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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.
firms,
- degree of homogeneity or heterogeneity of their
products
the existence of economies of scale of declining average costs represents the main reasons lying behind imperfect competition
Product Differentiation
Concentration Ratio the percent of total industry output that is accounted for by the few largest firm - (doesnt 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 = 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
AFC
MR RZ
AR
Q C, P ,R Q0 Q RZ
TC
VC
TR
FC
RZ Q Q0 Q RZ
TZ
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
MC = AC
AR = d
QM
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 P TC 1 67 29 2 59 54 3 51 89 4 43 143 5 35 215 6 27 305 7 19 412 8 11 537
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.