pp07

Slide 7.
Chapter 7
Analysis of monopoly markets
Joseph G. Nellis and David Parker, Principles of Business Economics, 2nd Edition Pearson Education Limited 2007
Slide 7.2
Topics
The conditions for monopoly. Price and output decisions in monopoly markets. Barriers to entry and exit. Welfare costs of monopoly. Possible dynamic gains from monopoly. Assessing monopoly power. Economic rent seeking behaviour.
Slide 7.3
Learning outcomes
This chapter will help you to:
Identify the circumstances and conditions under which a monopoly is said to exist. Recognise the main features of monopoly markets in terms of price and output decisions. Appreciate why a monopolist can be described as being a price-maker. Understand the importance and various forms of barriers to entry in monopoly markets as means of sustaining a position of market dominance.
Slide 7.4
Learning outcomes (Continued)

This chapter will help you to:
Grasp the significance of monopoly power and the impact on economic welfare in terms of allocative and productive efficiency. Assess the degree of monopoly power using various methods of measuring market dominance.
Appreciate the importance of potential market entry in limiting monopoly power (referred to as market contestability).
Understand the significance of rent seeking behaviour.
Slide 7.5
Figure 7.1
Price and output under monopoly

Slide 7.6
Barriers to entry and exit

Barriers to entry prevent competitors entering the market. Important examples are the following: Patents and copyright
Government regulations, licences and state ownership

Tariffs and non-tariff barriers. The existence of natural monopolies.
Lower costs of production than competitors

Control of necessary factors of production and materials Control of distribution channels
Slide 7.7
Other barriers to entry

Predatory pricing or the threat of a price war and other action against potential competitors. Creating excess capacity, which signals to potential suppliers that the monopolist might react to competition by increasing output and thus reducing the market price. Creating brand loyalty, including large-scale advertising expenditure. High research and development expenditure, as in the pharmaceuticals industry. A final barrier to entry is a barrier to exit. The main obvious barrier to exit facing a firm occurs where there are appreciable sunk costs.
Sunk costs arise when there is a need for high capital investment by a potential new entrant to match the production costs of the monopolist and these are costs which cannot be recouped if the firm subsequently decides to leave the industry.
Slide 7.8
The welfare costs of monopoly

Higher prices, higher profits and lower outputs. Loss of consumer surplus. Higher production costs. Loss of consumer choice.
Slide 7.9
Higher prices, higher profits and lower outputs than under perfect competition
Figure 7.2
The welfare costs of monopoly

Slide 7.10
Application 7.1
Patents and monoploly power

Slide 7.11
Possible dynamic gains from monopoly

The monopolist may price like a competitive firm whenever its market is contestable. A contestable market occurs where there are no barriers to the entry of firms into the market.
Slide 7.12
Assessing monopoly power

Government competition authorities have a number of ways in which they can assess the extent of competition in a market. Two approaches used involve an assessment of: Profit rates, and Concentration ratios.
Slide 7.13
Simple concentration ratios

These ratios represent the extent of the market supplied by a given number of firms. For example, a four-firm concentration ratio shows the percentage of the market supplied by the four largest producers.
Slide 7.14
Concentration ratios including market shares

One measure commonly used by government competition authorities is the so-called HerfindahlHirschman Index (HHI). This index, when measuring the degree of competition in a market, takes into account both the total number of firms in the market and their relative size distribution. It is measured as follows: HerfindahlHirschman Index (HHI) =
Si
i =1
where Si represents the market shares of each of the i firms in the market.
Slide 7.15
Economic rent seeking behaviour

Economic rent is earnings over and above those necessary to maintain an input in its present use (or its opportunity cost)
Rent seeking behaviour exists when economic agents attempt to earn economic rents
such as when a monopolist erects and maintains barriers to market entry or when firms collude rather than compete.
Slide 7.16
Key learning points

A pure monopoly exists when a single firm supplies the entire market for a good or service. Monopoly is associated with supernormal profits and with high barriers to entry to the market that protect the monopolists market dominance. The monopolists demand curve will be downward sloping, implying that more can be sold at lower price. Monopolists are price-makers and profits are maximised where marginal revenue (MR) equals marginal costs (MC).
Slide 7.17
Key learning points (Continued)

Barriers to entry prevent competitors entering the market, examples being patents and copyright, government regulations, licences and state ownership, tariffs and non-tariff barriers, natural monopolies, lower costs of production than competitors, control of necessary factors of production and control over distribution channels. Sunk costs arise when there is a need for high capital investment by a potential new entrant to match the production costs of the monopolist and these are costs which cannot be recouped if the firm subsequently decides to leave the industry.
Slide 7.18

The welfare losses associated with monopoly, compared with a competitive industry, fall into four main areas of concern, namely: higher prices, higher profits and lower outputs; loss of consumer surplus;
higher production costs;

loss of consumer choice. There are, however, possible dynamic gains from monopoly involving:
economies of scale and scope;

increased product and process innovation through increased investment in R&D.
Slide 7.19

Deadweight loss is the loss of welfare resulting from monopoly pricing.
A contestable market occurs where there are no barriers to the entry of firms into the market. The degree of monopoly power (dominance) in a market can be assessed using:
profit rates;
concentration ratios;
the HerfindahlHirschman Index.
Slide 7.20

Economic rent is earnings over and above those necessary to maintain an input in its present use (or its opportunity cost).
Rent seeking behaviour exists when economic agents attempt to earn economic rents.

pp07

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

pp07

Enviado por

Direitos autorais:

Formatos disponíveis

Slide 7.

Learning outcomes (Continued)

Price and output under monopoly

Barriers to entry and exit

Government regulations, licences and state ownership

Lower costs of production than competitors

Other barriers to entry

The welfare costs of monopoly

The welfare costs of monopoly

Patents and monoploly power

Possible dynamic gains from monopoly

Assessing monopoly power

Simple concentration ratios

Concentration ratios including market shares

Economic rent seeking behaviour

Key learning points

Key learning points (Continued)

Key learning points (Continued)

higher production costs;

economies of scale and scope;

Key learning points (Continued)

Key learning points (Continued)

Você também pode gostar