Monopoly Power

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A pure monopoly is defined as a single supplier. According to the Competition Act , abuse of dominant power means that a firm can 'behave independently of competitive pressures'. When a firm has exclusive ownership or use of a scarce resource, such as British Telecom who owns the telephone cabling running into the majority of UK homes and businesses. When governments grant a firm monopoly status, such as t he Post Office. When firms merge to given them a dominant position in a market. Monopoly power can be maintained by barriers to entry , including: I f the costs of production fall as the scale of the business increases and output is produced in greater volume, existing firms will be larger and have a cost advantage over potential entrants — this deters new entrants.

L imit pricing is a specific type of predatory pricing which involves a firm setting a price just below the average cost of new entrants — if new entrants match this price they will make a loss! This is often the case with natural monopolies , which own the infrastructure. For example, British Telecom owns the network of cables, which makes it difficult for new firms to enter the market.

If the set-up costs are very high then it is harder for new entrants. S unk costs are those which cannot be recovered if the firm goes out of business , such as advertising costs — the greater the sunk costs the greater the barrier. H eavy expenditure on advertising by existing firms can deter entry as in order to compete effectively firms will have to try to match the spending of the incumbent firm. I f consumers are loyal to a brand , such as Sony , new entrants will find it difficult to win market share.

F or example, contracts between specific suppliers and retailers can exclude other retailers from entering the market. F or example, if a brewer owns a chain of pubs then it is more difficult for new brewers to enter the market as there are fewer pubs to sell their beer to. Following Adam Smith , the general view of monopolies is that they tend to seek out ways to increase their profits at the expense of consumers, and , in so doing, generate more costs to society than benefits.

Clearly, consumers have less choice if supply is controlled by a monopolist — for example, the Post Office used to be monopoly supplier of letter collection and delivery services across the UK and consumers ha d no alternative letter collection and delivery service. Monopolies can exploit their position and charge high prices, because consumers have no alternative.

This is especially problematic if the product is a basic necessity, like water. Monopolists can also restrict output onto the market to exploit its dominant position over a period of time, or to drive up price. Use 'monopoly power' in a Sentence The monopoly power of the airline was too high so several other smaller airlines increased their investment in themselves to share the profits with the largest airline.

Gates smirked at the board's assertion he was in possession of a monopoly power , and gently placed his black top hat on the table. Microsoft enjoyed a great deal of monopoly power , which was reflected in the price of their products, until government restrictions took hold. You Also Might Like Both monopoly and oligopoly refer to a specific type of economic market structure, but understanding the differences and implications of the two can be difficult. This article will explain the key differences to understand a monopoly vs. How to Be Environmentally Conscious in a Small Most economic textbooks follow the practice of carefully explaining the perfect competition model, mainly because this helps to understand "departures" from it the so-called imperfect competition models.

The boundaries of what constitutes a market and what does not are relevant distinctions to make in economic analysis. In a general equilibrium context, a good is a specific concept including geographical and time-related characteristics "grapes sold during October in Moscow" is a different good from "grapes sold during October in New York". Most studies of market structure relax a little their definition of a good, allowing for more flexibility in the identification of substitute goods.

Monopolies derive their market power from barriers to entry — circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry: In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. High liquidation costs are a primary barrier to exiting.

The decision whether to shut down or operate is not affected by exit barriers. While monopoly and perfect competition mark the extremes of market structures [14] there is some similarity. The cost functions are the same.

Monopoly Power: Degree, Sources and Measures | Markets

The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions, some of the most important distinctions are as follows:. The most significant distinction between a PC company and a monopoly is that the monopoly has a downward-sloping demand curve rather than the "perceived" perfectly elastic curve of the PC company. If there is a downward-sloping demand curve then by necessity there is a distinct marginal revenue curve.

The implications of this fact are best made manifest with a linear demand curve. From this several things are evident. First the marginal revenue curve has the same y intercept as the inverse demand curve. Second the slope of the marginal revenue curve is twice that of the inverse demand curve. Third the x intercept of the marginal revenue curve is half that of the inverse demand curve.

What is not quite so evident is that the marginal revenue curve is below the inverse demand curve at all points. The fact that a monopoly has a downward-sloping demand curve means that the relationship between total revenue and output for a monopoly is much different than that of competitive companies. A competitive company has a perfectly elastic demand curve meaning that total revenue is proportional to output. For a monopoly to increase sales it must reduce price. Thus the total revenue curve for a monopoly is a parabola that begins at the origin and reaches a maximum value then continuously decreases until total revenue is again zero.

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The slope of the total revenue function is marginal revenue. Setting marginal revenue equal to zero we have. So the revenue maximizing quantity for the monopoly is A company with a monopoly does not experience price pressure from competitors, although it may experience pricing pressure from potential competition. If a company increases prices too much, then others may enter the market if they are able to provide the same good, or a substitute, at a lesser price.

A monopolist can extract only one premium, [ clarification needed ] and getting into complementary markets does not pay.

Monopolies are Not Allowed Under Antitrust Law

That is, the total profits a monopolist could earn if it sought to leverage its monopoly in one market by monopolizing a complementary market are equal to the extra profits it could earn anyway by charging more for the monopoly product itself. However, the one monopoly profit theorem is not true if customers in the monopoly good are stranded or poorly informed, or if the tied good has high fixed costs. A pure monopoly has the same economic rationality of perfectly competitive companies, i.

By the assumptions of increasing marginal costs, exogenous inputs' prices, and control concentrated on a single agent or entrepreneur, the optimal decision is to equate the marginal cost and marginal revenue of production. Nonetheless, a pure monopoly can — unlike a competitive company — alter the market price for its own convenience: In the economics' jargon, it is said that pure monopolies have "a downward-sloping demand".

Monopoly Power: Definition, Sources & Abuse

An important consequence of such behaviour is worth noticing: A monopoly chooses that price that maximizes the difference between total revenue and total cost. Market power is the ability to increase the product's price above marginal cost without losing all customers. All companies of a PC market are price takers. The price is set by the interaction of demand and supply at the market or aggregate level. Individual companies simply take the price determined by the market and produce that quantity of output that maximizes the company's profits.

If a PC company attempted to increase prices above the market level all its customers would abandon the company and purchase at the market price from other companies. A monopoly has considerable although not unlimited market power. A monopoly has the power to set prices or quantities although not both. The two primary factors determining monopoly market power are the company's demand curve and its cost structure. Market power is the ability to affect the terms and conditions of exchange so that the price of a product is set by a single company price is not imposed by the market as in perfect competition.

A monopoly has a negatively sloped demand curve, not a perfectly inelastic curve. Consequently, any price increase will result in the loss of some customers. Price discrimination allows a monopolist to increase its profit by charging higher prices for identical goods to those who are willing or able to pay more. For example, most economic textbooks cost more in the United States than in developing countries like Ethiopia. In this case, the publisher is using its government-granted copyright monopoly to price discriminate between the generally wealthier American economics students and the generally poorer Ethiopian economics students.

Similarly, most patented medications cost more in the U. Typically, a high general price is listed, and various market segments get varying discounts. This is an example of framing to make the process of charging some people higher prices more socially acceptable. This would allow the monopolist to extract all the consumer surplus of the market. While such perfect price discrimination is a theoretical construct, advances in information technology and micromarketing may bring it closer to the realm of possibility.

It is very important to realize that partial price discrimination can cause some customers who are inappropriately pooled with high price customers to be excluded from the market. For example, a poor student in the U. Similarly, a wealthy student in Ethiopia may be able to or willing to buy at the U. These are deadweight losses and decrease a monopolist's profits.

As such, monopolists have substantial economic interest in improving their market information and market segmenting. There is important information for one to remember when considering the monopoly model diagram and its associated conclusions displayed here. The result that monopoly prices are higher, and production output lesser, than a competitive company follow from a requirement that the monopoly not charge different prices for different customers. That is, the monopoly is restricted from engaging in price discrimination this is termed first degree price discrimination , such that all customers are charged the same amount.

If the monopoly were permitted to charge individualised prices this is termed third degree price discrimination , the quantity produced, and the price charged to the marginal customer, would be identical to that of a competitive company, thus eliminating the deadweight loss ; however, all gains from trade social welfare would accrue to the monopolist and none to the consumer.

In essence, every consumer would be indifferent between 1 going completely without the product or service and 2 being able to purchase it from the monopolist. As long as the price elasticity of demand for most customers is less than one in absolute value , it is advantageous for a company to increase its prices: With a price increase, price elasticity tends to increase, and in the optimum case above it will be greater than one for most customers.

A company maximizes profit by selling where marginal revenue equals marginal cost. A price discrimination strategy is to charge less price sensitive buyers a higher price and the more price sensitive buyers a lower price. The basic problem is to identify customers by their willingness to pay. The purpose of price discrimination is to transfer consumer surplus to the producer. Any company that has market power can engage in price discrimination. Perfect competition is the only market form in which price discrimination would be impossible a perfectly competitive company has a perfectly elastic demand curve and has zero market power.

There are three forms of price discrimination. First degree price discrimination charges each consumer the maximum price the consumer is willing to pay.

Use 'monopoly power' in a Sentence

Second degree price discrimination involves quantity discounts. Third degree price discrimination involves grouping consumers according to willingness to pay as measured by their price elasticities of demand and charging each group a different price. Third degree price discrimination is the most prevalent type. There are three conditions that must be present for a company to engage in successful price discrimination. First, the company must have market power.

A company must have some degree of market power to practice price discrimination. Without market power a company cannot charge more than the market price. A company wishing to practice price discrimination must be able to prevent middlemen or brokers from acquiring the consumer surplus for themselves. The company accomplishes this by preventing or limiting resale. Many methods are used to prevent resale. For example, persons are required to show photographic identification and a boarding pass before boarding an airplane.

Most travelers assume that this practice is strictly a matter of security. However, a primary purpose in requesting photographic identification is to confirm that the ticket purchaser is the person about to board the airplane and not someone who has repurchased the ticket from a discount buyer.

The inability to prevent resale is the largest obstacle to successful price discrimination. For example, universities require that students show identification before entering sporting events.

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Governments may make it illegal to resale tickets or products. In Boston, Red Sox baseball tickets can only be resold legally to the team. The three basic forms of price discrimination are first, second and third degree price discrimination.

Monopoly - Wikipedia

In first degree price discrimination the company charges the maximum price each customer is willing to pay. The maximum price a consumer is willing to pay for a unit of the good is the reservation price. Sellers tend to rely on secondary information such as where a person lives postal codes ; for example, catalog retailers can use mail high-priced catalogs to high-income postal codes. For example, an accountant who has prepared a consumer's tax return has information that can be used to charge customers based on an estimate of their ability to pay.

In second degree price discrimination or quantity discrimination customers are charged different prices based on how much they buy. There is a single price schedule for all consumers but the prices vary depending on the quantity of the good bought. The task for the seller is to identify these price points and to reduce the price once one is reached in the hope that a reduced price will trigger additional purchases from the consumer.

For example, sell in unit blocks rather than individual units. In third degree price discrimination or multi-market price discrimination [54] the seller divides the consumers into different groups according to their willingness to pay as measured by their price elasticity of demand.

Each group of consumers effectively becomes a separate market with its own demand curve and marginal revenue curve. Airlines charge higher prices to business travelers than to vacation travelers. The reasoning is that the demand curve for a vacation traveler is relatively elastic while the demand curve for a business traveler is relatively inelastic. Any determinant of price elasticity of demand can be used to segment markets. For example, seniors have a more elastic demand for movies than do young adults because they generally have more free time.

Thus theaters will offer discount tickets to seniors. The monopolist acquires all the consumer surplus and eliminates practically all the deadweight loss because he is willing to sell to anyone who is willing to pay at least the marginal cost.

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