Transcript IMPERFECT COMPETITION

IMPERFECT COMPETITION
MONOPOLY
GENERAL DESCRIPTION
 firm produces differentiated products firm can set its
price by itself,
 the imperfect competitor demand curve slopes
downward – in order to be able to sell the additional
unit of production, firm is forced to down the price.
Varieties of Imperfect Competition
 organizational characteristics of an industry, of which
the most important are:
- number and size of the sellers,
- extent of concentration and collusion among the
firms,
- degree of homogeneity or heterogeneity of their
products
Sources of Market Imperfections
COST CONDITION

the existence of
economies of scale of
declining average
costs represents the
main reasons lying
behind imperfect
competition
BARRIERS TO
COMPETITION
 Legal restrictions:



Patents
Entry or exit
restrictions (f. e.
tariffs or quotas on
foreign producers)
Product Differentiation
Another factors leading to imperfections of
market
 insufficient information of market participants,
 the ownership of an important factor of production by
one firm only,
 the state interventions into market mechanism (f. e.
price regulation of some products)
 political events (f. e. foundation of international trust
of oil exporters in sixtieth OPEC).
MEASURING MARKET POWER


Concentration Ratio – the percent of total industry output that
is accounted for by the few largest firm
- (doesn’t reflect the difference if the 100 % is divided between
four firms equally or if the most part represents only one firm)
The Herfindahl Index - reflect the effect of the size
differences equals to the sum of the squared market shares
in percentage terms:
H = Σ Si2 = S12 + S22 + ...
- when the industry is a pure monopoly, the H = 10 000, while if
an industry is perfectly competitive, H = 0.
ANALYSIS OF MONOPOLY
 a single seller with complete control over an industry
 demand sloping downward P >MR
 the maximum-profit price and quantity of a monopolist
comes where its marginal revenue equals its marginal
cost:
MR = MC
Graphical Analysis of Monopoly
C, P, R
AC
MC
AVC
AFC
MR
RZ
AR
Q
C, P, R
Q RZ
Q0
VC
TC
TR
FC
RZ
Q
Q0
Q RZ
TZ
THE COST AND CONTROL OF MONOPOLY
 monopoly doesn’t produce output up to the
point where the social cost (measured by
MC) is equal to the value of the good to
consumers (measured by P = MU) because
to do so would require lowering P to all
consumers, which would lose the monopolist
some profit
Social cost of Monopoly
P
Consumer surplus
deadweight welfare
loss
MC = AC
AR = d
QM
Q
INTERVENTION STRATEGIES

Taxes – by taxing monopolies, a government can reduce
monopoly profits, thereby softening some of the socially
unacceptable effects of monopoly

Price controls – represents centralized way of setting the price

Government ownership – usage of this kind of regulation
depends on wider contexts (political system, culture, history,
tradition ..)

Antitrust policy – laws that prohibit certain kinds of behaviour
(such as firms joining together to fix prices) or curb certain
market structures (such as pure monopolies)

Economic regulation – allows specialized regulatory agencies
to oversee the prices, outputs, entry and exit of firms in
regulated industries
Tasks:
1. Calculate the optimal output of monopoly and the amount of the monopoly
profit knowing:
Q
1
2
3
4
5
6
7
8
P
67
59
51
43
35
27
19
11
TC
29
54
89
143
215
305
412
537
2. Explain the mistakes in thinking:
a) Monopoly can set the price as high as it wishes,
b)The price control of monopoly leads always to decline in the profit of
monopoly.
3. Calculate the Herfindahl index for the market structure, where the market is
equally fragmented amongst four companies.