Monopolies diagram lesson

1
Monopoliesdiagram lesson!
2
How close to the money are you?
Anything unique?

• What can you remember from last lesson.
• Use your post-it notes to show your amazing
  memory.
• The more original the better!

Anything vital thats been forgotten?
Whats the key memories?
3
Monopoly power
Need to know this

• Monopoly power refers to cases where firms
  influence the market in some way through their
  behaviour determined by the degree of
  concentration in the industry
• Influencing prices
• Influencing output
• Erecting barriers to entry
• Pricing strategies to prevent or stifle
  competition
• May not pursue profit maximisation encourages
  unwanted entrants to the market
• Sometimes seen as a case of market failure

4
Monopoly
Vital revision

• Origins of monopoly
• Natural monopoly usually on a network or grid
  wasteful to duplicate!
• Geographical factors where a country or climate
  is the only source of supply of a raw
  materialquite rare. However, consider a single
  grocery store in a isolated village
• Government created monopolies now sold off!
• Through growth of the firm
• Through amalgamation, merger or takeover
• Through acquiring patent or license
• Through legal means Royal charter,
  nationalisation, wholly owned plc

5
Identify the source of monopoly power.
6
Identify the source of monopoly power.
7
Identify the source of monopoly power.
8
A natural monopoly?

• Why does it make no sense to have a 2nd channel
  tunnel?
• Despite being a natural monopoly, what
  competition does the firm face?

9
Label one side

• HIGH
• The other
• LOW

10
Monopoly characteristics

• Price
• Efficiency
• Innovation
• Collusion
• Promotion

Would you predict these to be HIGH or LOW?
11
Monopoly characteristics
Diagrams next lesson

• Price could be deemed too high, may be set to
  destroy competition (destroyer or predatory
  pricing), price discrimination possible.
• Efficiency could be inefficient due to lack of
  competition (X- inefficiency) or
• could be higher due to availability of high
  profits
• Innovation - could be high because of the promise
  of high profits, Possibly encourages high
  investment in research and development (RD).
  Could be low as there is no incentive to reduce
  costs.
• Collusion possible to maintain monopoly power
  of key firms in industry
• High levels of branding, advertising and
  non-price competition

12
BAA break up of monopoly
Further reading
13
How can a monopoly establish its position?

• Known as barriers to entry.
• Economies of scale
• Patent protection
• Information advantage (not sharing its trade
  secrets!)
• Government protection
• Control of resources

Can you think of any businesses that have these
characteristics that generates monopoly like
power?
14
How can a monopoly establish its position?

• Economies of scale Microsoft!
• Patent protection drugs (anti aids)
• Information advantage (not sharing its trade
  secrets!) Coca cola, Worcester sauce, Microsoft
  Iron bru! (not a monopoly though)
• Government protection (Kenya require new
  competitors to 1st get a no objection letter
  from existing firms! E.g mobile phones Telkom
  until 2002 was the only mobile network in African
  continent)
• Control of resources De beers diamonds in
  Africa 60 global sales!

15
Monopoly revenue diagram

• You will be drawing these in YOUR OWN NOTES
• As you need the practice.

16
Revenue curves of a monopoly
AS Micro theory review! Straight line D curve

• The monopolist can influence prices, so faces a
  downward facing Demand curve.
• As the price maker, it can choose the location of
  price along the Demand curve

17
Revenue curves of a monopoly

• So why would the monopolist might choose to
  locate its price at unitary elastic point?
• Look at the MR TR position!
• Note the relationship between MR AR. MR has
  exactly twice the slope of the AR curve.
• MR is ZERO at the maximum point of Total revenue

18
Profit orientated Monopoly diagram
Vital diagram!

• A monopolist wishing to maximise profits will
  produce at point where
• MR MC

19
So why does MC MR

• as the profit maximising position?

20
The profit maximising level of output
Another diagram to learn!
Vital diagram!
21
So to understand the diagram

• I have notes for you from these slides

22
Monopoly
This is both the short run and long run
equilibrium position for a monopoly
Given the barriers to entry, the monopolist will
be able to exploit abnormal profits in the long
run as entry to the market is restricted.
Costs / Revenue
MC
7.00
Monopoly Profit
AC
AR (D) curve for a monopolist likely to be
relatively price inelastic. Output assumed to be
at profit maximising output (note caution here
not all monopolists may aim for profit
maximisation!)
3.00
AR
MR
Output / Sales
Q1
23
A look back at the diagram for perfect
competition will reveal that in equilibrium,
price will be equal to the MC of production. We
can look therefore at a comparison of the
differences between price and output in a
competitive situation compared to a monopoly.
Welfare implications of monopolies
Costs / Revenue
MC
The price in a competitive market would be 3
with output levels at Q1.
7
AC
Loss of consumersurplus
The monopoly price would be 7 per unit with
output levels lower at Q2. On the face of it,
consumers face higher prices and less choice in
monopoly conditions compared to more competitive
environments.
3
AR
The higher price and lower output means that
consumer surplus is reduced, indicated by the
shaded area.
Q1
Q2
MR
Output / Sales
24
Monopoly
Welfare implications of monopolies
Costs / Revenue
MC
The monopolist will be affected by a loss of
producer surplus shown by the grey triangle
but..
7
AC
Gain in producer surplus
3
The monopolist will benefit from additional
producer surplus equal to the shaded rectangle.
AR
MR
Output / Sales
Q1
Q2
25
Welfare implications of monopolies
Costs / Revenue
The value of the shaded triangle represents the
total welfare loss to society sometimes
referred to as the deadweight welfare loss.
MC
7
AC
3
AR
MR
Output / Sales
Q1
Q2
26
Your go.

• Split into 2 groups
• Using your whiteboard to note your answers

27
Is it easy to criticise a monopoly?

• So go on then
• Brainstorm the key problems of having monopolies!
• Why do most governments intervene to disband
  monopolies?

• So do something more challenging
• Brainstorm the key benefits of having monopolies!
• Why do some governments allow monopolies to
  exist?

28
Problems of monopolies

• Excessive prices (above market equilibrium)
• Supernormal profits
• Easy life no incentive to be innovative sole
  supplier allocative inefficient
• Can delay innovation through barriers of entry
• Loss in consumer surplus and a gain in producer
  surplus (profits)
• Dead weight loss..
• Product is under consumed.

29
The Case Against Monopoly - inefficiencies

• There may be little pressure for a firm with
  monopoly power to maximise their efficiency or
  minimise costs of production
• (i) Managerial slack or X-inefficiencies
• (ii) Limited incentives to adopt cost-reducing
  innovations
• (iii) (John Hicks) The best of all monopoly
  profits is a quiet life
• The result may be a higher level of costs per
  unit (external diseconomies of scale)

30
Benefits of a monopoly

• EoS lower costs from size of business
• Innovation from retained profit have little
  threat of competition so will invest profits into
  LT RD
• New technology or product development many
  monopolies are patents protected..
• Fewer wastes of resources most monopolies are
  network based co that any competition requires
  duplication of resources.
• To avoid govt investigation may choose NOT to
  set excessive prices but pass on low LRAC (EoS) /
  abnormal profit as lower prices
• Productively efficient (MRMC)
• Creates stability for consumers monopolist knows
  its market well and can make LT plans with
  confidence

31
Monopoly

• Problems with models a reminder
• Monopolies not always bad may be desirable in
  some cases but may need strong regulation
• Monopolies do not have to be big could exist
  locally

32
Homework

• Revise diagrams from todays lesson for diagram
  test next lesson.
• Use textbook (if theyve arrived) to read up on
  Monopoly theory.
• (or read photocopy pages!)

33
Next lesson

• On Thursday go upstairs to S6 for the ½ lesson
  ICT research activity