Economic Management #5: Monopolies

[samvara]

Gah. Have demonstrated that one large mocha is an opportunity to feel queasy and have my eyeballs dry out. Don't do that again.

Monopoly Pricing:

• A monopoly is the dominant firm in the market place
• Monopoly pricing reflects the dominant position of the firm
• Unlike price-taking firms of perfect competition, the monopolist has the whole market demand curve to work with
• Monopolist has the ability to withhold supply as no other alternatives exsit for the buyers

Sources of Sustainable Market Power

• Legal Restrictions - copyrights and patents give firms monopoly rights for a specific period of time
• Resources - control of criticalresources
• Government authorise franchises - give control
• Economies of scale - larger firms can produce at a lower cost, if barrier to entry is high then existing firm has a huge advantage

Erosion: e.g. Netscape had 80% of the browser market until Internet Explorer was marketed very aggressively and took 55%, Firefox then eroded IE's position.

Price versus Quantity

• A monopoly can set Price (p) or Quantity (Q) to maximise profit, it can't set both.
• profit is maximised where MR = MC

Since a monopoly can choose to produce less, it is generally inefficient.

Market Power  = (price - MC)/Price * 100

• e.g. product sold at $5 but marginal cost is $2.5 then MP = (5 - 2.5)/5 * 100 = 50%

Price Discrimination

• involves departing from uniform pricing policy
• based on selling identical products at different prices
• requires transaction and information costs and the consequent inability of buyers to trade with each other (arbitrage) when they are sold the same product at a different price

Conditions for price discrimination

• firm must have some degree of market power
• consumers must have different elasticities of demand
• firm must be able to identify and charge acordingly
• resale by customers not possible

Multi-part tariffs (pay entry to a faire, pay for every thing you do in there, or price for commercial versus private electricity) or market segmentation (sell to two different parts of the market) are the big examples

...there was a bunch of stuff on why we regulate monopolies but I am gonna stop here.