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Concept of Monopoly market Price elasticity and MR Price and output determination Price determination
Monopoly market
single seller for a product with no close substitutes barriers to entry
P(Rs) Q 8 0
TR (Rs) 0
MR ..
TC 6
MC
AC
/un Total it 6
7
6 5.50 5 4 3
1
2 2.5 3 4 5
7
12
7
5
8
9 10 12 20 35
2
1 3 3 8 15
8
4 4 4 5 7
-1
1.5 1.5 1 -1 -4
-1
3 3.75 3 -4 -20
13.75 3 15 16 15 3 1 -1
Zero-profit monopolist
Price discrimination
Price discrimination - practice in which a firm charges consumers different prices for the same good By virtue of monopoly power a monopolist can charge different prices to different consumers or different groups Consumers are discriminated on the basis of their income or purchasing power, geographic location, age, sex, quantity they purchase etc.
N D
P1
70
r
C= $200
P2
50
30
The monopolist sets price $70 to sell 20 units to a particular group of consumers. At $50 it sells 40 units to another group of consumers; Sellers total revenue is higher than a single price mc case Demand A part of consumers surplus is extracted: area P1rtP2 and rts
90 Q, Units per day
20
40
D1 MR1 D2
MC MR2
MR = MR1 +MR2
60
D= D1+D2
o
40
20
Characteristics
1. Product differentiation: Firms differentiate their products from one another in respect of their shape, size, color, design, efficiency in use, packaging, after sale service, guarantee and warrantee. The main aim is to make consumer believe that a product is different from others, to create brand loyalty 2. Large number of sellers: Number of sellers is large; it may be 10, 20 or more depends on the size of the market. The number of firms is only so large that firms retains its power to be a price maker 3. Free entry and free exit: Firms are free to enter and exit from the market. Entry of new firms reduces a firms market share and exits of some firms does the opposite. It leads an intensive competition among them to retain their market share 4. Selling costs: Firms make heavy expenditures on advertisement and sales promotion costs; It is a distinguishing feature 5. Downward sloping demand curve: Firms face downward sloping demand curve; firms by exercising monopoly power can set higher prices and still retain some consumers
16-23
Cont
Product differentiation: Product differentiation implies that the products are different enough that the producing firms exercise a mini-monopoly over their product. The firms compete more on product differentiation than on price. Entering firms produce close substitutes, not an identical or standardized product. Many sellers: When there are many sellers, they do not take into account rivals reactions. The existence of many sellers makes collusion difficult. Monopolistically competitive firms act independently. Easy entry and exit: There are no significant barriers to entry. Barriers to entry prevent competitive pressures. Ease of entry limits long-run profit.
identical
differentiated
yes
horizontal
downwardsloping
30
Monopolistic competition
many yes zero yes
many