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MONOPOLY ECONOMIES OF SCALEMONOPOLY ECONOMIES OF SCALE
In spite of the undesirable economic effect of a In spite of the undesirable economic effect of a monopoly in general, a monopoly may in certain monopoly in general, a monopoly may in certain circumstances generate substantial economies of circumstances generate substantial economies of scale, which can be passed on to society in a lower scale, which can be passed on to society in a lower price. price.
The small firms of perfect competition are not large The small firms of perfect competition are not large enough to bring about the economies of scale. Such enough to bring about the economies of scale. Such economies of scale are to be found primarily in economies of scale are to be found primarily in natural monopolies. Some economists have natural monopolies. Some economists have questioned the existence of this beneficial questioned the existence of this beneficial economic effect. economic effect.
MONOPOLY TECHNOLOGICAL PROGRESSMONOPOLY TECHNOLOGICAL PROGRESS
Another potential benefit to society Another potential benefit to society from monopoly type firms is that profits from monopoly type firms is that profits are often the motivation for are often the motivation for technological progress and investment technological progress and investment in new technology is made possible by in new technology is made possible by the presence of these profits.the presence of these profits.
However, monopolies well protected byHowever, monopolies well protected byentry barriers will not need to seek new entry barriers will not need to seek new technology, and if they do, their goal technology, and if they do, their goal may be to lower costs for additional may be to lower costs for additional profits and new entry barriers.profits and new entry barriers.
PRICE DISCRIMINATIONPRICE DISCRIMINATION
Price discrimination exists Price discrimination exists whenever different prices are whenever different prices are charged for the samecharged for the same product product and the difference in price and the difference in price cannot be explained by costs. cannot be explained by costs.
PRICE DISCRIMINATION PRICE DISCRIMINATION CONDITIONSCONDITIONS
In order for the price discrimination to be In order for the price discrimination to be possible, a firm must;possible, a firm must;- be a monopoly or have some power over - be a monopoly or have some power over price,price,- be able to segment its market, and- be able to segment its market, and- be able to prevent cross selling from- be able to prevent cross selling from one one market segment to another.market segment to another.Generally, the market segments will have Generally, the market segments will have different elasticity's.different elasticity's.
PRICE DISCRIMINATION PRICE DISCRIMINATION
EFFECTSEFFECTS The purpose of price discrimination is to The purpose of price discrimination is to
increase the profit of the monopolist. This is increase the profit of the monopolist. This is achieved by charging a higher price to those achieved by charging a higher price to those customers who are more inelastic. customers who are more inelastic.
Price discrimination is generally considered Price discrimination is generally considered harmful to society and an unfair practice. harmful to society and an unfair practice.
Price discrimination is, nevertheless, tolerated Price discrimination is, nevertheless, tolerated in many instances, in part, because it may in many instances, in part, because it may result in larger overall output, and is result in larger overall output, and is occasionally a form of income redistribution. occasionally a form of income redistribution.
NATURAL MONOPOLYNATURAL MONOPOLY
Natural monopolies are said to exist Natural monopolies are said to exist in industries where competition is in industries where competition is unworkable and would result in costly unworkable and would result in costly duplication of fixed capital. Most duplication of fixed capital. Most naturalnatural monopolies are public monopolies are public utilities. These are regulated by the utilities. These are regulated by the government. government.
REGULATED MONOPOLYREGULATED MONOPOLY
The major task of the government The major task of the government regulating a natural monopoly is to set the regulating a natural monopoly is to set the price (or rate) that the utility is allowed to price (or rate) that the utility is allowed to charge. One method is the fair-return charge. One method is the fair-return pricing method. pricing method.
The price is set at the point where it is The price is set at the point where it is equal to average total cost. The average equal to average total cost. The average total cost is allowed to include a market rate total cost is allowed to include a market rate of return to make sure that new funds can of return to make sure that new funds can be attracted for expansion. This practice be attracted for expansion. This practice often results in cost padding by utilities. often results in cost padding by utilities.
REGULATED MONOPOLY SUBSIDYREGULATED MONOPOLY SUBSIDY
In a few cases of natural In a few cases of natural monopolies, a price below average monopolies, a price below average cost is imposed on a utility to cost is imposed on a utility to require a large output from the firm.require a large output from the firm.
The loss incurred by the firm is then The loss incurred by the firm is then offset with a subsidy. This is most offset with a subsidy. This is most often present in transportation often present in transportation companies.companies.
Monopoly Model Monopoly Model AssumptionsAssumptions
Pure monopoly is rare and even rarer in Pure monopoly is rare and even rarer in the new global economy. the new global economy.
Circumvent patents Circumvent patents
Monopolies may be the most efficient Monopolies may be the most efficient allocation of resources. allocation of resources.
Least cost, lowest priceLeast cost, lowest price
Nature of Monopolist RevenueNature of Monopolist Revenue
Marginal Revenue is < price. Marginal Revenue is < price. In order to increase sales must lower price. In order to increase sales must lower price. TR increases at a decreasing rate. TR increases at a decreasing rate.
Monopolist is price maker. Monopolist is price maker. Controls price through control of quantity. Controls price through control of quantity. But Elasticity of demand controls But Elasticity of demand controls
monopolist. monopolist.
Societal Evaluation of Societal Evaluation of
MonopolyMonopoly
Higher prices, lower output, Higher prices, lower output, allocative inefficiency. allocative inefficiency.
Unequal income distribution. Unequal income distribution. Since monopolists do not face Since monopolists do not face
competitioncompetition they tend to become they tend to become inefficient. inefficient.
Little incentive for R & D unless R & Little incentive for R & D unless R & D is the source of the monopolists D is the source of the monopolists barrier to entry. (Microsoft) barrier to entry. (Microsoft)
