by MC - MR). The monopolist could increase profits even further by reducing output to Q m . The increase in profit due to a decrease in production volume Q m instead of Q” is given by the area below the MC curve and above the MR curve, between Q m and Q”. We can also show algebraically that output Q m maximizes profit. Profit is equal to the difference between income and costs, which are a function of Q.
In Fig. 2, the total profit received by the monopolist will be equal to the area of the quadrilateral AR m BC. The segment AP m reflects the profit per unit of production. Total profit can be obtained by multiplying profit per unit of output by the profit-maximizing volume of production.
Since a monopoly firm is an industry, the equilibrium in the short run will be the equilibrium in the long run. The firm will maximize profits as long as it remains a monopolist, i.e. will be able to put up reliable barriers to the entry of other firms into this industry.
This approach to the study of monopoly destroys some of the unfair accusations against it.
Firstly, the monopolist does not at all seek to “break” its monopoly price. It, as in the case of free competition, is established under the condition MR = MC. And if the monopolist sets a price above P m, then, as already mentioned, this will entail a decrease in the quantity of production below Q m, as well as profit. This is disadvantageous for the monopolist.
Secondly, the monopolist is always concerned with maximizing total profit, not profit per unit of output. And for this reason, he would rather sell more and cheaper for the sake of a larger total profit than less and more expensively for the sake of a smaller total profit.
Third, a pure monopoly does not always make a profit. She can also suffer losses (Fig. 3).
Rice. 3.
When costs are so high that demand does not cover them, the monopolist suffers losses, the size of which is determined by the area P m ABC. But the company will continue to operate until its losses exceed its fixed costs. In Fig. 3 with Q = Q m P m > AVC, therefore, the monopolist will continue to work, since its total loss is less than its average fixed costs AFC (AFC = ATC - AVC).
But what is “bad” about a monopoly?
If we talk about pure competition, we can note its efficiency, both production and in the field of resource distribution. This cannot be said about a pure monopoly. The monopolist will find it profitable to sell a smaller volume of products (Q m) and charge a higher price (P m) than a competing producer would do (Q c and P c) (Fig. 4). monopoly market barrier profit
Rice. 4.
If the monopolist's profit-maximizing price is higher than the competitive price, this means that society values the monopolist's products more highly. If the profit-maximizing volume of production of the monopolist is less than the competitive volume, this means that the monopolist is not producing an insufficient amount of product.
Consequently, the distribution of resources turns out to be irrational from the point of view of society. There is an underdistribution of resources - the monopolist considers it profitable to limit output, and therefore use fewer resources than is justified from the point of view of society.
There is another way to explain the fact of a decrease in the welfare of society as a result of the functioning of monopolies. It is known that in a competitive market the price is equal to the marginal cost, and in a monopoly power the price exceeds the marginal cost. The conclusion follows: since a monopoly leads to higher prices and a decrease in production volumes, there is a deterioration in the welfare of consumers and an improvement in the welfare of firms. But how does this change the well-being of society as a whole? Because of the higher price, consumers lose a portion of the surplus equal to the area of the trapezoid (A + B). The producer, however, makes a profit equal to the area of rectangle A, but loses part of his surplus, indicated by triangle C. Therefore, the net profit of the producer is (A - C). Subtracting the loss of consumer surplus from the producer's profit, we get: (A + B) - (A - C) = B + C. These are the net losses of society from monopoly power, or the dead weight of a monopoly - a decrease in welfare corresponding to a decrease in the value of consumer surplus and producer surplus by compared to the equilibrium situation in a free market. Its value corresponds to the area of the triangle (B + + C). The first who, in the mid-50s, tried to determine the dead weight of a monopoly was A. Harberger, therefore the triangles corresponding to the costs to society from the existence of a monopoly were called Harberger triangles.
The next question is: is it true that monopolists strive for technological improvements and, with their help, reduce production costs? If so, are they doing it better than competing manufacturers?
Competitive firms, of course, have a strong incentive to innovate. But we already know that free competition deprives firms of economic profits. And innovations are very quickly copied by other competing companies.
A monopolist, thanks to the existence of barriers to entry into the industry, can receive economic profit. This means that it will have more financial resources for scientific and technological progress. But does he have the desire for this?
On the one hand, the lack of competitors will not push the monopolist to innovate. On the other hand, research work and technical innovations can become one of the barriers to entry into the industry. And it cannot be denied that scientific and technological progress is a means of lowering production costs, and therefore increasing profits.
It turns out that it is difficult to draw a conclusion about the effectiveness of a monopoly. But there is a conclusion. And he is like this:
- 1. If the economy is static, if economies of scale are equally available to all firms (both purely competitive and monopolistic), then pure competition is more effective than pure monopoly, since it stimulates the use of the best known technology and distributes resources in accordance with the needs of society.
- 2. If the economy is dynamic, if the effect of scale is available only to the monopolist, then a pure monopoly is more efficient.
- 3. Test.
- 1. Price discrimination is...
When studying the demand for the monopolist's products and pricing, it was assumed that the monopolist sets a single price for all buyers. But a monopolist, under certain conditions, can take advantage of the peculiarities of its market position (he is the only seller) and increase his profits by charging different prices for the same product to different buyers. This behavior of a monopolist is called price discrimination.
Price discrimination is selling at more than one price when the price differences are not justified by differences in costs. This is the most consumer-unfavorable form of imperfect competition.
Price discrimination is possible under certain conditions:
the seller has monopoly power, allowing him to control production and prices;
the market can be segmented, i.e. buyers can be divided into groups, the demand of each of which will differ in degree of elasticity;
a consumer who purchases a product cheaper cannot sell it at a higher price.
Price discrimination has three forms.
According to the buyer's income. A physician may accept a reduced fee from a low-income patient with fewer resources and less health insurance, but charge a larger bill to a high-income client with high-cost insurance.
By volume of consumption. An example of this type of price discrimination is the pricing practices of electricity supply companies. The first hundred kilowatt-hours is the most expensive, as it provides the most important needs for the consumer (refrigerator, minimal necessary lighting), the next hundreds of kilowatt-hours become cheaper.
By the quality of goods and services. By dividing passengers into tourists and businessmen going on business trips, airlines diversify ticket prices: a tourist class ticket is cheaper than a business class ticket.
By time of purchase. International and long-distance telephone calls are more expensive during the daytime and cheaper at night.
In all cases, firms engaged in price discrimination not only receive the usual monopoly profits, but also appropriate part of the consumer surplus.
Correct answer: A. selling the same products at different prices to different buyers with the same production costs.
2. The type of market in which there is only one seller enterprise is ...
Correct answer: B. monopoly.
A. Monopsony is a market in which there is only one buyer of a product, service or resource, including the employer of labor.
B. Oligopoly is a market structure in which very few sellers dominate the sale of a product, and the entry of new sellers is difficult or impossible.
D. Monopolistic competition is a type of industry market in which there is a fairly large number of firms selling differentiated products and exercising price control over the selling price of the goods they produce.
D. Perfect competition is an idealized state of the product market, characterized by: the presence in the market of a large number of independent entrepreneurs (sellers and buyers); the ability for them to freely enter and leave the market; equal access to information and a homogeneous product.
A firm has monopoly power when it has the ability to influence the price of its product by changing the quantity it is willing to sell. The extent to which a monopolist can exercise its monopoly power depends on the availability of close substitutes for its product and its share of the given market. Naturally, a firm does not need to be a pure monopoly to have monopoly power. Moreover, it is necessary that the demand curve for the company's products be sloping downward, and not be horizontal, as for a competitive company, since otherwise the monopolist will not have the opportunity to change the price by changing the quantity of goods offered. In the extreme, limiting case, the demand curve for a product sold by a pure monopoly is a downward sloping curve of market demand for this product. The significant difference between a monopolistic market and a competitive market is that the monopolist is able to influence the price received for the product, while a competitive seller does not have this opportunity. A firm with monopoly power is a firm that at its own discretion sets the price for its product, and does not take it for granted, i.e., unlike again from a competitive seller, it is not a price taker, it is a price setter.
Pure monopoly, like perfect competition, are extreme forms of market organization (market structure). Real market structures fall between these two extremes.
In a pure monopoly, we are faced with a single seller of a product that has no close substitutes.
The monopolist is a price taker - the volume of its sales affects the price at which this volume can be sold.
Consider the problem of maximizing profit for a monopolist. The more quantity of goods a monopolist wants to sell, the lower the price per unit of goods should be. Because of the law of demand, marginal revenue—the increase in revenue when sales increase by one unit—decreases as sales increase. To ensure that the monopolist's total revenue does not decrease, the price reduction (that is, the monopolist's loss on each additional unit of goods sold) must be compensated by a large percentage increase in sales volume. Consequently, it is advisable for a monopolist to conduct its operations in the elastic part of demand.
As output increases, the monopolist's marginal costs increase (or at least remain constant). The firm will expand output as long as the additional revenue from selling an additional unit of output exceeds, or at least is not less than, the additional cost associated with its production, since when the cost of producing an additional unit of output exceeds the additional revenue, the monopolist suffers a loss.
Let's formalize what has been said. Let I be the profit of the monopolist (I = TR-TC, where TR is the total revenue of the monopolist, TC is its total costs). Both revenue and costs depend on the quantity of products produced and sold. Therefore, profit is a function of quantity I = f(Q). Conditions for maximizing profit:
The first condition: MR = MC, where MR is marginal revenue, MR = ΔTR/ΔQ and MC is marginal cost, MC = ΔTC/ΔQ.
Second condition: ΔMR/ΔQ = ΔMC/ΔQ.
Rice. 1.2.1 Profit maximization
Profit is maximum if, with marginal revenue equal to marginal costs, marginal revenue decreases with increasing output to a greater extent than marginal costs. In conditions of profit maximization by a monopolist, marginal costs, in contrast to the perfect competition market model, can decrease. A monopolist can, while maximizing profits, refuse to increase output, even if the marginal and average costs of production decrease. This, as is known, serves as one of the arguments in favor of the thesis about the production inefficiency of a monopoly.
Let's find the price that the profit-maximizing monopolist will set. To do this, we show the dependence of marginal revenue on price:
MR = Q*(ΔP/ΔQ) + P (1.2.1)
By multiplying the first term by P/P and Q/Q, since ΔQ/ ΔP * P/Q = Ed, where Ed is the price elasticity of demand, the resulting expression can be rewritten as: MR = P (1+1/ Ed)
From the condition of maximum profit it follows that the price of the monopolist and the marginal costs of production are related by the relationship:
P = MC/(1+1/ Ed); (1.2.2)
Since Ed< -1 (спрос эластичен), цена монополиста всегда будет больше его предельных издержек. Процентное превышение цены над предельными издержками, как мы знаем, отражает уровень монопольной власти.
Does this mean that a monopolist cannot incur losses? Whether the monopolist will make a profit or incur losses depends on the ratio of the maximum willingness of buyers to pay and the average cost of production at the optimal output volume (when the condition MR = MC is satisfied). If the firm’s average production costs Qm are higher than the demand price, then, despite the fact that the monopolist produces the optimal volume of products and sets a price above marginal costs, its profit is negative (Fig. 1.2.2)