MONOPOLIES,

MONOPSONIES, AMD
DOMINANT FIRMS
Magfirah Ayu Meilani 15060053
Salwa Nabila Putri 15060043
Melda Susanti 15060023
 Monopoly Behavior
 If the monopoly set a
quatity, the market price is
determined by market
demand curve.
 Profit maximation
A monopoly sets it level of
output to maximize its
profits. Because the
demand curve is downward
loping, the more the
monopoly sells, the lower
the price it receives.
 Profit are maximized where
marjinal revenue equal marginal
cost
 Price-cost margin: the
difference between price and
marginal cost as a fraction of
price.
 The price—cost markup is also
called the Lerner Index of
market power.
 Where the elasticity of demand
is relatively inelastic, a
monopoly markup may be
substantial
 Monopoly Power
Monopoly power whenever a firm can influence the price it receives for its
product, the firm is said to have monopoly power or market power.
Prices may exceed marginal cost even though profits are not above
competitive level.
 The incentive for efficient operation
An inefficient monopoly can profitably remain in business
Monopolies want to miximize profits, and the only way a firm can do do is
to minimize its cost at its chosen output level.
A monopoly, however, may not have the same ability to produce as
efficiently as a competitive firm
 Monopoly behavior over time
If monopoly were operating in the elastic portion of its demand curve, it
could increase its profits by raising its proces until it was operating in the
elastic portion of its demand curve.
If the monopoly is operating in the elastic ortion of demand curve, it should
keep increasing its price, obtaining ever more profits, until it is in elastic
portion of demand curve.
Timeless model, in actual market, demad curves shift over time
Consumers may have a more inelastic demand curve in the short run than
in long run
 THE COST AND BENEFITS OF
MONOPOLY
 The deadweigt loss of monopoly
In order to maximize its profit, a monopoly sets its output where its
marginal revenue curve intersect its marginal cost curve
Both monopoly and inefficient tax cause a deadweight loss
Tax revenues go to goverment, whereas the monopoly keeps the
monopoly profit.
 Rent-seeking behavior
Firms compete to earn the”rent”(monopoly profit) from monopoly, the
expenditure of resources to attain govermet-created monopoly profits
The recent rescinding of may goverment regulations will provide sizable
benefits to society
•Monopoly profits and deadweight
loss vary with the elasticity of
demand
Monopoly profits and the
DWL triangle depend on the
shape of demand curve.
Monopoly profits and
deadweight loss vary with
the elasticity of demand
with linear demand curve,
p=a-bQ
Demand curve become
steeper at a given quatity,
the deadweight loss
increases
 The benefits of monopoly
The walfare harms from monopoly may be offset by several benefits
These benefits are ignored in the static analysis above where we
calculated deadweight lossess
If monopoly had no offetting benefits, competitionn would be preferable.
As long as new entry takes time, the firms could price above their
marginal cost.
Because there is no benefit from this action, such behavior should be
discouraged
 CREATING AND MAINTAINING A
MONOPOLY
 Knowledge advantage
o A firm may have special knowledge
that enable it to produce a new or
better product that others cannot
imitation.
o A firm may have special knowledge
about production techniques that
enable it to produce the same
product at lower cost than other firm,
which may be unable to discover the
production technique of the efficient
firms
 Goverment-created monopolies
A firm may be a monopoly because the goverment protects it from entry
by other firm
Trade barrires can be used to prevent entry
 Natual monopoly
In some markets, it is efficient for only one firm to produce all the output.
Whwn totoal production cost would rise if two or more firms produced
instead of one
If production is characterized by economics of scale everywhere, then
average cost declines as output increaces, and it is always less costly for
one firms to produce qny given ouput that for several firms to produce that
output.
 PROFIT AND MONOPOLY
 Althought a monopoly may earn positive profit, it does not follow that
any firm that earns positive profit is monopoly.
 Althought a monopoly earns higher profit than a competitive firm
would, a monopoly can make losses, just as a a competitive firm can.
 In the long run, a competitive firms make zero economics profit,
whereas a monopoly makes a zero or positive profit.
 In the short run, both competitive firms and monopolies may make
losses or profits
MONOPSONY
 A single buyer in a market is called a monopsony
 A monopsony decision on how much to buy affect the price it
must pay.
 The monopsony decides how much to purchase by choosing
a price-quantity pair on the market supply curve.
 The marginal cost to a monopsony of buying additional unit is
described bya a marginal outlay schedule
 Marinal outlay schedule lies
above the upward-sloping curve
because the monopsony must
raise the wage for all its workers
to hire an extra worker
 There is some evidence of
monopsony power in some
agricultural and natural
resource market
 In long run, supply curve is flat,
there may not be any
monopsony power even in the
short run.
DOMINANT FIRM WITH A
COMPETITIVE FRINGE
 If one firm is a price setter and faces smaller, price-taking
firms, it called a dominant firm.
 The smaller, price-taking firms, called fringe firm, each have
a very small share of the market, though collectively they
may have a substantial share of the market
 How entry limits a dominant firm’s market power:
 Entry by other firms is impossible
 Entry by competing fringe firms can occur instantancously
 Two main conclusions:
 It is generally not in a profit-maximizing dominant firms best interest
to set its price so low thatit drives all competitive-fringe firm out of the
market
 The presence of competitive-fringe firm or the treat of entry by
additional firms may force a dominant firm to set a price lower than
the price monopoly would set.
 Least four major cause of lower cost at some firm are dominant;
A firm may be more efficient than its rivals
An early entrant to market may have lower cost from having learned by
experience how to produce more effficiently
An early enttant may have had time to grow large optimally so as t benefit
from economics of scale
The goverment may favor the original firm
That a dominant fir may have a superior product in a market where each
firm produce a differentiated product.
 The no-entry model, five crusial assumptions underlies this no-entry
model;
 There is one firm that is much larger than any other firm because of its
lower production costs
 All firm, except the dominant firm, are price-takers
 The number of firm in compettive fringe is fixed
 The dominant firm knows the market demand curve
 The dominant firm can predict how much ouput the competitive fringe willa
produce at any given price
Two types of market:
The dominant firmchanges a
high price, so that it makes
economic profits and the fringe
firms also make profits or break
even
The dominant firm set a price
so low that the fringe firms shut
down to avoid making lisses