Cyberoaf - Business structures
From KstructIB
[edit] Monopoly
Absolute monopoly occurs when a single seller provides a product with no close substitute.
Sources : 1. Legal Monopoly: based on patents, copyright, license... 2. Nationalized industry: post, railway, telecom... 3. Local monopoly: one gas station, cafeteria 4. Natural monopoly: based on economies of scale. 5. High cost of entry:
LRAC
6. Advertising and product differentiation: Barbie dolls 7. Import restrictions: Indian car industry (till 90s) 8. Industry ‘standard’: Microsoft as PC standard
Monopoly Profits :
Y P
MC
D
C E AC
X A D=AR B MR
A – Profit maximising (MC = MR) B – Maximum Revenue (MR = 0) C – Lowest cost of prduction (optimum output – MC = AC) D – Social optimum (MC = P) E – Normal Profit (AC = AR) XY = Abnormal profit (above AC curve at Production point P) Note: - Monopoly is able to earn super-normal profits even in the long-term b/c of barriers to entry. - Will not produce at most efficient output MC=AC - Instead will produce less and charge more. (MC = MR) Against Public Interests :
A. High prices - Less consumer surplus – Net welfare loss
B. Less output - Less employment - Inefficient resource allocation - Barriers to entry - ‘natural’ monopolies have barriers to entry in the form of large economies of scale and high fixed costs. - ‘artificial’ monopolies have them as price discrimination, limit pricing, suppression of competition.
C. Suppression of competition
D. Limited consumer choice - Poor quality goods
E. “x ineffiency” - Poor service - No need for efficiency
F. Slow technological progress - Less innovation, research & development.
G. Restricts price mechanism
Potentially in Public Interest :
A. Lower production costs - Economies of Scale (falling LRAC curve) - Less advertising - Better working conditions
B. No wasteful duplication
C. Short Term: - ‘limit pricing’ can keep prices down
D. Stable output/prices
E. Some gain from price discrimination , ‘cross-subsidies’
F. Public sector monopolies can consider public interest
G. Monopolist cannot set both price and output (limited by demand curve but still a price maker)
H. Reward for inventions/research + Patents
I. Schumpeter: “ creative destruction ” ‡ monopolies provide incentive for discovery of better products.
J. Large funds for research and development - i.e.: Bell Labs ‡ transistors, microwave, fibre optics, UNIX, semiconductors (did 10% of US basic industrial research in ‘70s)
K. Pure monopoly is theoretical - More realistic: monopolistic competition / oligopoly
Oligopoly A few big companies produce similar goods (some product differentiation): - i.e.: USA car industry (top 5 producers sell 80% of cars), beer market, detergents. Characteristics : - high barriers to entry - i.e.: technological barrier to entry - interdependent behavior : - firms consider the reactions of other firms when making their own decisions on output and price. - non-price competition - compete by branding and advertising products and product differentiation. - stable/rigid prices Kinked demand curve : Price D1
P1 MR1 MC2 MC1 D2
Output
Q1
MR2 Note: a range of cost curves between MC1 and MC2 exist ‡ a profit maximising oligopolist will produce at P1 and Q1 ‡ even large shifts in costs will cause prices to remain fixed.
Perfect Competition
Market where the degree of competition between firms is absolute/perfect.
Characteristics : - firms are ‘ price takers ’ - theoretical model - but useful to compare w/ the theoretical perfect/pure monopoly to draw conclusions on the effects of markets being more/less competitive.
Assumptions :
1. Many sellers
2. Many buyers
3. Homogeneous (identical) products
4. No barriers to entry into the industry
5. Perfect knowledge
‡ Therefore the demand curve is perfectly elastic .
D S D = AR = MR
Market Firm Note: TR = P x Q AR = TR/Q = PxQ/Q = P Short-run equilibrium :
Price MC ATC
p D,AR,MR p2
q Output
Firm will produce where MR = MC where profit is maximized. Below p2, normal profit, above: supernormal profit. ‡ eventually the industry supply will shift w/ new companies and demand for the firm will lower to p2 (long- run equilibrium). Firm’s Shut-down Point :
Price MC ATC
AVC D,AR,MR p 0
q Output
At prices lower than 0p the firm will not cover their variable costs .‡ firm makes a smaller loss by closing down and paying only fixed costs. MR=MC=AVC is shut-down point.
Monopolistic Competition
Market w/ a large number of firms producing a relatively small percentage of total output + highly competitive / firms have a ‘monopoly’ over their own brand but there are many close substitutes.
- i.e.: restaurants, performance artists...
Characteristics :
- Low barrier to entry/exit to industry
- High profits eroded by new entrants
- Seller have little control over price.
- Results in product differentiation
- Homegenous product (therefore close substitute)
Short run equilibrium :
MC ATC
D
Firm’s shut-down point
Output
MR
Shaded area: supernormal profit .
Long run equilibrium : eventually DEMAND shifts down so that MC=MR, p=ATC, and TR=TC ‡ normal profit only.
Competition vs. Monopoly
A. When there are no economies of scale:
p1
S = MC
p0 D=AR Output q1 MR q0
Monopolist taking over a multi-plant (plant = factory, office, farm) industry will produce at (p1,q1) instead of (p0,q0) ‡ less allocatively efficient position (p does not = MC).
B. When there are economies of scale: (LRAC sloping down w/ output)
p0 MC1 = S (perfect comp.)
MC2
p1 D=AR Output q0 q1 MR
With economies of scale, a monopolist faces a different MC curve (MC2). Production shifts from (p0,q0) to (p1,q1) which is still not allocatively efficient but results in a lower price and greater output.
‡ ‘natural’ monopolies
Note: to force the monopolist to produce allocatively efficiently:
- Gov. subsidy
- Nationalize industry (order prices to equal MC)
- Regulate private monopoly prices.
Price Discrimination
Charging a higher price to some customer than to others for an identical good or service.
Reasons :
- trying to increase profit by absorbing consumer surplus
Necessary Conditions :
1. Supplier must be a monopoly power (i.e.: price maker)
2. Must be groups of buyers w/ different elasticities of demand
3. The groups can be identified and separated
