Académique Documents
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Practices in Monopoly
Learning Outcome
• What is monopoly
• Features of Monopoly
• Real Indian and Global examples of Monopoly.
• Analysis of monopoly power through case study.
• Price Determination under Monopoly in short run
and long run
What is Monopoly?
Necessary Conditions
– Existence of monopoly power – price discrimination can
occur only if monopoly power exists and there are no
competitors in the market
– Existence of different degree of elasticity of demand –
monopolist can charge higher price for inelastic market and
lower price for elastic market
– No resale – product purchased in the low-priced market
should not be resold in the high-priced market
– Legal sanction – government allows the public utility firms
such as electricity to charge different prices from different
consumers
Demand and MR Curves
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Indian Railway: The best example of
monopoly in India
• The development of railway had its roots in the
1800’s.
• State owned railway company of India
• First introduced in 1853 in India.
• Recently railway started advertising and
promotional schemes to attract the passengers.
Railways reduces travel insurance to
just one paisa from 92 paise
• In a "Diwali bonanza" ahead
of the festival, rail
passengers can now avail
travel insurance scheme at
just one paisa.
Price Determination under Monopoly
Monopoly
Division of market
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Bases of Price Discrimination
Personal
Geographical
Time
Purpose of use
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20
MCQ
MR
Quantity
4. Free Entry or Exit
• Firms can enter or exit the market without
restriction.
5. Role of non-price competition is significant – various
methods used to attract the customers to buy a particular brand.
(Attractive packaging , higher commission to distributors, sales
promotion, advertisement etc.)
MR
Quantity
Q*
PROFIT MAXIMIZATION IN SHORT RUN (cont.)
Monopolistic competitive firm at break-even
Normal profit or break-even is The profit maximization
earned when TR = TC. level occurs where MR
curve and MC curve
Price (RM) At this output, monopolistic
MC
intersects at Point A.
competitive firm is at the break-
even or earns normal profit. ATC
AC/ P*
DD = AR
MR
Quantity
Q*
PROFIT MAXIMIZATION IN SHORT RUN (cont.)
Monopolistic competitive firm suffers economic losses
Economic losses or subnormal At this output, monopolist suffers economic losses
profit is the losses incurred by a or subnormal profit equal to the shaded area.
monopolistic competitive firm when
Price (RM) ATC
MC
TR < TC.
DD = AR
MR
Quantity
Q*
PROFIT MAXIMIZATION IN LONG RUN
Monopolistic competitive firm earns normal profit in long run
A monopolistic competitive
firm earns normal profit in
Price (RM) the long run due to free LRMC
entry and exit.
LRATC
P*
DD = LRAR
LRMR
Q*
Quantity
MCQ
– Barriers to entry
– Price War
– Non-pricing strategies
– Interdependence
Reliance Jio entry may hit top telcos’
earnings
1. First assumption: If an oligopolist reduces its price, its rivals will follow and
cut their prices to prevent losing the customers.
P*
dd
DD
Q* Quantity
OLIGOPOLY (cont.)
This shows the price rigidity At this range of MR, any The kinked demand
in the oligopoly market. change in the MC does not curve below Point E
reflect changes in the profit creates a gap in the
Price (RM)
maximizing price and output. MR, which is indicated
by the dotted line ab.
MC1
MC2
E
P*
b DD
Q*
MR Quantity
Duopoly
Thus A’s output is declining progressively (with ratio=1/4), whereas B’s output
Cournot’s Model
• Firm A produces profit maximising
Price, output (OQA) at MR=MC=0 and
Reven D sells half of the total market
ue,
Cost demand (Half of OD*).
• Point A is the mid point of market
A demand DD*.
P
• Firm B assumes A will continue to
A
B produce OQA ,so considers QAD*
P as the market available to it and
B AD* as its demand curve. Its MR
O D*=A curve will be MRB.
Q Q Quan
M M R • B maximizes profit and produces
RB tity
A B
RA QAQB.
• Thus A and B together supply to
three fourths of the total market,
while one fourth remains
unattended.
Collusive Oligopoly
• Rival firms enter into an agreement in mutual interest on various
accounts such as price, market share, etc.
• Explicit collusion: When a number of producers (or sellers) enter into
a formal agreement.
• Tacit collusion/Implicit: A collusion which is not formally declared.
• Cartel
• Agreement price and output.
• Small number of sellers with homogeneous product.
• Price fixation, total industry output, market share, allocation of
customers, allocation of territories, establishment of common sales
agencies, division of profits, or any combination of these.
Types of Cartels
• Two types:
• centralized cartels
• market sharing cartels.
Centralized Cartels
• Assuming the case of a cartel with
two firms facing same MR and AR
Price,
Cost,
MCB
∑MC • MCA = Firm A’s marginal cost
Revenue
MCA • MCB = Firm B’s marginal cost
• ∑MC = industry marginal cost
P
• OQ = profit maximizing output
because (MR=∑MC).
• OQA = A’ output
• OQB = B’s output
AR=D
MR • OQ=OQA + OQB; OQA > OQ B
• OP = price at which both firms can
O sell their output. Price will be
Quantity
QB QA Q determined by summation of all
firms’ costs and demand.
• In a cartel an individual firm is just
a price taker.
Market Sharing Cartels
Price, • Firms decide to divide the
Cost, market share among them and
Revenue fix the price independently.
MC AC
• All firms have the same cost
PA functions because they are
producing a homogenous
PB product but have different
demand functions.
ARA • Due to different demand
MRA functions, at equilibrium total
ARB
MRB output = OQA+ OQB, where
OQA> OQB.
O
Q B QA Quantity • The quantity of output produced
and sold would depend upon
the terms of agreement among
the firms in the cartel.
Factors Influencing Cartels
• Nature of product
• Cost structure
• Characteristics of sales
Product Pricing
Take –away of today’s lecture
Introduction
Penetration Pricing
• When a new firm plans to enter a market dominated by existing players, it
charges a low price, even lower than the ongoing price.
• Principles of marginal costing are used in this case.
Entry Deterring Pricing
• If the prevailing price is already very low, new entrants with high fixed cost
will not enter the market at a price lower than the prevailing price.
• Existing small players may not survive due to higher average cost.
• Also known as Limit Pricing.
Price Skimming
• A complete pricing package suitable for different life cycle
stages of a product, i.e. high price at the time of introduction
and lower price during maturity. (e.g. movie tickets, cars,
mobile handsets)
• During introduction stage producers charge a very high price
to skim the market and earn supernormal margins.
• During growth and maturity, sellers reduce their profit
margin and charge lower price to attract larger number of
consumers who have lower paying capacity.
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Informal and Tacit Collusion
they have tried to engage in price war to win more customers but have not