Presentation why is monopoly not popular in the current business environment(1)
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Presentation why is monopoly not popular in the current business environment(1)
- 1. WHY IS MONOPOLY NOT POPULAR IN THE CURRENT BUSINESS ENVIRONMENT?
- 2. TYPES OF MARKET STRUCTURES IN THE ECONOMY Market structure identifies how a market is made up: Number of firms in the industry Nature of the product produced Degree of monopoly power each firm has Degree to which the firm can influence price Profit levels Firms’ behaviour – pricing strategies, non-price competition, output levels Extent of barriers to entry More competitive / More number of firms Less competitive / Less number of firms Perfect Competition Monopolistic Competition Oligopoly Monopoly
- 3. MONOPOLY MARKETPLACE A pure monopoly is where only one producer exists in the industry. Sources of monopoly: Economies of scale and excess capacity Economies of scope and cost complementarities Capital requirements, sales and distribution networks Differentiated products and brand loyalty Patents and other legal barriers Tying and exclusive contracts Entry limit pricing Monopoly power: Firms influence the market through their behaviour, determined by the degree of concentration in the industry: Influencing prices Influencing output High barriers to entry EXAMPLE: Exclusive licensure, anti-competitive subsidization and/or tariff protection including Public Utilities, TV distribution rights, and Professional Sports Leagues.
- 4. MONOPOLY IN CURRENT ENVIRONMENT Monopoly rarely exists as there is always some form of substitute available in the market. EFFECTS OF A MONOPOLISTIC MARKETS Premium price Restricts output Restricting choice for consumers Irrelevant features to differentiate the products AVAILABILITY OF ALTERNATIVES CAN AFFECT THE MONOPOLISTIC MARKETS Customers can find alternatives to the products offered by the monopolist. EXAMPLE: For example: The US Postal Service had monopolistic powers on delivering first-class letters. The consumers many find alternatives, such as using standard mail through FedEx or UPS, or using email instead of a letter.
- 5. MONOPOLY RESTRICTS INCENTIVE TO INNOVATE Monopoly • Low incentive to engage in R&D as the profit is protected by absolute barriers to entry Oligopoly • Encourage technical advances and spent the highest amount on R&D among the four different market structure Monopolistic Competition • Firms invest in product development as they compete over product differentiation Perfect Competition • Firms of the same industry may gather their resources and develop R&D programs • Individually, the firms spend no significant amount on R&D
- 6. ALLOCATIVE INEFFICIENCY IN A MONOPOLY V/S COMPETITION Allocative efficiency refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. Profit maximization in perfect competition • P = MC, where the price (P) is a measure of how much buyers value the good and the marginal cost (MC) is a measure of what marginal units cost society to produce Profit maximization in monopoly • P > MC; which implies the marginal benefit to society (as measured by P) is greater than the marginal cost to society of producing additional units, and a greater quantity should be produced. CONCLUSION: • Consumers suffer from a monopoly because a lower quantity will be sold in the market, at a higher price, than would have been the case in a perfectly competitive market.
- 7. PRICING UNDER A MONOPOLISTIC ENVIRONMENT Monopolies create prices that are higher, and output that is lower, than perfectly competitive firms. Monopolies can influence a good's price by changing output levels, which allows them to make an economic profit. The firm will always set output at a level at which MC=MR, so the quantity is where these two curves intersect. Price is determined by the demand for the good when that quantity is produced. Because a monopoly's marginal revenue is always below the demand curve, the price will always be above the MC at equilibrium, allowing the firm to earn a significant economic profit.
- 8. PROFIT UNDER A MONOPOLISTIC ENVIRONMENT Profit = Maximizing Output MR = MC rule states that the profit = maximizing output The monopolist would be able to maximize profit where TR minus TC is the greatest, which depends on quantity sold as well as on price. Income distribution is more unequal under a monopoly and can be regulated by the government Producer surplus is significant due to lack of competition, but consumer surplus would be minimum.
- 9. SOCIAL COST OF MONOPOLY There is a loss of consumer surplus and a deadweight loss from monopoly pricing. Monopoly earns a higher profit because of its market power Creates a social cost, called a deadweight loss, as some consumers who would be willing to pay for the product up to its marginal cost (MC), are not served. In a monopolized market, the firm produces and sells a quantity of output below the level that maximizes total surplus (as discussed in the previous slides). The deadweight loss is the low quantity of output served by the monopoly’s high price. NOTE: • In a competitive market, all the gains from trade are realized. • If sellers have market power, some gains from trade are lost because the quantity traded is below the competitive level.
- 10. LEGAL RESTRICTIONS AGAINST MONOPOLY Monopolies fail to allocate resources efficiently Policy makers in the government have taken initiatives to respond to the problem of monopoly: By trying to make monopolized industries more competitive (Competition Law) By regulating the behaviour of the monopolies (Regulation) Competition Law Competition law is a law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. It is implemented through public and private enforcement. It prohibits the creation of a monopoly power. EXAMPLES OF COMPETITION LAWS: • Anti-trust law in the United States • Anti-monopoly law in China and Russia • Trade practices law in the United Kingdom and Australia.
- 11. PURE MONOPOLIES IN THE LONG RUN Pure monopolies do not exits For a pure monopoly to exist; all the three conditions should be satisfied; otherwise, a monopoly would be reduced to a competitive market. 1. Single seller in the market 2. No close substitutes available 3. Strong barriers to entry All the above three conditions are difficult to satisfy in the long run as any company with a new or innovative product or service enjoys a monopoly only till competitors emerge with the substitute of the product. In the current business environment, Monopolies are often temporary and/or generally take control of only a certain region “No firm is completely sheltered from rivals; all firms compete for consumer dollars. Hence, pure monopoly does not exist in the long run.”
- 12. REFERENCES Academic • Foundation for Economic Education • Oxford Academic Journals • http://www.dklevine.com/papers/monopoly_innovation.pdf • http://www.econ.yale.edu/~gjh9/econ115b/slides11_4perpage.pdf • http://cnx.org/contents/dN6jsAyR@2/How-a-Profit-Maximizing-Monopo Internet • www.economicsonline.co.uk • http://smallbusiness.chron.com/monopoly-affect-business-consumers- 70033.html • http://www.alternet.org/economy/us-economy-increasingly-dominated- monopolies-2015-corporate-mergers-continue • http://www.hopesandfears.com/hopes/now/question/216743-is- competition-or-monopoly-more-innovative
Notas do Editor
- Speaker narration notes: What are the different types of market structures in an economy and how are they characterised? There are four major types of market structures in an economy. Perfect Competition Monopolistic Competition Oligopoly Monopoly Each market structure has its distinctive features characterised by: Number of firms in the industry Nature of the product produced Degree of monopoly power each firm has Degree to which the firm can influence price Profit levels Firms’ behaviour – pricing strategies, non-price competition, output levels Extent of barriers to entry Perfect Competition: is characterised by Large number of firms; homogenous (identical) products; freedom of entry and exit; Firms are price takers and have no control over the price they charge; Each producer supplies a very small proportion of total industry output; and consumers and producers have perfect knowledge about the market. Monopolistic Competition: is characteristics by Large number of firms in the industry; products are close but not perfect substitutes; firms have some element of control over price as the firms can differentiate their product from their rivals; Few barriers to entry and exit; and consumer and producer have knowledge imperfect Oligopoly: is characterised by small number of very large producers dominating the industry; Relatively stable price across the industry; Behaviour of firms affected by what they believe their rivals; Goods offered could be homogenous or highly differentiated; Branding and brand loyalty are source of competitive advantage; Non-price competition may be prevalent and High barriers to entry in the industry. Monopoly: is characterised by a marketplace where only one producer exists in the industry and hence dominates the market; therefore the firm Influences the prices and output in the market; and high barriers to entry. As we move from left to right, the competitiveness increases.
- Speaker narration notes: A pure monopoly is where only one producer exists in the industry. Therefore, the single firm dominates the market with its product / service offering. Some common sources of a monopoly are: - Economies of scale and excess capacity - Economies of scope and cost complementarities - Capital requirements, sales and distribution networks - Differentiated products and brand loyalty - Patents and other legal barriers (licenses) - Tying and exclusive contracts - Entry limit pricing (predatory pricing illegal) A monopoly firm exercises Monopoly power. Monopoly power refers to cases where firms influence the market in someway through their behaviour, determined by the degree of concentration in the industry. Influencing prices Influencing output High barriers to entry For Example: The most common monopoly markets operate with exclusive licensure, anti-competitive subsidization and/or tariff protection. These include public utilities and TV rights. Utilities market is highly monopolistic such as providers of water, natural gas, telecommunications, and electricity as they are granted exclusive rights to service municipalities through local governments. Ownership or control of essential resources is another barrier to entry that leads to monopoly, such as the professional sports leagues that control player contracts and leases on major city stadiums.
- Speaker narration notes: Monopoly rarely exists as there is always some form of substitute available in the market. EFFECTS OF A MONOPOLISTIC MARKETS The common objection with monopolistic markets is that a monopoly could charge a premium to its customers as the buyer has no available substitutes, and hence are forced to pay more to the monopolist. According to neoclassical analysis, a monopolistic market is undesirable because it restricts output, not because the monopolist benefits by raising prices. Restricted output equates to less production, and hence regulate the supply of the product in the market. Restricting choice for customers. To differentiate its products monopolists add irrelevant features and do not concentrate on improving the basic product which in turn results in consumers paying extra for added features but in reality that feature of product does not result in increase in consumer surplus. It is often argued that for a monopolistic markets it is uncommon to restrict output or gain super-normal profits in the long run. As customers can find alternatives to the products offered by the monopolist. For example: The U.S. Postal Service had a legal monopolistic powers on delivering first-class letters. The consumers many find alternatives, such as using standard mail through FedEx or UPS, or using email instead of a letter.
- On the basis on innovation and incentive to invest in R&D, monopolistic market lacks behind other competitive markets. 1. Under a Monopoly market, the firm has little incentive to engage in R&D as the profit is protected by absolute barriers to entry, the only reason for R&D would be defensive; to reduce the risk of a new product or process which would destroy the monopoly. 2. Under a Oligopoly market, firms encourage technical advances including as they are large in size and experience ongoing economic profits. Firms in oligopoly spent the highest amount on R&D among the four different market structures. 3. Under Monopolistic Competition, there is a strong profit incentive for the firms to engage in product development as they depend on product differentiation to stand out from a large number of rivals. However, most firms remain small which limits their ability to secure funds for R&D. 4. Under Perfect Competition, the firms of the same industry may gather their resources together and develop R&D programs. On the other hand, the firms individually spend no significant amount on innovation and R&D as the firms are small in size and earn zero economic profit in the long run.
- Allocative Inefficiency of a Monopoly Allocative efficiency refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. Profit maximization in perfect competition is where each firm produces the quantity of output where P = MC, where the price (P) is a measure of how much buyers value the good and the marginal cost (MC) is a measure of what marginal units cost society to produce. In the case of monopoly, price is always greater than marginal cost which implies the marginal benefit to society (as measured by P) is greater than the marginal cost to society of producing additional units, and a greater quantity should be produced. Hence, Consumers suffer from a monopoly because a lower quantity will be sold in the market, at a higher price, than would have been the case in a perfectly competitive market.
- Pricing under monopoly Monopolies create prices that are higher, and output that is lower, than perfectly competitive firms. This causes economic inefficiency. How? Monopolies, unlike perfectly competitive firms, are able to influence the price of a good by changing the output level and able to make a positive economic profit. While a perfectly competitive firm faces a single market price, represented by a horizontal demand/marginal revenue curve. A monopoly faces the downward-sloping market demand curve. Typically a monopoly selects a higher price and lesser quantity of output than a price-taking company. Hence, less is available to customers at a higher price. Graphically, the firm will always set output at a level at which marginal cost equals marginal revenue, so the quantity is where these two curves intersect. Price, however, is determined by the demand for the good when that quantity is produced. Because a monopoly's marginal revenue is always below the demand curve, the price will always be above the marginal cost at equilibrium, allowing the firm to earn a significant economic profit.
- Profit under monopoly Profit = Maximizing Output The MR = MC rule in micro economics states that the profit = maximizing output. The monopolist cannot charge the highest price possible in order to maximize profit. It would be able to maximize profit where TR minus TC is the greatest, which depends on quantity sold as well as on price. The monopolist can charge the price that consumers will pay for that output level. Therefore, the price is on the demand curve. Losses can occur in monopoly, although the monopolist will not persistently operate at loss in the long run. Income distribution is more unequal under a monopoly as compared with the competitive market environment, unless the government regulates the monopoly and prevents monopoly profits. Producer surplus is significant due to lack of competition, but consumer surplus would be minimum. This market structure will not contribute to a fair income distribution to the society.
- Social cost of a Monopoly There is a loss of consumer surplus and a deadweight loss from monopoly pricing. There is optimum allocation of resources under perfect competition and therefore social welfare is maximum. However, under monopoly resources are misallocated which causes loss of social welfare. A monopoly firm earns a higher profit because of its market power. But it also creates a social cost, called a deadweight loss, as some consumers who would be willing to pay for the product up to its marginal cost (MC), are not served. The problem in a monopolized market arise because the firm produces and sells a quantity of output below the level that maximizes total surplus (as discussed in the previous slides). The deadweight loss is the low quantity of output served by the monopoly’s high price. Note: In a competitive market, all the gains from trade are realized. If sellers have market power, some gains from trade are lost because the quantity traded is below the competitive level.
- LEGAL RESTRICTIONS AGAINST MONOPOLY Monopolies fail to allocate resources efficiently because monopolies produce less than the socially desirable quantity of output and as a result charge prices above marginal cost. Policy makers in the government have taken initiatives to respond to the problem of monopoly by: By trying to make monopolized industries more competitive (Competition Law) By regulating the behaviour of the monopolies (Regulation) Competition Law Competition law is a law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. It is implemented through public and private enforcement. It prohibits the creation of a monopoly power. Competition law is known as anti-trust law in the United States, and as anti-monopoly law in China and Russia; trade practices law in the United Kingdom and Australia.
- Pure monopolies do not exits in the long run For a pure monopoly to exist; all the three conditions should be satisfied; otherwise, a monopoly would be reduced to a competitive market. Single seller in the market No close substitutes available Strong barriers to entry All the above three conditions are difficult to satisfy in the long run as any company with a new or innovative product or service enjoys a monopoly only till competitors emerge with the substitute of the product. To conclude the presentation , we can say that “No firm is completely sheltered from rivals; all firms compete for consumer dollars. Hence, pure monopoly does not exist in the long run.” In the current business environment, Monopolies are often temporary and/or generally take control of only a certain region.