ECO1010S_Ch11_Monopoly.pptx

ECO1010S_Ch11_Monopoly.pptx - ECO1010S Microeconomics...

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Monopoly ECO1010S Microeconomics Chapter 11 Monopoly Cecil Mlatsheni Room 4.43 Economics Building Consultation: by appointment [email protected]
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Topics covered in this section 2 How monopolies arise Profit maximisation under monopoly Price discrimination Comparing monopoly and perfect competition Monopoly policy issues
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What is a monopoly? A market structure in which there is a single supplier of a product. Key features Only a single producer - no competition Sells a product for which there are no close substitutions Examples: Basic public utilities suppliers (water, electricity, post and telecommunication…etc) Barriers to entry: prevent the new businesses from entering an industry in which the existing firms are earning an economic profit.
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Type of barriers 4 Natural barriers - economies of scale – see diagram on next slide Size of the market – not big enough to accommodate more firms Exclusive ownership of raw materials (De Beers controlling and owning mines and supply of diamonds to the market) Patents, copyright.. Licensing (cellular phone providers, certain professions like medicine and law) Purchase of sole rights (e.g. rights to televise a sporting event) Import restrictions to protect from foreign competition Barriers created by firms themselves (predatory pricing, also building up excess capacity to strategically flood market)
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Natural Monopoly
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Price setting strategy 6 Either Single price: sell each unit of its output for the same price to all its customers. Price discrimination: sell different units of a good or service for different prices, coming back to this later
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Single price monopoly’s output and price decisions 7 For now let’s assume we’re dealing with a single price monopolist Objective - profit maximisation Decision by the monopolist is how much to produce in order to maximise its profit.
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Price and marginal revenue under monopoly 8
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