Pure Monopoly Report 2024 PDF

JAGANNATH UNIVERSITY Department of Marketing Course Name : Microeconomics Course code : Mkt-1204 Assignment On : Pure Monopoly Submitted To Professor Dr. Imranul H...

JAGANNATH UNIVERSITY Department of Marketing Course Name : Microeconomics Course code : Mkt-1204 Assignment On : Pure Monopoly Submitted To Professor Dr. Imranul Hoque Department of Marketing Jagannath University Submitted By Team Synergy 17th Batch, Session : 2022-2023 Department of Marketing Submission Date: 26th May 2024 Member of  Team Synergy Sl Name ID 1 Hasibul Ahmed B220204016 2 Fatema Akter B220204019 3 Syema Sultana B220204021 4 Md Afzal Hossain B220204047 Nayeem (GL) 5 Mariam Binta B220204051 Mustafa 6 Md Saiful Islam B220204067 7 Iffat Kamal B220204080 8 Israt Anwar Nahin B220204086 9 Samia Rahman B220204104 An Introduction to Pure Monopoly A pure monopoly is a market structure where a certain product is produced or sold by a single company. A pure monopoly occurs when no competitors or substitute products exist in the market. The pure monopoly definition stems from the idea that the producing company controls the market and is essentially the industry in this particular situation. The difference between a monopoly and a pure monopoly is that a monopoly may exist in an industry with multiple suppliers of a product, whereas for a pure monopoly, the producer or supplier of a product can only be one. Pure monopolies are very rare in real life. For their existence, there are specific characteristics that have to be met. Characteristics of Pure Monopoly : 1. One seller and several buyers The monopolist’s company is the sole business in its industry. However, many purchasers rely upon and buy from the pure monopolist. 2. No Close Substitutes No close substitutes exist for the product sold by the pure monopolist. Therefore, the cross-elasticity of demand between the product and that of pure monopoly competition has is minimal or nil. 3. Difficulty of New Firms’ Entry There are either natural or artificial barriers to entry into the business, even if a company produces excessive profits. 4. Monopolies are themselves an Industry As in a monopoly, there is only one company within an industry. The distinction between business and industry comes to an end. 5. Price Setter In a monopoly, the monopolist controls the commodity’s supply. However, because of the vast number of purchasers, the desire of every individual buyer represents a small portion of the entire demand. Consequently, customers must pay the price set by the monopolist. Barriers to Entry The factors that prohibit firms from entering an industry are called barriers to entry. In pure monopoly, strong barriers to entry effectively block all potential competition.  Economies of Scale Economies of scale constitute one major barrier. This occurs where the lowest unit costs and, therefore, lowest unit prices for consumers depend on the existence of a small number of large firms or, in the case of a pure monopoly, only one firm. The below chart indicates economies of scale over a wide range of output. In industries with significant economies of scale, the monopolist benefits from an entry barrier. New entrants, starting as small-scale producers, cannot compete on cost and would be driven out by the monopolist's lower prices. Entering the market as a large-scale producer is risky due to high startup costs and customer loyalty to existing products. Economies of scale:the natural monopoly case.A declining long run average total cost curve over o wide range of output quantities indicates extensive economies of scale. Legal Barriers to Entry Government also creates legal barriers to entry by awarding patents and licenses ▪ Patents : A patents is a executive rights of an investor to use or to allow another to use her or his invention. Monopoly power achieved through patents may well be self sustaining, even though patents eventually expire and generic drugs then complete with the original brand.example,IBM,Pfizer,Intel,Xerox etc ▪ Licenses: Government may also limit entry into an industry or occupation through licensing. In a few instances the government might “licence” itself to provide some product and threreby create a public monopoly. some states only govt owned retail outlet can sell alcohol. Ownership or Control of Essential Resources  Under a pure monopoly, ownership of essential resources is the most significant barrier to entry. To establish a monopoly, there must be a unique product that only a monopolist can supply and for which there are no close substitutes. A monopolist can use private property as an obstacle to potential rivals. For example, a firm that owns or controls a resource essential to the production process can prohibit the entry of rival firms. example. new sport club. Pricing and Other Strategic Barriers to Entry theHowever, text explains for how a monopoly, a monopolist the market can block price market entry is strategic through not setactions, by theeven intersection without naturalof thebarriers entry demand like and economies of scale or resource ownership. The firm may lower prices, increase advertising, or take other steps to make entry supply difficult curves, for the monopolist decides what the supply will be — the monopolist sets the for rivals. price atof which Examples its profits Entry Deterrence: are maximized, which will then determine what the supply will be. Even (2005): Dentsply if a farm is not U.S. The dominant protected maker offrom entry false teeth bymarket (80% say share) extensive economies was found from selling competing brands, deterring foreign competitors from entering the market. of scale to have unlawfully or ownership prevented distributors of essential resources entry may effectively be block by the way the monopolist response to American Express (2015): American Express was found guilty of restricting competition by prohibiting merchants from promoting attempt rival by(like credit cards rivals Visa to enter the industry. or MasterCard) to their customers. Monopoly Demand The pure monopolist in the market - As the only supplier of a specific good or service, the pure monopolist in the market has total control over supply and prices. They can set prices higher than they would in a competitive market since they have no competition and can therefore maximize earnings. This dominance can lead to higher prices, reduced consumer choice, and potentially lower levels of innovation compared to competitive markets. Marginal revenue is less than price With a fixed down slopping demand curve the pure monopolist can increase sales only by charging a lower price. The monopolist must reduce price to increase sales, unlike a competitive firm. Marginal revenue (MR) is always less than the price for a monopolist because price cuts apply to all units sold. The monopolist’s price-setting behavior means its demand curve is the same as the market demand curve. price and marginal revenue in pure monopoly. A pure monopolist or any other competitor with a down sloping demand curve such as D much set a lower price in order to sell more output. Here by charging $132 rather than $142 the monopolist cells and extra unit and gain $132 from the cell. But from these gain must be subtracted $30 which reflects the $10 less the monopolist charged for each of the first 3 unit. Thus the marginal revenue of the fourth unit is $102=($132 - $530) considerably less than its $132 price. The monopolist is a price maker means downsloping Monopolistic demand curve is the market demand curve - The monopolistic demand curve represents the total demand for a product or service in a market where there is only one supplier, or monopolist. In this scenario, the demand curve faced by the monopolist is essentially the same as the market demand curve because there are no other firms offering similar products to consumers. As a result, the monopolist's demand curve reflects the aggregate preferences and purchasing behavior of all consumers in the market. This allows the monopolist to have significant control over pricing and quantity supplied based on the level of demand for the Down sloping The Monopolist Sets Price in the Elastic Reason of Demand Demand curve is down-sloping - The down sloping demand curve illustrates the inverse relationship between price and quantity demanded for a good or service. As the price decreases, consumers are typically willing to buy more of the product, and as the price increases, they buy less. This fundamental concept, known as the law of demand, helps analyze consumer behavior and market dynamics. Output and Price Determination Here are some significant point about output and price determination : 1.Cost Data: Cost data refers to the expenses a firm incurs in producing and selling a good or service. It's crucial for determining the minimum price a firm needs to charge to avoid losses. There are two main categories of costs: Fixed Costs: These costs remain constant regardless of the production level. Examples include rent, salaries of administrative staff, etc. Variable Costs: These costs vary directly with the output level. Examples include raw materials, labor costs for production workers, etc. By analyzing cost data, firms can calculate: Total Cost (TC): The sum of all fixed and variable costs at a particular output level. Average Total Cost (ATC): Total cost divided by the number of units produced. Average Variable Cost (AVC): Variable cost divided by the number of units produced. Marginal Cost (MC): The additional cost incurred by producing one more unit of output. 2.MR = MC Rule: The MR = MC rule is a central concept in economics, especially for firms operating in perfectly competitive markets. It states that a profit-maximizing firm will produce the level of output where the marginal revenue (MR) from selling an additional unit equals the marginal cost (MC) of producing that unit.  Marginal Revenue (MR): The additional revenue earned by selling one more unit of output. Profit maximization by a pure monopolist. The pure monopolist maximizes profit by producing at the MR = MC output here Qm = 5 units. Then as seen from the demand curve it will charge price Pm = $122. Average total cost will be A= $94 meaning that per unit profit is Pm - A and total profit is 5× (Pm- A). Total economic profit is thus represented by the green rectangle. Why is MR = MC Important? At the point where MR = MC, the firm is earning the maximum profit per unit sold. Producing more units would result in MR falling below MC, leading to diminishing returns. Conversely, producing less would mean leaving potential profit on the table. How Cost Data and MR = MC Rule Work Together: Firms use cost data to estimate their MC curve. They then analyze the market to determine the demand for their product and derive the MR curve. By finding the point where the MR curve intersects the MC curve, they identify the optimal output level and the corresponding price that will maximize their profit. A monopoly doesn't have a supply curve because, unlike competitive firms, it controls both price and output. In a competitive market, firms are price takers and supply a specific 3.No quantity Monopoly at each Supply price, creating Curve a clear supply curve. However, a monopolist is a price maker and chooses its output where marginal revenue equals marginal cost (MR = MC), then sets the price based on the demand curve. A no-monopoly supply curve, also known as a competitive market supply curve, represents Sincethe therelationship monopolistbetween can charge different the quantity of aprices forservice good or the same quantity depending that producers on able are willing and demand conditions, there’s no fixed relationship between price and quantity. This makes it to offer at various prices in a perfectly competitive market. impossible for a monopolist to have a traditional supply curve. 1. Upward sloping: The supply curve slopes upward from left to right, indicating that producers are willing to supply more units of a good as the price increases. This is based on the law of supply, which states that all else being equal, as the price of a good rises, the quantity supplied will also rise. 2. Perfectly elastic: In a perfectly competitive market, the individual firm is a price-taker and has no control over the market price. As a result, the supply curve is perfectly elastic at the market price, which means that firms can sell as much as they want at that price. 3. Marginal cost equals price: In the long run, under perfect competition, firms will produce where marginal cost equals price to maximize profits. This implies that the supply curve will coincide with the portion of the marginal cost curve above the minimum average variable cost. 4. Determinants of supply: Factors that influence the supply curve include input prices, technology, expectations, government policies, and the number of firms in the market. Any factor that affects production costs or the ability of firms to produce goods will shift the supply curve. 5. Market equilibrium: The intersection of the market demand curve and the no-monopoly supply curve determines the equilibrium price and quantity in a perfectly competitive market. At this point, the quantity demanded equals the quantity supplied, ensuring market efficiency. 6. Efficiency: In a perfectly competitive market, the equilibrium price achieved through the interaction of supply and demand leads to allocate efficiency, where resources are allocated to their most valued uses. This means that there are no dead weight losses in such a market. 3.Misconceptions Concerning Monopoly Pricing A monopolist does not charge the highest possible price because its goal is to maximize total profit, not unit profit or price. While Maximum it1.could Price: charge higher Inthese prices, a monopoly market, would reduce theofmonopolist the number seeks units sold, leading foroverall to lower maximum profits. profit. But people often believe that the monopolist want to set maximum price which is incorrect. For example, selling 5 units at a price of $122 (with a profit of $28 per unit) results in a total profit of $140, which is more than selling 4 units at $132 per unit (with a profit of $32 per unit and a total profit of only $128).** 2. Total The Profit monopolist but seeks not unittotal to maximize profit: profit, The monopolists not per-unit want toprice profit, so it balances earnandmaximum totalthis. output to achieve profit but is on The focus the total profit generated from all sales, not just the highest profit per unit. not seeks for maximum unit profit. Actually, the monopolist accepts a lower-than maximum per-unit profit because additional sales more than compensate for the lower unit Monopoly 4.The Possibility of Losses by Monopoly The likelihood of economic profit is greater for a pure monopolist then for a pure competitor. In the long run the pure competitor is destined to have only a normal profit, whereas barriers to entry mean that any economic profit realized by the monopolist can persist. The Loss-minimizing position of a Pure Monopolist The loss minimizing position of a pure monopolist. If demand D is weak and costs are high the pure monopolist maybe unable to make a profit. Because Pm exceeds V the average variable cost at the MR = MC output Qm the monopolist will minimize losses in the short run by producing at that output. The loss per unit is A = Pm and the total loss is indicated by the blue rectangle. 1. High costs: If the monopolist faces unexpectedly high production costs or input prices increase significantly, they may struggle to cover these costs with their current pricing strategy, leading to losses. 2. Decline in demand: A decrease in demand for the monopolist's product can result in excess capacity and lead to losses as they are unable to sell all of their output at the initial price levels. 3. Price regulation: In some cases, monopolists may face price regulations imposed by the government, limiting their ability to set prices at profitable levels, thus leading to losses. 4. Entry of competitors: If new competitors enter the market or substitute products become more attractive to consumers, the monopolist may experience a decrease in market share and revenue, leading to losses. 5. Technological changes: Rapid technological advancements can render a monopolist’s product obsolete or less competitive, resulting in a decline in demand and potential losses if the firm fails to adapt quickly. 6. Strategic mistakes: Poor strategic decisions in pricing, production, or investment can result in losses for monopolists. For instance, setting prices too high may lead to a loss of market share, while setting prices too low may not cover costs. Economic Effects of Monopoly 1. Price, Output, and Efficiency Monopoly vs. Perfect Competition: Efficiency in Competitive Markets: In a purely competitive market, the price (P), marginal cost (MC), and minimum average total cost (ATC) are equal (P = MC = minimum ATC). In productive This achieves both Monopoly Outcomes: a monopoly, efficiencythere (lowestis allocating production inefficiency, cost) and as the allocative efficiency monopolist (resources charges are allocated a where optimally, higher P = MC). price, produce a little output without minimizing its costs. This results in a dead When a monopoly replaces a competitive market, the monopolist reduces output (Qm) and increases price (Pm). The monopolist’sweight marginalloss, a loss revenue ofless (MR) is social welfare than price because because resources aredemand of the downward-sloping not being curve. used efficiently. Inefficiency results: Productive inefficiency: Output is less than the optimal level (Qc), and price is higher than in a competitive market. Allocative inefficiency: The monopolist underproduces, meaning society values additional units more than the cost of producing them. Deadweight Loss: The monopolist’s underproduction leads to a deadweight loss (represented by the triangle abc in the figure), which is a net loss to society. This happens because fewer goods are produced and consumed than in a competitive market, and resources are misallocated. Income Transfer: Monopolies transfer income from consumers to themselves by charging higher prices than would exist under perfect competition. This is often referred to as a “private tax.” Cost Complications in Monopolies: Monopolies can have different cost structures than competitive firms. Four key factors may lead to differences in costs: Economies of Scale: Some monopolies, especially in industries like software and telecommunications, benefit from large economies of scale, leading to lower long- run average total costs. However, these cost savings do not always result in lower prices for consumers. Simultaneous consumption and network effects further enhance economies of scale. For example, software like Windows is developed once and distributed to millions, leading to very low marginal costs. Efficiency of pure Monopoly relative to a purely competitive industry : (a) in a purely X-Inefficiency: competitive X-inefficiency industry occurs when entryminimize a firm doesn’t and exit ofoften costs, farmsdue ensure that priceMonopoly to lack of competition. (Pc) equals firms, marginal cost sheltered from (MC) competitive pressures, are more prone to X-inefficiency. andmanagement, Inefficient that the minimum average lack of motivation, total or poor cost output supervision can cause(Qthe c) monopolist is produced. Both to operate productive at higher costs thanefficiency necessary. (P= minimum ATC) and allocative efficiency (P = MC) are obtained (b) MC and charges Rent-Seeking Behavior: pricemay Monopolies Pm.engage Thusinoutput is lower( rent-seeking, Qresources spending m rathertothan Qc)orand maintain price acquire is higher monopoly (Pm rather power (e.g., lobbying than Pc ) than for government protections), which raises costs without increasing output. they would Technological Advances:be a purely competitive industry. While monopolies have the financial ability to innovate, they may lack the incentive due to the absence of competitive pressure. However, monopolies might pursue innovation to maintain barriers to entry or prevent future competition. 2. Income Transfer Policy Options for Dealing with Monopolies: Antitrust Action: If a monopoly is formed through anticompetitive behavior, the government can file antitrust charges to either restrict its practices or break the firm into smaller competing entities (e.g., the breakup of Standard Oil in 1911). Regulation of Natural Monopolies: The monopoly power is to transfer income from consumers to business owners. As firms (industries For natural monopolies charge higher prices, where one firm canconsumers are cost produce at a lower forced to spend than multiple more firms), on essential the government goods, may allow it the monopoly but regulate prices and operations. leaves them with less income for other expenses which can lead to income Creative Destruction: redistribution Sometimes, monopolies issues.due to emerging technologies. In such cases, governments may allow the monopoly to exist, are unsustainable knowing that innovation will eventually disrupt it (e.g., the U.S. Postal Service being challenged by email and courier services). Conclusion: Monopolies generally lead to higher prices, lower output, and less efficient resource allocation compared to competitive markets. While some 3. Cost Complications monopolies might benefit from economies of scale, these savings are often not passed on to consumers. Governments can address monopolies through antitrust laws, regulation, or by allowing technological advances to naturally dismantle monopolistic power. The Inefficiencies of monopoly may be reduced by economies of scale ,and technology , but they may be intensified by X- inefficiency and rent- seeking expenditures. Monopolies can achieve economies of scale by producing goods or services at lower costs. Technology helps to innovate the products. X-inefficiency occurs when a firm produces output at a higher cost than is necessary to produce it.  X-inefficiency: The average-total-cost curve (ATC) is assumed to reflect the minimum cost of producing each particular level of output. Any point above these “lowest cost” ATC curve such as X or X’ implies X-inefficiency operation at greater than lowest cost for a particular level of output. Rent seeking expenditures Rent seeking behavior is any activity design to transfer income or wealth to a particular firm or resource supplier at someone else or even society’s expense. Rent-seeking expenditure is transferring income to a particular firm at someone else expense. 4. Assessment and Policy options Three general policy options to control monopoly: -Government can file charges against the monopoly under the antitrust laws. -Government may decide to regulate prices and operations for new products. -The real world monopolies will collapse due to creative destruction caused by new technologies.( when new product enter intro the market , current products become obsolete) Price Discrimination Price discrimination refers where a firm sells the same product or service at different prices to different consumers, not based on differences in cost, but based on the consumers’ willingness to pay. It allows firms to capture more consumer surplus and increase their profits  Conditions The opportunity to engage in price discrimination is not readily available to all sellers. It is possible when the following conditions are met: Monopoly power:The seller must be a monopolist or, at least, must posses some degree of monopoly power, that is, some ability to control output and price. Market segregation : At relatively low cost to itself, the seller must be able to segregate buyers into distinct classes, each of which has a different price elasticities of demand, as the examples below will make clear. No resale: The Original purchasers cannot resell the product or service. If buyers in the low-price segment of the market could easily resale in the high price segment, the monopolist’s price discrimination strategy would create competition in the high price segment. This competition would reduce the price in the high discrimination Policy. This conditions suggest that service industries such as the transportation industry or legal medical services, Where resale is impossible, are good candidates for price discrimination. Price discrimination is typically classified into three main types: first-degree, second-degree, and third-degree price discrimination. Here’s a brief explanation of each: 1. First-Degree Price Discrimination (Perfect Price Discrimination):This occurs when a seller charges each consumer the maximum price they are willing to pay. 2. Second-Degree Price Discrimination (Quantity-Based or Product versional). This type involves charging different prices based on the quantity consumed or the version of the product. 3. Third-Degree Price Discrimination (Group Pricing):This occurs when a seller charges different prices to different groups of consumers based on identifiable characteristics such as age, location, or occupation. Graphical Analysis : price discrimination to different groups of buyers. The price discriminating monopolist represented here maximize it’s total profit by dividing the market into two segments based on different in elasticity of demand. It then produces and sells MR =MC output in each market segment (For visual clarity, average total cost (ATC) is assumed to be constant. Therefore MC equals ATC at all output levels).(a) The firm charges a higher price to customer who have a less elastic demand curve and (b) a lower price to customers with a more elastic demand. The price discriminators total profit is larger than it would be with no discrimination and therefore a single price. Regulated monopoly Regulation of a monopoly means the government controls the prices the company charges as well as other key operational policies. Power generation companies, like natural gas and electric providers, are examples of regulated monopolies. Socially optimal price : P=MC The allocating efficient quantity of output, or the socially optimal quantity is where the demand equals marginal cost. But the monopoly will not produce at this point. Instead, a monopoly produces too little output at too high a cost, resulting in dead weight loss. Fair -return price P=ATC A fair-return price is (one which enforces a price ceiling where economic profits are zero)(p=ATC).At the fair -return price, there is less dead weight loss than an unregulated monopoly and the firm breaks even. Dilemma of Regulation The trade off a regulatory agency faces in setting the maximum legal price a monopolist may charge) : The socially optimal price is below average total cost and either bankrupts the firm or requires that it be subsidized while the higher fair-return price does not produce allocating efficiency. How the government control monopoly The government can regulate monopolies through : 1. Price capping-limiting price increases 2. Regulation of mergers 3. Breaking up monopolies  4. Investigations anti cartels and unfair practice 5. Nationalization - government ownership. A pure monopoly sets its profit-maximizing output and price by using the following approach: 1. Profit Maximizing Rule: MR = MC Like firms in competitive markets, a monopolist maximizes profit where marginal revenue (MR) equals marginal cost (MC). A pure monopolist is the sole producer of a commodity for which they are no close substitute. The monopolist calculates the marginal revenue from each additional unit sold and compares it to the marginal cost of producing that unit. The monopolist will increase production as long as MR is greater than MC. When MR equals MC, the firm stops producing more because producing beyond this point would reduceAprofit. monopolist can increase profit by pricing and price discrimination. 2. Determine Output (Qm) The monopolist finds the output level where the MR and MC curves intersect on the graph. This is the profit-maximizing output (Qm). For example, if producing 5 units is where MR = MC, then 5 units will be the profit-maximizing output. 3. Determine Price (Pm) from the Demand Curve Once the monopolist determines the output (Qm), it uses the market demand curve to find the highest price consumers are willing to pay for that quantity. A vertical line is drawn from the profit-maximizing output (Qm) up to the demand curve to find the corresponding price (Pm). This price is higher than the marginal revenue due to the downward-sloping demand curve, as the monopolist must reduce the price to sell more units. 4. Economic Profit The monopolist also compares the price (Pm) to the average total cost (ATC) of producing the output. If the price exceeds ATC, the monopolist earns economic profit. Economic profit per unit = Price (Pm) ÿ ATC, and total profit = per-unit profit × number of units sold. Example: A monopolist finds that producing 5 units maximizes profit because MR = MC at that output level. The demand curve shows that consumers are willing to pay $122 for 5 units. If the ATC at 5 units is $94, the monopolist earns $28 per unit in profit. Total profit would be $140 (5 units × $28 per unit). Graphical Representation: MR and MC curves intersect at the profit-maximizing output (Qm). A line from Qm to the demand curve shows the profit-maximizing price (Pm). The area between the price (Pm) and the ATC curve, up to the output Qm, represents the monopolist's total economic profit.