4. Market Power and Monopoly Behaviours Flashcards
4 Types of Market Structures
- Perfect Competition
- Pure Monopoly
- Monopolistic Competition
- Oligopoly
- Focusing on: firms, types of products sold, barriers to entry+exit = they wield influence of market power
Perfect Competition
- Lots of buyers and sellers
- Product homogeneity
- Free exits and entry
- Perfect information
- Profit-Maximisation =MR=MC=P
- Firms are price takers
- Long-run equilibrium = 0 economic profit
- Supply determined by firms’ marginal and average cost. + market price
Profit Maximisation of Pure Monopolists
Profits max. where slope of TR = slope of TC
- Slope of TR = MR = ∆TR/ ∆Q
- Slope of TC = MC = ∆TC/ ∆Q
Output in Monopolies
Increase in outputs in monopolies = loss in revenue from sales as price decreases
- Demand curve downwards sloping
- MR < P
Monopoly Barriers
High barriers to enter = firms enjoy sustained ^ profits
Profit Max. Monopoly
MR must cut MC from above
- Graph!
Short-Run effect of Profit Max. Monopoly
Shutdown Condition
- Cease Production if AR is below AVC at every output level
- Fixed costs are irrelevant
Long Run effects of Profit Max. Monopoly
Caused by MC = MR
- Long-run profits depend on AR, ATC and level of output
- Potential to sustain + economic profits cus of barriers to entry
Monopoly Inefficiency
- Pm > MC = inefficient
- Efficiency cost seen by the DWL
- CS under mon. + PS under mon. + DWL under mon. = tot. surplus under Perf. Comp.
Supply in Monopolists
Output decision depends on MC and DC –> No specific correspondence btw price and MR when DC shifts
- Supply rule no supply curve
- no 1-1 relation. in Q + P supplied when equilibrium
Monopoly Causes
When Minimum Efficient Scale (MES) reaches Qd by the market
- causes technology that determines MES to then determine whether market is monopolistic or competitive
Perfect Comp. Short-Run Profit Maximisation
Market demand curve = downwards sloping but demand curve facing the individual firm is perfectly elastic –> AR=P=MR as firms are price takers
- shutdown condition = price falls below minimum AVC.
- short-run supply curve is then rising portion of the short-run MCC that lies ABOVE the minimum value of the ACC.
Short-Run Supply Curves (PC)
Is the sum of the individual firm supply curves (same as demand)
If multiple firms have identical supply functions, market supply is just both variables x together.
Plot inverse supply curve to plot new supply curve.
Short-Run Breakeven Point (PC)
Point price = the minimum of the ATC = lowest point the firm wont suffer negative profits in short-run.
Adjustments in the long-run (PC)
+ economic profit = incentive for outsiders to enter the industry = supply curve shifts right
Keeps happening until:
- Price reaches min. point of LAC curve
- All firms move to the capital stock size which rises short-run average TCC that is tangent to LAC at minimum point
Marginal Revenue and Elasticity of Demand (PC)
^ in TR = ^ in revenue due to additional sales if sold at original price.
decrease in TR = loss of revenue as lower price for every unit of sales
Perfect First Degree Price Discrimination
Charging dif. prices for each consumer and for each unit sold.
- firms can capture entire consumer surplus and efficiency cost is eliminated.
Second Degree Price Discrimination
Charging dif. prices for dif. quantities of the same good.
- consumers are therefore better off by expanding output at lower costs - firm still increases profits.
- Hurdle Model: setting hurdles that make discount price available to buyers who chose to ‘jump’ over it.
Third Degree Price Discrimination
Separating consumers into 2+ groups with separate demand curves and charging each group differently
- Optimal pricing so that MR for each group is the same and = to MC
Monopolies in 2 Markets
Charge higher in market where demand is less elastic with respect to price. –> more a mono. participates = smaller efficiency loss will be
- price discrimination allows product availability to consumers who wouldnt have purchased otherwise = consumer surplus
Monopolistic Competition
- Market has commodities traded that are very close but not perfect substitutes
- product differentiation is tried to be implemented = individual supplier has some sort of monopoly power
- Few Barriers to entry and exit
- Equilibrium price is above MC
- Output is left of min. point of AC curve = ATC not minimised = excess capacity
