PERFECT COMPETITION:
-Horizontal Demand Curve for Individual Firms
-Marginal Revenue = Average Revenue
-Price = Marginal Cost at the profit maximizing output level
-Perfectly elastic firm demand, while market demand elasticity can be anything
-In the long run, firms will only make normal profits
MONOPOLIES
-Downward Sloping Demand for the Firm
-Marginal Revenue is less than Average Revenue
-Price is greater than Marginal Cost at the profit maximizing level
-Elasticity is greater than 1, or the firm will not produce
-In the long run, monopolies can make economic profits
In a monopoly, there is no 'market supply curve', because the monopoly IS the market. Also, there is no difference between the long run and the short run, due to barriers to entry, which prevent other firms from entering the monopolist's industry.
---------------------------------------------
BARRIERS TO ENTRY: These can be natural or artificial
Profits still act as a signal for other firms to enter a monopolist's industry. Various BTEs (Barriers to Entry) prevent new firms from entering this market, however. As a result, market supply remains stable, and thus, a monopoly can still make economic profits over the long run.
Natural Barriers to Entry:
Economies of Scale and Scope- larger, well established firms are more able to access the cost-cutting benefits which are part and parcel to economies of scale. In a natural monopoly, one firm can remain in business because demand conditions prevent smaller, less efficient firms from competing and selling their products at a comparable price. EG: It's much less expensive to buy electricity from a pre-existing power company which already has a large, efficient power grid in place than it is to purchase electricity from a tiny solar farm which does not have the same economies of scale. Consumers choose the cheaper product, hence a natural monopoly.
Startup Costs- For larger industries, this can make entry impossible for all but the wealthiest of firms. EG: a nuclear reactor can cost billions in startup costs.
Artificial Barriers to Entry (Most of these are created or perpetuated by the government)
-Patents (These are prevalent in the pharmaceuticals industry, and they create legal monopolies on certain drugs for 20 years)
-Franchises (If you want to make big macs, then you need to buy a Mickie-Dee's franchise)
-Charters (These required for professionals like lawyers)
-Licenses (Eg: for farming or hunting or busking)
-Environmental Regulations (These force products to be up to certain environmental standards in order for them to be sold in a certain place. California is notorious for having very high environmental regulations, thus preventing the sale of many automobiles in the state of California)
-Red Tape (Aka: administrative forms which take a while for competing foreign firms to fill out before they can sell their product in a certain country)
-Government Procurement Policies (ie: Obama urges everybody to "buy American")
-Predatory Pricing (Safeway lowers its prices to the point where competing 'mom and pop' grocers can no longer compete. The rest of the safeway empire effectively subsidizes that one store, and the once the competition goes out of business, they raise their prices even higher than the competitions was in order to recap losses)
-Product Differentiation (This is psychological, and creates an artificial monopoly for stupid things like shampoo and toothpaste, which by all accounts, accomplish the same task regardless of brand).
-Etc.
In monopolies, barriers to entry prevent other firms from entering an industry in reaction to perceived profits, so monopolies CAN reap long run economic profits.
CARTELS: Voluntary Associations of producers who agree to act as a monopoly to maximize joint profits (ie: OPEC and DeBeers (a diamond wholesaler famous for paying hollywood to use expensive diamonds in movies to somehow ingrain the idea of diamonds symbolizing love into our public consciousness). When a cartel forms, all of the firms within the cartel are able to enjoy monopoly profit maximization (aka, they can sell less of their product for more money)
Problems:
-Enforcement Issues: Firms within a cartel have a large incentive to "cheat" and increase their own profits at the expense of everyone else in the cartel (backstabbing and cheating often cause cartels to collapse).
-Restrictive Entry: The profits create incentive for new entry.
MONOPOLIES and CARTELS USUALLY DO NOT LAST FOREVER! Why? CREATIVE DESTRUCTION (Schumpeter 1883-1950)!
-Creative new ideas destroy old ideas and structures, thus creating economic growth
-In the very long run, new products or processes ultimately circumvent barriers to entry (for an example, the explosion in online media distribution has caused many recording artists to completely cut out the middle man [record labels] and start selling their music directly to their fans through their own websites).
-Because of this, monopolies don't tend to stick around for very long unless they are protected by the government.
PRICE DISCRIMINATION & MULTI-PRICE MONOPOLISTS
Price Discrimination is when the same producer charges different prices for different units of the same good for reasons other than costs. There are a few ways of doing price discrimination:
1: You can charge the same buyer two different prices for the same good (ie: quantity discounts, wholesale versus retail, or the fact the certain goods are much cheaper in different locations [Buying textbooks in India will maybe set you back $50- not $500])
2: You can charge different buyers different prices for the same good
EG:
-Wholesale food products versus retail food products (same product, but it is cheaper to buy it wholesale)
-Telephone (residential phones are less expensive than business phones, even though it is the same service)
-Hydroelectric (After you have used up a certain amount of power, often, power becomes cheaper by the Kilowatt-hour)
-Airlines
-Seniors/Students/Children's Discounts (like for translink)
-Dumping
-Hurdle Pricing (new technology is often extremely expensive initially, because many people are willing to buy new technology at a much higher price. After a few months, the price decreases).
CONDITIONS FOR PRICE DISCRIMINATION TO OCCUR:
-Monopoly Power must be Established (price takers cannot offer different prices, and firms must be able to 'segment' up the market in order to utilize price discrimination)
-Consumers must value different units of the same product differently (this means that demand must be negatively sloped for the firm. This means either than each individual consumer values a product less as they increase consumption, or that different groups of consumers are willing to purchase the same good at different prices)
-No Arbitrage/Resale Market (Price discriminating monopolies must avoid pricing a product so low for one market segment that a third party could buy their product at the lower price and then resell it at a higher price. This would effectively destroy their monopoly power).
ADVANTAGES OF PRICE DISCRIMINATION:
-Multiprice monopolists effectively cut into consumer surplus and take is as profit. By selling at many different prices for different quantities, they are able to raise the price closer to what the consumers value the product at for each level of output. Profits increase, and consumer surplus decreases.
-In a perfect price discrimination scenario, the monopolist charges the demand curve price (the reservation price) for each quantity of a good. As a result, the marginal revenue becomes the price line. Output is the same as it would be for perfect competition, and all consumer surplus has been converted into profits.
RESULTS OF PRICE DISCRIMINATION:
-Higher Profits (for each output, profits will be higher for a multi-price monopolist than for a single-price monopolist)
-Higher Output (Output can be higher for multi-price monopolists than for single-price monopolists because a multi-price monopolist can continue to produce until price = marginal cost)
-The Market is very efficient this way- consumers may hate it, but it allows for much higher productivity than other systems.
-The total economic surplus from economic exchange is much greater due to this increase productivity.
-The firms, however, see all of the surplus, while the consumers get no surplus
-Different people with different opinions will judge this as "right or wrong" based on value judgements
RECAP:
Things to ask when looking at a graph
1- Is this for the individual firm, or for the entire industry
2- Is this the short run, or the long run?
3- Is this perfect competition, monopoly, or a different market structure?
That's all
No comments:
Post a Comment