Monopolies Flashcards
What is a monopoly
A single supplier that serves the market
Why do monopolies arise?
Due to cost advantages of a single firm or due to government intervention
What are the cost advantages a monopoly can grow from?
- Superior technology or organisation (Henry ford and assembly lines)
- Exclusive control over an important production input (de beers and diamonds)
- Natural monopoly - average cost curve always downward sloping
Causes of monopolies?
- Government intervention: a government monopoly where a government corporation is the sole provider of a particular good or service and competition is prohibited by law
e.g., postal systems, railroads etc - Patents: temporary monopoly granted to encourage innovation
e.g., pharmaceuticals, xerox
When does a monopoly shut down?
If revenue < variable cost
Output decision of monopolies?
Profits maximised when MR = MC
MR ≠ p for a monopolist (as in perfect competition)
Monopolists sell ___\
The entire market quantity (Q)
Profit maximising behaviour of monopoly is determined by the…
Market demand curve.
- As it is the only supplier, it doesn’t have to consider competitor’s reactions when it changes P or Q
BUT it is constrained by demand
How is a monopoly’s profit maximising behaviour constrained by demand?
Monopolist has to choose a point on the demand curve which maximises profits.
It can either set the price p (resulting in quantity Q) or set quantity q resulting in price p.
Both approaches yield same result.
Marginal revenue formula?
MR = dR(Q)/dQ
MR = dp(Q)/dQ * Q + p(Q)
dp/dQ * Q -> loss on existing sales
p(Q) -> revenue from new sales
For a perfectly competitive firm.. MR equals..?
MR = p
As dp/dQ < 0, we have MR___
MR < p
We can also write marginal revenue as a function of the PED
MR = p(Q)(1 + 1/PED)
A monopolist will NEVER operate on the inelastic part of a demand curve
If demand is inelastic -1 < PED < 0
MR is negative because
MR = p(Q)(1+1/PED)
MC are NEVER NEGATIVE why?
Otherwise total cost would go DOWN when more output is produced.
On the inelastic part of a demand curve what is the relationship between MR and MC
MR < MC
The monopolist could increase profits by producing less
Q down, R up, C down so profits up
So it isn’t true that monopolists produce goods with inelastic demand
Compared to perfectly competitive outcome..?
Monopoly has lower output and higher price
Monopoly has lower welfare
To maximise welfare, monopoly can produce where…?
P = MC
How to prevent or regulate monopolies?
- Deregulation - Deregulation reduces monopolies by removing government restrictions, allowing more companies to enter a market and compete, which helps prevent a single dominant player.
- Trade liberalisation
- Competition policy - CMA investigate anti-competitive practices and, if necessary, take actions to promote a competitive marketplace. UK 🇬🇧
- Structural remedies
- Conduct remedies
What is a structural remedy?
Trying to alter industry structure to make it more competitive.
- Block mergers to prevent creation of market power
- Force companies to restructure their business in a way that fosters competition
- Break up companies (RARE)
Why are structural remedies not always feasible?
- Remedies and breakup of companies are highly complex & costly to implement
- Sometimes not also desirable eg with natural monopolies
What are conduct remedies?
Gov, intervention to restrict a monopolists behaviour without changing the underlying market structure
- Prevent firms from fixing prices and forming cartels
- For natural monopolies, directly intervene in the price setting process of the firm
Most common way of regulating monopolies?
- Set a price ceiling at the competitive price
(= MC)
Why do monopolies lead to welfare losses?
Because output is lower in a monopoly than in perfect competition
Price regulation can eliminate welfare losses but ?
It’s difficult to implement
