Tag Archives: monopoly

Price Discrimination

24 Jul

Price Discrimination

      In all previous articles I assumed that monopolists charge a single price to all buyers. But under some conditions monopolists can increase their revenues by charging different prices to different demanders.  By doing this kind of act monopolist is engaging in price discrimination, the practice of selling of the same product to different buyers when the price difference aren’t justified by difference in cost.
   In order to engage in price discrimination there are some conditions that must be realized:

  • Market segregation– the seller should be able to differentiate the buyers into different classes, each of them having different wants and abilities to pay for the product.  This division of buyers is usually related to different elasticities of demand.
  • Monopoly power– another important characteristic is that seller should be a monopolist or at least to possess some monopoly power, so that he may control the quantity output and the price.
  • No resale-The original buyer mustn’t be able to resell the good or service. Otherwise, if the buyer from low-price segment is able to sell the goods purchased to buyers from high-price segment, then our seller will have some competition in high-price segment. This competition will reduce the price and will cancel seller’s price discrimination policy.

Examples of Price Discrimination
   Some movie theatre or golf clubs differentiate their charge on the basis of time ( lower rates in the night and higher rates in the evening) and age(younger- lower ability to pay, so less money is charged).  Another example can serve railroads where shipper of 1 tone of jewelry is charge more than a shipper of 1 tone of tomatoes.

Consequences of price discrimination
   Monopolist can increase its revenue by practicing price discrimination. At the same time, perfect price discrimination results in an increase of output. In this case each consumer pays the price that he or she is willing rather than to forgo the product.
   Other things equal, the monopolist that practices perfect price discrimination is producing a higher quantity of output than the monopolist that isn’t practicing it. When the non-discriminating monopolist lowers its price to sell additional unit, this lower price is applied not only to additional output but also to the prior units. So the non-discriminating monopolist’s marginal revenue falls more rapidly than the price and, marginal revenue, graphically, lies below demand curve. However when a discriminating monopolist lowers its price, this reduced price is applied only to additional units sold not to prior units. Thus marginal revenue equals price for each unit of output, graphically MR and Demand curve coincide.
   Although price discrimination results in more economic profit than that achieved by single price monopolist, it also results in greater output, so less allocative inefficiency.

Price Discrimination

Price Discrimination

Barriers to entry in a Pure Monopoly

19 Jul

Barriers to entry a monopoly
   A pure monopoly is a market model in which entry is blocked. So what factors (barriers to entry) prohibit firms to enter this industry?

Economies of Scale
   Modern technology in some industries is such that it permits extension of economies of scale- declining ATC (average total cost). So a firm’s production price will decline if a wide range of output is produced. Given a market demand, only a few large firms, or even a single one, can achieve low average total costs. When long-run ATC is declining only a single producer, a pure monopolist will be able to produce any particular output at minimum total cost.
   If pure monopoly exists in an industry, then economies of scale will serve as entry barriers and will protect the monopolist from competition. New firms will try to enter the industry as small-scale producers but they won’t be able to produce the output at that small price produced by monopolists, so these small firms won’t be able to obtain normal profits needed for survival. A new firm might try to enter as a big producer, but the massive plant output will require very huge amount of financing, which for a new and untried firm will be very difficult to get. In most cases the financial obstacles and risks to start a big business are hinders, that’s why entering in a pure monopoly market system is rarely successful.
   There may be some cases in which market demand curve is cutting long-run ATC curve in a point where ATC curve is still declining  we say that in this case a natural monopoly exists.  So if ATC curve is declining we might say that this firm may set a lower price for its products, but this doesn’t really happen. Conversely, a natural monopolist might set its product’s price far above ATC, so that it obtains an economics profit, that’s why government has to regulate price charged by natural monopolists.

Patent
    A patent is investor’s right to use his or her own invention. Patent and patent’s law protects inventor from rivals who use the invention without helping with expenses or effort at developing it.
   Research and development is what provides our world with new amazing inventions. Firms may get monopoly power by researching or purchasing patents from other firms so they may strengthen current market position.
   The profit from one patent can finance the research for other patentable products. So, monopoly power achieved through patents may self-sustain firm, even if they eventually expire.

Licenses
   Government may limit entry into an industry by licensing. In a country only a small number of licenses for telephone operators may exist. That’s why new telephone operators can’t enter this industry. In some cases government may license itself at providing some products and that’s how it creates a pure monopoly.

Private Property
   A monopolist may use private property as an obstacle to eliminate rivals. So a firm that controls an important resource needed for production of a specific good may effectively block entry of new rival firms.

Pricing
   In some cases a monopolist may create entry barriers by cutting products’ prices, stepping up advertising, or taking other strategic actions to make entrance for a new firm difficult.

Pure Monopoly

13 Jul

Pure monopoly

   Pure monopoly happens when one firm is the single supplier of a product for which there are not substitutes. Some of the main characteristics of pure monopoly are:

  • Single Seller– A pure monopoly is an industry in which a sole producer is the single supplier of a specific good or service in this market model.
  • No Close Substitutes– A pure monopoly’s product is unique and there aren’t any close substitutes for it, so that consumer has to choose to buy or not to buy the product.
  • Price-maker– The pure monopolist controls the quantity supplied of good and service, so that it controls the price.  This kind of firm or industry is called price-maker, unlike pure competitors which are price-taker, because they can’t control the price, since quantity produce by them is very small relative to total quantity output. The pure monopolist confronts downward-sloping curve.  So it can change the product’s price by changing the quantity of good that it produces. The monopolist can use this advantage to maximize its profits.
  • Blocked entry– A pure monopolist doesn’t have any competitors because there are some barriers that keep competitors away from entering the industry. These barriers may be technological, economical or some other types, but the fact remains that no other firms may enter in our pure monopoly market.

 There are very rare examples of pure monopoly, but there are examples of some less pure forms of it. In many countries many government-owned or government regulated public utilities (gas, water, electricity) may be monopolies. Also, some professional sport teams are thought to be monopolies, because they are suppliers of unique service in large geographic areas. Examples may serve some major football matches like between Real Madrid and Barcelona in Spain, which serve as representative of large cities in Spain.  In some small towns airline service or train-transport may be pure monopolies if they are represented only by one firm in these regions. Also, in some very small areas banks, pharmacies or theaters may be examples of pure monopolies.

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