1. For the same demand and cost conditions, how do price and output of a monopol
ID: 1186242 • Letter: 1
Question
1. For the same demand and cost conditions, how do price and output of a monopoly compare to those for a competitive firm and why is the deadweight loss of a monopoly a loss of welfare?
2. a)Define the market for Coca-Cola. That is, what would you include in the market for Coca-Cola?
b)Considering your answer for part a, how does what you include in this market alter the market power of Coca-Cola?
c) Explain how cross-price elasticity of demand is relevant to a firm being investigated for antitrust violation. If you were the chief economist for this firm, would you want to show a high cross-price elasticity or a low-low cross price elasticity of demand between your product and a rival product? Why?
Explanation / Answer
1. A monopoly (from Greek monos ????? (alone or single) + polein ?????? (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity (this contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry).[1] Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.[2] The verb "monopolize" refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge high prices.[3] Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).[4] A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monopsony) and the other companies (oligopoly) in ways that leave market interactions distorted.[citation needed] When not coerced legally to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at higher prices than would be the case for perfect competition.[citation needed] Monopolies can be established by a government, form naturally, or form by integration. In many jurisdictions, competition laws restrict monopolies. Holding a dominant position or a monopoly of a market is not illegal in itself, however certain categories of behavior can, when a business is dominant, be considered abusive and therefore incur legal sanctions. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyright, and trademarks are sometimes used as examples of government granted monopolies, but they rarely provide market power. The government may also reserve the venture for itself, thus forming a government monopoly Characteristics Profit Maximizer: Maximizes profits. Price Maker:- Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm. High Barriers to Entry:- Other sellers are unable to enter the market of the monopoly. Single seller:- In a monopoly, there is one seller of the good that produces all the output.[5] Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry. Price Discrimination:- A monopolist can change the price and quality of the product. He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market. Monopoly versus competitive markets While monopoly and perfect competition mark the extremes of market structures[15] there is some similarity. The cost functions are the same.[16] Both monopolies and perfectly competitive companies minimize cost and maximize profit. The shutdown decisions are the same. Both are assumed to have perfectly competitive factors markets. There are distinctions, some of the more important of which are as follows: Marginal revenue and price: In a perfectly competitive market, price equals marginal cost. In a monopolistic market, however, price is set above marginal cost.[17] Product differentiation: There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute for any other. With a monopoly, there is great to absolute product differentiation in the sense that there is no available substitute for a monopolized good. The monopolist is the sole supplier of the good in question.[18] A customer either buys from the monopolizing entity on its terms or does without. Number of competitors: PC markets are populated by an infinite number of buyers and sellers. Monopoly involves a single seller.[18] Barriers to Entry: Barriers to entry are factors and circumstances that prevent entry into market by would-be competitors and limit new companies from operating and expanding within the market. PC markets have free entry and exit. There are no barriers to entry, exit or competition. Monopolies have relatively high barriers to entry. The barriers must be strong enough to prevent or discourage any potential competitor from entering the market.[citation needed] Elasticity of Demand: The price elasticity of demand is the percentage change of demand caused by a one percent change of relative price. A successful monopoly would have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of effective barriers to entry. A PC company has a perfectly elastic demand curve. The coefficient of elasticity for a perfectly competitive demand curve is infinite.[citation needed] Excess Profits: Excess or positive profits are profit more than the normal expected return on investment. A PC company can make excess profits in the short term but excess profits attract competitors, which can enter the market freely and decrease prices, eventually reducing excess profits to zero.[19] A monopoly can preserve excess profits because barriers to entry prevent competitors from entering the market.[20] Profit Maximization: A PC company maximizes profits by producing such that price equals marginal costs. A monopoly maximises profits by producing where marginal revenue equals marginal costs.[21] The rules are not equivalent. The demand curve for a PC company is perfectly elastic
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.