EntranceThe system of economic relations arising between the state, society and monopolies. Monopoly
When a monopolist determines the optimal volume of output, the same approaches can be used as in pure competition:
- comparison of gross revenue with gross costs;
- comparison of marginal revenue with marginal cost.
In the first approach, the optimal output will be such a volume of output at which the gross revenue to the greatest extent exceeds gross costs. In this case, the monopolist receives the maximum gross profit. According to the table, the optimal number of products is 9 units. In this case, the price is 61 p.
Graphically, the firm's choice of the optimal output volume can be shown in Fig. b, depicting there the curve of the gross costs of the TS. The monopolist will make a profit between points C and E. The optimal volume is achieved with an output in which there is a maximum gap between the TR and TC charts - this is 9 units. The maximum gross profit Tπ is equal to segment AB.
In the second approach, the monopolist must produce additional units of output as long as MR > MC, i.e., the firm receives marginal, additional profit Мπ. The maximum gross profit will be at such an output volume at which MR = MC.
According to Table. MR > MC from the first to the ninth unit and should be produced. The maximum gross profit, in accordance with the MR = MC rule, is achieved at 9 units, where the marginal revenue in last time exceeds the marginal cost (21 rubles > 20 rubles). This quantity of products can be sold at a price of 61 rubles. for a unit. The maximum gross profit with this volume will be 248 rubles. It makes no sense to produce the tenth unit, since MR< MC (11 р. < 25 р.). Монополист будет нести предельный, дополнительный убыток (-14р.) и его валовая прибыль снизится на эту величину.
Graphically, the firm's choice of the optimal production volume is shown in Fig. In accordance with the intersection point of the MR and MC graphs (point E), Q m = 9 units. However, the monopolist will not sell this quantity of output at the price corresponding to point E. The higher demand schedule for its products and monopoly power allow it to sell this quantity at a higher price P m . In accordance with the data in the table, the price of P m is 61 rubles.
An analysis of the economic behavior of a firm under conditions of pure competition and pure monopoly allows us to note some of the main economic consequences of a monopoly.
1. Under conditions of pure monopoly, a firm with the same costs and demand it is profitable to sell less products, but at a higher price than in conditions of pure competition. This can be shown graphically in Fig. Let's pretend that we are talking about the same industry that produces a certain homogeneous product.
On fig. it can be seen that the optimal output Q m , which provides the monopolist with the maximum gross profit, is less than the equilibrium output Q c , which would be established in a competitive industry. At the same time, the price P m at which the monopolist will sell products is higher than the equilibrium price P c that would be formed in a competitive industry market. This consequence needs to be explained.
Pure monopoly contributes to the growth of inequality in the distribution of income in society as a result of monopoly market power and charging higher prices at the same cost than under conditions of pure competition, which allows for monopoly profit.
Under conditions of market power, it is possible for a monopolist to use price discrimination when different prices are assigned to different buyers.
Many of the pure monopoly firms are natural monopolies that are subject to mandatory government regulation under antitrust laws.
To study the case of a regulated monopoly, we use the graphs of demand, marginal revenue and costs of a natural monopoly that operates in an industry where positive effect scale is manifested at all volumes of output. The higher the firm's output, the lower its average cost ATC. In connection with such a change in average costs, the marginal cost of MS at all outputs will be lower than average costs. This is due to the fact that, as we have established, the marginal cost graph intersects the average cost graph at the point of minimum ATC, which is absent in this case.
Determination of the optimal volume of production by a monopolist and possible methods its regulation will be shown in Fig.
As can be seen from the graphs, if this natural monopoly were unregulated, then the monopolist, in accordance with the rule MR = MC and the demand curve for his products, chose the quantity of products Q m and the price P m that would allow him to get the maximum gross profit. However, the price P m would exceed the socially optimal price.
Socially optimal price is the price that ensures the most efficient distribution of resources in society. As we established earlier in Topic 4, it must correspond to marginal cost (P = MC). On fig. this is the price P o at the point of intersection of the demand curve D and the marginal cost curve MC (point O). The volume of production at this price is Q o.
However, if the state authorities fixed the price at the level of the socially optimal price P o, then this would lead the monopolist to losses, since the price P o does not cover the average gross costs of the ATS.
To solve this problem, the following the main options for regulating the monopolist:
Allocation of state subsidies from the budget monopoly industry to cover the gross loss in the case of a fixed price at the socially optimal level.
Giving the monopoly industry the right to price discrimination in order to obtain additional income from more solvent consumers to cover the loss of the monopolist.
Setting a regulated price at a level that ensures a normal profit. In this case, the price is equal to the average gross cost. In the figure, this is the price P n at the point of intersection of the demand curve D and the ATC average gross cost curve. Output at a regulated price P n is equal to Q n . The price P n allows the monopolist to recover all economic costs, including a normal profit.
Chapter 7 Monopoly
A monopoly is a market structure that meets the following conditions:
The output of a commodity by an entire industry is controlled by only one seller of it, who is called a monopolist. In other words, the monopoly firm is the sole producer of the good and represents the entire industry;
The product produced by the monopolist is special in its kind and has no close substitutes. Accordingly, the demand for a product changes slightly when prices for goods in other industries change, and therefore the cross elasticity of demand for a monopolized product and products of other sectors of the economy is very low;
The monopoly is completely closed to the entry of new firms into the industry.
These conditions mean that a monopoly firm is able to independently change the price of the goods sold in any direction within certain limits (unlike perfect competition, in which individual firms cannot influence the price of the goods they produce). Since the monopoly firm acts as an industry, the demand curve for the entire volume of goods produced, i.e. the market (industry) demand curve is also a monopoly demand curve. This means that the monopoly firm is obliged to lower the price of the product produced in order to sell an additional unit of its product. It follows that, in contrast to perfect competition, in which marginal revenue is also equal to price, under monopoly marginal revenue MR is always less than average revenue AR, i.e. is always less than the price of the good and the marginal revenue curve MR always lies below the AR curve, i.e. below the demand curve.
Equilibrium in the short run. According to the universal rule 2, acting in any market structure, the firm produces such a quantity q of the good, at which MR=MC. The monopoly firm will also seek to fulfill this condition; the price of the goods in this case will be determined by the demand for the goods of the monopoly firm (demand curve). The disclosure of the dependence of the price of a product produced by a monopolist on the volume of output is easier to do using the appropriate charts.
Rice. 15. Profit maximization by a monopoly firm
As can be seen from fig. 15, the firm produces such a volume of goods q e, in which MR = MC. The price P e in this case is determined by the corresponding point E 1 on the demand curve D. If the price P e exceeds the average total costs, i.e. is above the ATC curve (Fig. 15a), then the company makes a profit equal to the shaded rectangle
In the event that the average total costs for the release of the volume of goods q e are equal to the price (curve ATC 1 in Fig. 15b), then the company fully covers the costs of lost opportunities and has zero profit.
When the total cost per unit of output exceeds the price (curve ATC2 in Fig. 15b), the monopoly firm incurs losses (shaded area).
Since the monopoly firm's MR curve always lies below the demand curve, unlike perfect competition, where the condition for profit maximization is the equality P = MS, under monopoly the universal rule 2 (MS = MR) is performed when marginal cost is less than the price of the good (MC< Р) and the point of intersection of the MC and MR curves is below the D curve.
Typically, there are typical misconceptions regarding the principles of the operation of a monopoly. First, there is an opinion that a monopoly firm can set any price for the goods it sells monopoly. However, the price of a product produced by a monopolist depends on the demand for this product and, for given values of q e (when MC = MR), has a very specific (P e in Fig. 15) value. Secondly, it is considered that the monopolist realizes with the maximum profit each unit of the goods. But a careful examination of Fig. 15a shows that by releasing qa units of goods (where the total cost per unit of output is minimal), the firm would have a higher profit per unit of output than at the point q e (the price P a is higher than P e, and the average total costs are lower).
Consequently, the monopolist maximizes total profit by increasing output to q e: losing in "specific" profit (per unit of output), he increases total profit by expanding production volumes. Finally, thirdly, from the point of view of the layman, the monopolist necessarily has a profit. However, it is obvious that the monopolist's success depends entirely on the objective market situation: changes in demand, rising costs due to an increase in resource prices can lead to the situation shown in Fig. 15b when the monopolist incurs losses. Therefore, the monopolization of an industry does not mean at all that the monopolist will make a profit.
Equilibrium of a monopoly firm in the long run. If a firm is a monopolist, then it represents the industry, and the profit maximization conditions for an individual monopoly firm apply to the entire industry. Undoubtedly, the profit received by the monopoly firm will attract other firms into the industry. Therefore, the monopolist will achieve equilibrium in the long run only if he can keep the industry he controls from entry into it by other firms.
The obstacles that a monopolist puts forward in the way of penetration of other firms into the industry are called entry barriers.
Barriers are divided into natural and artificial.
natural arise when a firm or group of firms manages to achieve low average costs in the long run, which makes it possible to force other firms out of the industry. Natural barriers are also created when the demand conditions for an industry product allow only one firm to remain in the industry. Finally, there is a natural barrier associated with the complexity of entering the industry: monopolized industries, as a rule, have a significant volume of output, so a new company to enter the industry needs to make more investments, train qualified personnel, create a product marketing system, etc. This often leads to serious costs, which stops potential manufacturers of this product from being introduced into the industry.
Man-made barriers may arise in a purely institutional way, for example, as a result of government actions. In particular, guaranteeing patent rights to an invention, granting special privileges (usually various kinds of licenses), ensuring the secrecy of individual developments, and controlling the use of important strategic raw materials can provide individual firms with the opportunity to monopolize the industry. Another nature of artificial barriers is the dishonest purposeful actions of the monopolistic firms themselves: the threat of force to potential competitors, pressure on resource owners, etc.
Due to the fact that the monopolist necessarily reduces the volume of production to a level below the potential for the sake of obtaining monopoly profits, in a given market structure, economic resources are used inefficiently. Therefore, in many countries, including Russia, antitrust laws are being adopted.
In the system of economic relations, there are natural monopolies. Traditionally, a monopoly is interpreted as a market situation characterized by such production conditions that provide economies of scale in production, as well as technological reliability and availability of services to the consumer.
In Russia, in accordance with federal law natural monopoly is considered as “a state of the commodity market in which the satisfaction of demand in this market is more efficient in the absence of competition due to the technological features of production, and the goods produced by subjects of natural monopoly cannot be replaced in consumption by other goods, and therefore the demand for this commodity the market is less dependent on changes in the price of goods than the demand for other types of goods. Natural monopolies in Russia are regulated in the following areas:
Transportation of oil and oil products through main pipelines;
Transportation of gas through pipelines;
Rail transportation;
Services of transport terminals, ports, airports;
Public electric and postal communication services.
Almost all countries with developed economies are reforming natural monopolies, aimed at creating a competitive environment, reducing costs and prices, and generally improving the efficiency of these sectors of the economy. Russia is also reforming its natural monopolies.
(Materials are given on the basis of: V.F. Maksimova, L.V. Goryainova. Microeconomics. Educational and methodological complex. - M.: Publishing Center of the EAOI, 2008. ISBN 978-5-374-00064-1)
1. Monopoly
What is a monopoly?
Marginal revenue of a monopolist
Profit maximization by a monopolist
Monopoly and elasticity of demand
How do taxes affect the behavior of a monopolist?
Monopoly and efficiency
2. Monopolistic competition
Price and production volume under conditions monopolistic competition
3. Oligopoly
What is an oligopoly?
Oligopoly Models
4. Use and allocation of resources by the firm
Marginal yield of a resource
Marginal resource cost
Choosing a Resource Combination Option
conclusions
Terms and concepts
Questions for self-examination
Perfect competition, as already noted, is rather an abstract model, convenient for analyzing the basic principles of the formation of a firm's market behavior. In reality, purely competitive markets are rare, as a rule, each company has its own “face”, and each consumer, choosing the products of a particular company, is guided not only by the usefulness of the products and its price, but also by their attitude towards the company itself, to the quality of products produced. her products. In this sense, the position of each firm in the market is somewhat unique, or, in other words, there is an element of monopoly in its behavior.
This element leaves an imprint on the activities of the company, makes it take a slightly different approach to the formation of a pricing strategy, determining the volume of output that is most effective in terms of profits and losses.
Monopoly
What is a monopoly?
To determine how monopoly affects the behavior of a firm, let us dwell on the theory of monopoly. What is a monopoly? How are the costs of a monopoly enterprise formed, on the basis of what principles does it set the price for its products, and how does it determine the volume of production?
The concept of pure monopoly is also usually an abstraction. Even the complete absence of competitors within the country does not exclude their presence abroad. Therefore, one can imagine a pure, absolute monopoly rather theoretically. A monopoly assumes that one firm is the only manufacturer of any product that has no analogues. At the same time, buyers do not have a choice and are forced to purchase these products from a monopoly company.
One should not equate pure monopoly with monopoly (market) power. The latter means the opportunity for the firm to influence the price and increase economic profit by limiting the volume of production and sales. When people talk about the degree of monopolization of a market, they usually mean the strength of the market power of individual firms present in this market.
How does a monopolist behave in the market? He has full control over the entire output of the product; if he decides to raise the price, he is not afraid to lose part of the market, to give it to competitors who set lower prices. But this does not mean that he will indefinitely raise the price of his products.
Since the monopoly firm, like any other firm, seeks to obtain high profits, it takes into account market demand and its costs when deciding on the selling price. Since the monopolist is the only producer of this product, the demand curve for its product will coincide with the market demand curve.
How much output should the monopolist provide in order to maximize its profit? The decision on the volume of output is based on the same principle as in the case of competition, i.e. on the equality of marginal revenue and marginal cost.
Marginal revenue of a monopolist
As already mentioned (see Chapter 11), for a firm in conditions of perfect competition, the equality of marginal revenue and price is characteristic. For a monopolist, the situation is different. The curve of average income and price coincides with the market demand curve, and the curve of marginal income lies below it.
Why does the marginal revenue curve lie below the market demand curve? Since the monopolist is the only producer of products on the market and a representative of the entire industry, he, by reducing the price of products to increase sales, is forced to reduce it for all units of goods sold, and not just for the next one (Fig. 12.1).
Rice. 12.1. Price and marginal revenue of a monopoly firm:D - demand;MR - Marginal Revenue
For example, a monopolist can sell at a price of 800 rubles. only one unit of their product. To sell two units, he must lower the price to 700 rubles. for both the first and second unit of production. To sell three units of production, the price should be equal to 600 rubles. for each of them, four units - 500 rubles. etc. The income of the monopoly firm, respectively, will be upon sale: 1 unit. - 800 rubles; 2 units - 1400 (700 . 2); Z units -1800 (600 . 3); 4 units - 2000 (500 . 4).
Accordingly, the marginal (or additional as a result of an increase in sales by one unit of output) income will be: 1 unit. - 800 rubles; 2 units - 600 (1400 - 800); 3 units - 400(1800 - 1400); 4 units - 200 (2000 - 1800).
On fig. 12.1 curves of demand and marginal income are shown as two non-coinciding lines, and the marginal income in all cases, except for the release of 1 unit, is less than the price. And since the monopolist decides on the volume of production, equalizing marginal revenue and marginal cost, the price and quantity of output will be different than under competitive conditions.
Profit maximization by a monopolist
To show at what price and what volume of output the marginal revenue of the monopolist will be as close as possible to the marginal cost and the resulting profit will be the largest, let's turn to a numerical example. Imagine that the company is the only manufacturer of this product on the market, and summarize the data on its costs and income in Table. 12.1.
Table 12.1. Dynamics of costs and incomes of firm X in a monopoly
We assumed that 1 thousand units. a monopolist can sell its products at a price of 500 rubles. In the future, with the expansion of sales by 1 thousand units. he is forced to reduce its price by 12 rubles each time, so the marginal revenue is reduced by 4 rubles. with each increase in sales. The firm will maximize profit by producing 14,000 units. products. It is at this level of output that its marginal revenue is closest to marginal cost. If it produces 15 thousand units, then this additional 1 thousand units. will add more to costs than to income, and thereby reduce profits.
In a competitive market, when the firm's price and marginal revenue are the same, 15,000 units would be produced. products, and the price of this product would be lower than in a monopoly:
Graphically, the process of choosing a price and volume of production by a monopoly firm is shown in Fig. 12.2.
Rice. 12.2. Determination of price and volume of production by a monopoly firm:D - demand;MR - marginal revenue; MC - marginal cost
Since in our example production is possible only in whole units of output, and point A on the graph lies between 14 and 15 thousand units, 14 thousand units will be produced. products. The 15th thousand not produced by the monopolist (and it would have been produced under competitive conditions) means a loss for consumers, since some of them refused to buy because of the high price set by the monopoly manufacturer.
Any firm whose demand is not perfectly elastic will face a situation where marginal revenue is less than price. Therefore, the price and volume of production that bring her maximum profit will be respectively higher and lower than under perfect competition. In this sense, in markets of imperfect competition (monopoly, oligopoly, monopolistic competition), each firm has a certain monopoly power, which is strongest under pure monopoly.
Monopoly and elasticity of demand
As already noted, the marginal revenue in conditions of perfect competition is equal to the price of a unit of goods and the demand for the firm's product is perfectly elastic. When monopoly power exists, marginal revenue is less than price, the demand curve for the firm's output is sloping, allowing the firm with monopoly power to earn additional profits. 
The elasticity of demand for a product (even if there is only one seller of this product on the market) affects the price set by the monopolist. Having information about the elasticity of demand E R, as well as data characterizing the marginal cost of the company MS, the company's management can calculate the price of products P using the formula:
The higher the elasticity of demand, the closer the conditions of the monopolist's activity to the conditions of free competition, and vice versa, with inelastic demand, the monopolist creates more opportunities to "inflate" prices and receive monopoly income.
How do taxes affect the behavior of a monopolist?
As the tax increases marginal cost, their MC curve will shift to the left and up to MC1, as shown in Figure 1. 12.3. The firm will now maximize its profit at the intersection point of P1 and Q1.
The monopolist will reduce production and raise the price as a result of imposing a tax. How much it will raise the price can be calculated using formula (12.1). If the elasticity of demand, for example, is -1.5, then
At the same time, after the introduction of the tax, the price will increase by an amount three times the amount of the tax. The effect of the tax on the monopoly price thus depends on the elasticity of demand: the less elastic the demand, the more the monopolist will raise the price after imposing the tax.
Rice. 12.3. The impact of the tax on the price and output of a monopoly firm:D - demand, MR is marginal revenue; MS - marginal costs without tax; MC1 - marginal cost including tax
Evaluation of monopoly power
Elasticity of demand is an important factor limiting the firm's monopoly power in the market. If we are dealing with a pure monopoly (only one seller), the elasticity of demand becomes the only market factor that limits monopoly arbitrariness. That is why the activity of all branches of natural monopoly is regulated by the state. In many countries, natural monopoly enterprises are state-owned.
However, pure monopoly is quite rare, as a rule, either monopoly power is divided among several large firms, or there are many small firms in the market, each of which produces products that differ from others.
Thus, in markets of imperfect competition, each firm has some degree of market power, which allows it to set a price above marginal revenue and earn economic profit.
As you know, the difference between price and marginal revenue depends on the elasticity of demand for the company's products: the more elastic the demand, the less opportunities for additional profit, the less the firm's bargaining power.
Under conditions of pure monopoly, when the demand for the firm's product coincides with the market demand, its elasticity is the determining measure of the firm's market power. In other cases, where market power is shared between two, three, or more firms, it depends on the following factors:
1. Elasticity of market demand. Demand for an individual firm's product cannot be less elastic than market demand. The greater the number of firms present in the market, the more elastic will be the demand for the products of each of them. The presence of competitors does not allow an individual firm to significantly raise the price without fear of losing part of its sales market.
Therefore, the assessment of the elasticity of demand for the firm's products is the information that should be known to the firm's management. Elasticity data should be obtained by analyzing the sales activities of the firm, sales volume at various prices, conducting marketing research, evaluating the activities of competitors, etc.
2. Number of firms in the market. However, the number of firms alone does not give an idea of how monopolized the market is. To assess the competitiveness of the market, the Herfindahl market concentration index is used, which characterizes the degree of market monopolization:
H=p12 + p22 + …….+ p12 +….+ pn2 (12.2)
where H is the concentration index; p1 ,p2,…….,pi …. pn- percentage firms on the market.
Example 12.1. Let us estimate the degree of market monopolization in two cases: when the share of one firm is 80% of the total sales of this product, and the remaining 20% is distributed among the other three firms, and when each of the four firms carries out 25% of sales in the market.
The market concentration index will be: in the first case H= 802+ 6.672 +6.672 + 6.672 = 6533;
in the second case H= 252i4 == 2500.
In the first case, the degree of market monopolization is higher.
3. The behavior of firms in the market. If firms in the market pursue a strategy of fierce competition, lower prices to capture a larger market share and drive out competitors, prices can drop to near competitive levels (equality of price and marginal cost). Monopoly power and, accordingly, the monopoly income of firms will decrease. However, the receipt of high incomes is very attractive for any firm, therefore, instead of aggressive competition, overt or covert collusion, the division of the market, is more preferable.
The structure of the market, the degree of its monopolization should be taken into account by the company when choosing an activity strategy. The emerging Russian market is characterized by a highly monopolized structure supported by the creation of last years various kinds of concerns, associations and other associations, one of the goals of which is to maintain high prices and ensure a "quiet existence" for themselves. At the same time, the expected increase in the openness of the Russian economy to the world economy leads to competition with foreign firms and significantly complicates the position of domestic monopolists.
In addition to the economies of scale already discussed above, there are other reasons that lead to a monopoly. Among them, a significant role is played by the establishment of barriers to the entry of new firms into the industry. Such obstacles may be the need to obtain special permission government agencies to engage in one or another type of activity, licensing and patent barriers, customs restrictions and direct import bans, difficulties in obtaining loans, high initial costs for opening a new enterprise, etc.
For example, in order to open a commercial bank in Russia, in addition to the established minimum size of the authorized capital, a special permit is required Central Bank RF, which is quite difficult to obtain. It is no less difficult to "get" a relatively cheap loan. The introduced new import duties on alcoholic beverages, tobacco products, automobiles, etc. reduce the competitiveness of foreign goods and strengthen the position of domestic producers.
At the same time, making high profits is a powerful incentive that attracts new firms to a monopolized industry. And if the industry is not a natural monopoly (and most Russian monopolies are not), then the monopoly firm can expect an unexpected competitor to appear at any moment.
The higher the profit of a monopoly enterprise, the more willing to enter the industry, for example, by expanding the production and sales of substitute goods. The entry of new firms into the market with products that can effectively replace the monopolist's products leads to a switch in consumer demand. Under such conditions, the monopolist will be forced to reduce the price, give up part of the profit in order to maintain its position in the market.
Legislative barriers to entry into the industry are also not eternal. To support state officials who express their interests, monopolists spend significant funds, which are included in costs, increasing them. Therefore, in the conditions of a developed market economy, the position of monopoly firms is not so "cloudless" as it seems at first glance.
Price discrimination
Price discrimination is one of the ways to expand the sales market in a monopoly. By producing less products and selling them at a higher price than under conditions of pure competition, the monopolist thereby loses a part of potential buyers who would be ready to purchase the product if its price were lower than the monopoly one. however, by lowering the price in order to expand sales, the monopolist is forced to lower the price of all products sold. But in some cases, the firm may set different prices for the same product for different groups of buyers. If some buyers purchase products at a lower price than others, there is a practice price discrimination.
Price discrimination can be carried out under the following conditions:
. the buyer, having purchased the product, does not have the opportunity to resell it;
. it is possible to divide all consumers of this product into markets, the demand for which has different elasticity.
Indeed, if a firm that produces any product that can be resold, such as televisions, refrigerators, cigarettes, etc., decides to resort to price discrimination, it will face the following situation. Reducing the price of these goods for pensioners and maintaining it at the initial level for all other categories of the population will lead to the fact that when buying these goods, pensioners will immediately resell them. In addition, such a pricing policy can cause dissatisfaction among buyers.
The situation is different if the products cannot be resold; this includes primarily certain types of services. In this case, for consumer groups whose demand is more elastic, various types of price discounts are established. In other words, different groups of consumers represent different markets, the elasticity of demand for which is different.
Suppose that some airline was selling 100 thousand tickets at a price of 500 rubles. for one ticket. This price was set based on the equality of marginal revenue and marginal cost. The monthly gross income of the company was 50 million rubles. However, as a result of the changes that have taken place (fuel prices have risen, workers have been wage) the company's costs have risen, and the ticket price has been doubled. At the same time, the number of tickets sold decreased by half and amounted to 50,000 tickets. Despite the fact that the total gross income remained at the level of 50 million rubles, there is an opportunity to generate additional income by attracting passengers who canceled flights due to high prices through the provision of discounts.
On fig. 12.4 graphically depicts the situation when the market for the services of an airline is divided into two separate markets. The first (Fig. 12.4, a) is presented wealthy people, businessmen for whom the speed of movement is important, and not the price of a ticket. Therefore, their demand is relatively inelastic. The second market (Fig. 12.4, b) is those for whom speed is not so important, and at high prices they will prefer to use the railway. In both cases, the marginal cost of the airline is the same, only the elasticity of demand is different.
From fig. 12.4 shows that with a ticket price of 1 thousand rubles. not a single consumer from the second market will use the services of the airline. However, if this group of consumers is given a 50% discount, the tickets will be sold and the company's income will increase by 25 million rubles. monthly.
Rice. 12.4. Price discrimination model: MC - marginal cost,D andMR is the demand and marginal revenue of the firm in the first market;D1 andMR1 is the demand and marginal revenue of the firm in the second market
On the one hand, price discrimination allows you to increase the income of the monopolist, and on the other hand, more consumers get the opportunity to use this type of service. This pricing policy is beneficial to both parties. However, in some countries, price discrimination is considered as an obstacle to competition and the strengthening of monopoly power and its individual manifestations fall under antitrust laws.
Monopoly and efficiency
Modern economists believe that the spread of monopoly reduces economic efficiency for at least three main reasons.
First, the profit-maximizing output of the monopolist is lower and the price is higher than under perfect competition. This leads to the fact that society's resources are not used in full, and at the same time, part of the products needed by society is not produced. The quantity of products produced does not reach the point corresponding to the minimum average gross cost, as a result of which production is not carried out with the lowest possible costs at a given level of technology. In other words, maximum production efficiency is not achieved.
Secondly, being the only seller in the market, the monopolist does not seek to reduce production costs. He has no incentive to use the most advanced technology. Renovation of production, cost reduction, flexibility are not matters of survival for him. For the same reasons, the monopolist has little interest in research and development and the use of the latest achievements of scientific and technical progress.
Third, barriers to entry of new firms into monopolized industries, as well as the enormous effort and money that monopolists spend on maintaining and strengthening their own market power, have a deterrent effect on economic efficiency. It is difficult for small firms with new ideas to break into monopolized markets.
Another point of view on the problems of monopoly and efficiency is represented by the position of J. Galbraith and J. Schumpeter. Without denying the negative aspects of the monopoly (for example, higher prices for products), they also highlight its advantages in terms of scientific and technological progress. These benefits, according to them, are as follows:
1. Perfect competition requires each manufacturer to use the most efficient equipment and technology already in existence. However, the development of new progressive technical solutions is beyond the power of a single competitive firm. Significant funds are needed to finance R&D, which a small firm that does not earn stable economic profits cannot have. At the same time, monopolies or oligopolies with high economic profits have sufficient financial resources for investment in scientific and technological progress.
2. The high barriers that exist to the entry of new firms into the industry give oligopolies and monopolies confidence that the economic profit that results from being used in production scientific and technological achievements, will remain for a long time and investment in R&D will yield long-term returns.
3. Obtaining monopoly profits through higher prices is an incentive for innovation. If every cost-reducing innovation was followed by a price cut, there would be no reason to innovate.
4. Monopoly stimulates competition, since monopoly high profits are extremely attractive to other firms and support the desire of the latter to enter the industry.
5. In some cases, a monopoly helps to reduce costs and realize economies of scale (natural monopoly). Competition in such industries would increase average costs and reduce efficiency.
All market economies have antitrust laws that control and limit monopoly power.
2. Monopolistic competition
Two extreme types of markets have been considered: perfect competition and pure monopoly. However, real markets do not fit into these types, they are very diverse. Monopolistic competition is a common type of market that is closest to perfect competition. The ability for an individual firm to control price (market power) is negligible here (Figure 12.5).
Rice. 12.5. Strengthening market power
We note the main features that characterize monopolistic competition:
. there are a relatively large number of small firms in the market;
. these firms produce a variety of products, and although the product of each firm is somewhat specific, the consumer can easily find substitute products and switch his demand to them;
. Entry of new firms into the industry is not difficult. To open a new vegetable shop, atelier, repair shop, significant initial capital is not required. The scale effect also does not require the development of large-scale production.
Demand for the products of firms operating under monopolistic competition is not perfectly elastic, but its elasticity is high. For example, monopolistic competition may include the market sportswear. Adherents of Reebok sneakers are willing to pay more for its products than for sneakers of other companies, but if the price difference is too large, the buyer will always find analogues of lesser-known companies on the market at a lower price. The same applies to products in the cosmetics industry, the production of clothing, medicines, etc.
The competitiveness of such markets is also very high, which is largely due to the ease of entry of new firms into the market. Let's compare, for example, the market for steel pipes and the market for washing powders. The first is an example of an oligopoly, the second is an example of monopolistic competition.
Entering the steel pipe market is difficult due to large economies of scale and large initial investment, while the production of new grades of washing powder does not require the creation of a large enterprise. Therefore, if firms producing powders earn large economic profits, this will lead to an influx of new firms into the industry. New firms will offer consumers new brands of washing powders, sometimes not much different from those already produced (in new packaging, a different color or intended for washing). different types tissues).
Price and output under monopolistic competition
How is the price and output of a firm determined under monopolistic competition? In the short run, firms will choose the price and output that maximize profits or minimize losses, based on the already known principle of equality of marginal revenue and marginal cost.
On fig. 12.6 shows the curves of prices (demand), marginal income, marginal and average variables and gross costs of two firms, one of which maximizes profits (Figure 12.6, a), the other minimizes losses (Figure 12.6, b).
Rice. 12.6. The price and output of a firm under monopolistic competition, maximizing profits (a) and minimizing losses (b):D - demand:MR— marginal revenue; MC - marginal cost:AVC - average variable costs; ATS - average gross costs
The situation is in many ways similar to perfect competition. The difference is that the demand for firms' products is not perfectly elastic, and therefore the marginal revenue curve runs below the demand curve. The firm will make the greatest profit at the price P0 and the output Q0, and the minimum losses - at the price P1 and the output Q1.
However, in markets of monopolistic competition, economic gains and losses cannot last long. In the long run, losing firms will choose to leave the industry, and high economic profits will encourage new firms to enter. New firms producing similar products will gain their market share, and the demand for the goods of the firm that received economic profit will decrease (the demand curve will shift to the left).
A decrease in demand will reduce the firm's economic profit to zero. In other words, the long-term goal of firms operating under monopolistic competition is to break even. The situation of long-term equilibrium is shown in fig. 12.7.
Rice. 12.7. The long-run equilibrium of a firm under monopolistic competition is:D - demand;MR— marginal revenue; MS - marginal costs; ATS - average gross costs
The lack of economic profit deprives new firms of the incentive to enter the industry, and old firms to leave it. However, in conditions of monopolistic competition, the desire to break even is more of a trend. In real life, firms can earn economic profits over a fairly long period. This is due to product differentiation. Some types of products manufactured by firms are difficult to reproduce. At the same time, barriers to entry into the industry, although not high, still exist. For example, to open a hairdressing salon or engage in private medical practice, you must have the appropriate education, confirmed by a diploma.
Is the market mechanism of monopolistic competition efficient? From the point of view of resource use, no, since production is not carried out at minimum cost (see Figure 12.7): production Q0 does not reach a value where the average gross cost of the firm is minimal, i.e. constitute the quantity Q1. However, if we evaluate the effectiveness in terms of satisfying the interests of consumers, then the variety of goods that reflects the individual needs of people is more preferable for them than the same products at lower prices and in larger quantities.
3. Oligopoly
What is an oligopoly?
oligopoly name the type of market in which a few firms control the bulk of it. At the same time, the range of products can be both small (oil) and quite extensive (cars, chemical products). An oligopoly is characterized by restrictions on the entry of new firms into the industry; they are associated with economies of scale, high advertising costs, existing patents and licenses. High barriers to entry are also a consequence of the actions taken by the leading firms in the industry in order to keep new competitors out of the industry.
A feature of an oligopoly is the interdependence of firms' decisions on prices and output. No such decision can be made by a firm without taking into account and evaluating possible responses from competitors. The actions of competing firms are an additional constraint that firms must consider when determining optimal price and output. Not only costs and demand, but also the response of competitors determine decision making. Therefore, the oligopoly model should reflect all three of these points.
Oligopoly Models
Does not exist unified theory oligopoly. However, economists have developed a number of models, which we will briefly discuss.
Cournot model. For the first time, an attempt to explain the behavior of an oligopoly was made by the Frenchman A. Cournot in 1838. His model was based on the following premises:
. there are only two firms in the market;
. each firm, making its decision, considers the price and volume of production of a competitor to be constant.
Suppose that there are two firms in the market: X and Y. How will firm X determine the price and volume of production? In addition to costs, they depend on demand, and demand, in turn, on how much output firm Y will produce. However, firm X does not know what firm Y will do, it can only assume possible options for its actions and plan its own output accordingly.
Since market demand is a given value, the expansion of production by the firm will cause a decrease in demand for the products of firm X. In fig. Figure 12.8 shows how the demand schedule for firm X's products will shift (it will shift to the left) if firm Y starts to expand sales. The price and output set by firm X on the basis of the equality of marginal revenue and marginal cost will decrease, respectively, from P0 to P1, P2 and from Q0 to Q1, Q2.
Rice. 12.8. Cournot model. Change in the price and output of firm X with the expansion of production by firm Y:D - demand;MR - marginal revenue; MC - marginal cost
If we consider the situation from the perspective of firm Y, then we can draw a similar graph that reflects the change in the price and quantity of its output depending on the actions taken by firm X.
By combining both graphs, we get the response curves of both firms to each other's behavior. On fig. 12.9 curve X reflects the reaction of the firm of the same name to changes in the production of the firm Y, and the curve Y, respectively, vice versa. Equilibrium occurs at the point where the response curves of both firms intersect. At this point, firms' assumptions match their actual actions.
Rice. 12.9. Response curves of firms X and Y to each other's behavior
One essential circumstance is not reflected in the Cournot model. Competitors are expected to react to a firm's price change in a certain way. When firm Y enters the market and robs firm Y of consumer demand, firm Y "gives up" and enters into a price game, lowering prices and output. However, firm X can take a proactive stance and, by significantly reducing the price, keep firm Y out of the market. Such firm actions are not covered by the Cournot model.
A "price war" reduces the profits of both sides. Since the decisions of one of them affect the decisions of the other, there are reasons to agree on price fixing, the division of the market in order to limit competition and ensure high profits. Since all kinds of collusion are subject to antitrust laws and prosecuted by the state, firms in an oligopoly prefer to refuse them.
Since price competition benefits no one, each firm would be willing to charge a higher price if its competitor did the same. Even if demand changes, or costs decrease, or some other event occurs that allows the price to be lowered without hurting profits, the firm will not do so for fear that competitors will perceive such a move as the start of a price war. Raising prices is also unattractive, as competitors may not follow suit.
The firm's response to price changes by competitors is reflected in curved curve models demand for the firm's products in an oligopoly. This model was proposed in 1939 by the Americans
R. Hall, K. Hitch and P. Sweezy. On fig. 12.10 curves of demand and a limiting income of firm X (are selected by a thick line) are represented. If a firm raises its price above P0, then its competitors will not raise prices in response. As a result, firm X will lose its customers. Demand for its products at prices above P0 is very elastic. If firm X sets the price below P0, then competitors are likely to follow in order to maintain their market share. Therefore, at prices below P0, demand will be less elastic.
Rice. 12.10. Curved Demand Curve Model:D1,MR1 - curves of demand and marginal income of the firm at prices above Р0;D2 MR2 - curves of demand and marginal income of the firm at prices below P0
The sharp difference in the elasticity of demand at prices above and below P0 causes the marginal revenue curve to break, which means that a price decrease cannot be compensated by an increase in sales. The curved demand curve model provides an answer to the question why firms in an oligopoly strive to maintain stable prices by moving competition to the non-price area.
There are other models of oligopoly based on game theory. Thus, when determining its own strategy, the firm evaluates the probable profits and losses, which will depend on which strategy the competitor chooses. Let us assume that firms A and B control the majority of sales in the market. Each of them seeks to increase sales and thereby ensure profit growth. The result can be achieved by lowering prices and attracting additional buyers, intensifying advertising activities, etc.
However, the result for each firm depends on the reaction of the competitor. If firm A starts to cut prices and firm B follows, none of them will increase their market share and their profits will decrease. However, if firm A lowers prices and firm B does not do the same, then firm A's profits will increase. Developing its strategy in the field of prices, firm A calculates the possible responses from firm B (Table 12.2).
Table 12.2. The influence of market strategy on the change in the profit of firm A
(numerator) and company B (denominator), million rubles.
If firm A decides to lower prices and firm B follows it, firm A's profit will be reduced by 1,000 thousand rubles. If firm A lowers prices, and firm B does not do the same, then the profit of firm A will increase by 1,500 thousand rubles. If firm A does not take any steps in the field of prices, and firm B lowers its prices, firm A's profit will be reduced by 1,500 thousand rubles. If both firms leave prices unchanged, their profits will not change.
What strategy will Firm A choose? The best option for her is to reduce prices with the stability of firm B, in this case, profit increases by 1500 thousand rubles. However, this option is the worst from the point of view of firm B. For both firms, it would be expedient to leave prices unchanged, while profits would remain at the same level. However, fearing the worst options, firms will reduce their prices, while losing 1000 thousand rubles. arrived. Firm A's price reduction strategy is called least loss strategy.
The desire for the least loss can explain why firms in an oligopoly prefer to spend heavily on advertising, increasing their costs and not achieving an increase in market share.
None of the above models of oligopoly can answer all questions related to the behavior of firms in such markets. However, they can be used to analyze certain aspects of the activities of firms in these conditions.
4. Use and allocation of resources by the firm
As shown above, firms in market conditions widely use the method of comparing marginal revenue and costs when making decisions about the volume of sales and the price of products. The same method is used in determining the amount of resources needed for the production of products, providing the company with the minimum total costs and, accordingly, the maximum profit. This is what will be discussed below.
What determines the demand for resources from an individual firm? First of all, it depends on the demand for finished products produced using these resources, so the higher the demand for products, the higher the demand for the necessary resources, taking into account changes in the efficiency of their use. Yes, in developed countries energy demand is growing very slowly. .Another circumstance affecting the demand for resources is their prices. The funds of the firm directed to the purchase of resources are included in its production costs Therefore, the firm seeks to use resources in such a quantity and combination that will allow it to maximize profits.
The amount of resources used by the firm depends on their return, or productivity. The latter is subject to the law of diminishing returns. Therefore, the firm will expand the use of resources as long as each additional resource will increase its income to a greater extent than its costs.
How does the introduction of additional resources into production affect the firm's income? An increase in the use of any resource leads to an increase in output, and hence the income of the firm.
Marginal yield of a resource
Assume that the firm uses only one variable resource. They may be labor separate view equipment, etc. Growth in output in in kind, provided by increasing this resource by one, is called marginal product. The increase in the firm's income due to an additional unit of this resource is called resource marginal return or marginal revenue product (MRP). As noted above, marginal product first rises and then begins to decline in accordance with the law of diminishing returns. Since the growth of marginal product occurs over a very short period, we can ignore it and assume that it will decrease from the very beginning.
Consider the marginal return on the resource of firm X (Table 12.3). If the firm operates under conditions of perfect competition, the price of output is constant and does not depend on the volume of output. If the firm is an imperfect competitor, then it is forced to reduce the price with the expansion of sales. Accordingly, the marginal return on the resource of an imperfect competitor firm does not coincide with the marginal return on the resource of a competitive firm.
Table 12.3. Marginal profitability of the resource of firm X in conditions of perfect and imperfect competition in the product market
From the data in Table. 12.3 it can be seen that the rate of decline in the yield of a resource for a monopolist is higher than for a purely competitive firm, and the graph of the marginal profitability of a resource for a monopolist will have a steeper slope (Fig. 12.11). This circumstance is important for the firm, since marginal profitability is one of the factors that determines the amount of a given resource that the firm will use.
But in order to make a decision to expand the use of a given resource in production, a firm must not only know how an additional resource will affect an increase in its income. She always compares income with costs and evaluates profit. Therefore, she must determine how the purchase and use of an additional resource will affect the increase in costs.
Rice. 12.11. Graph of the marginal yield of a resource for a firm in conditions of perfect and imperfect competition in the market finished products: MRP1, MRР2 - marginal returns, respectively, under the specified conditions;Qres - the amount of resource used;Qres - resource price
Marginal resource cost
The increase in costs due to the introduction into production of an additional unit of a variable resource is called the marginal cost of the resource. When a firm faces perfectly competitive conditions in a resource market, its marginal cost per resource will be equal to the price of that resource.
For example, if a small firm wants to hire an accountant, they will be paid according to the market wage rate. Since the firm's demand is only a small fraction of the demand for accountants, it will not be able to influence their salary levels. The marginal cost of labor for the firm will look like a horizontal line (for example, see Figure 12.12).
How much resource should be used?
The principle of choosing the amount of resource used by the firm is similar to the principle of determining the optimal volume of output. It will be profitable for the firm to increase the amount of resource used up to the point where its marginal return equals the marginal cost of that resource (Figure 12.12). In this example, with a resource price of 1000 rubles. a perfectly competitive firm in the market of finished products will use 6 units. of this resource (the schedule of marginal profitability MRP1), and in conditions of imperfect competition - only 5 units. (graph of the marginal return of the MRP2 resource).
Rice. 12.12. The optimal amount of resource used for a competitive firm and for a firm that is an imperfect competitor in the market of finished products:MPR1 andMPR2 - marginal resource returns for the firm under conditions of perfect and imperfect competition in the finished product market, respectively; MCres - marginal cost per resource
We have determined how much of the variable resource the firm will use, given that all other resources are constant. However, in practice, the firm is faced with the question of how to combine the resources used in order to maximize profits. In other words, she is faced with a situation where several resources are variables and it is necessary to determine in which combination to use them.
Choosing a Resource Combination Option
The producer's choice of the combination of resources that provides the minimum cost is reminiscent of the consumer's choice (see Chapter 9). From various sets of goods offered that bring him the same satisfaction, the consumer chooses one that suits his limited budget.
The manufacturer makes a choice from all the options for combining the resources used, with the help of which it is possible to produce a given amount of finished goods, taking into account the prices of the resources. Assume that two interchangeable resources are used. For example, the company took over the cleaning of city streets from snow. For this purpose, she needs wipers and snowplows. How many machines and how many wipers does she need to do a fixed amount of work at the lowest cost?
Let's build a graph showing all possible combinations of the number of cars and the number of janitors (Fig. 12.3). You can use 4 cars and 20 people, 2 cars and 40 people, 1 car and 80 people, as well as any other combination marked by any point on the curve. The curve has a curved shape: with an increase in the number of janitors, their marginal profitability will decrease, while cars, on the contrary, will increase. This is due to the well-known law of diminishing returns. The total income at all points will be the same and equal to the area of the harvested territory multiplied by the cost of cleaning its unit (1 km2).
Rice. 12.13. A schedule of possible options for combining two types of resources required to perform a given amount of work: K - the number of snowplows;L - number of janitors
In order to make a decision on how many machines and janitors are needed for cleaning the streets, it is not enough for a company to know only their required number and number. It is necessary to take into account the costs of the company, which it will incur as a result of the use of different amounts of manual labor and machines, and determine the minimum. Costs depend on the price of snowplows and the wages of janitors.
Suppose that the use of one car will cost the company 20 thousand rubles, and hiring 10 janitors - 10 thousand rubles. The total cost of the company associated with the purchase of cars and hiring janitors can be calculated by the formula:
C=KRK+LPL (12.3)
Where C is the total costs of the company, thousand rubles; K is the number of cars, pcs.; RK - the price of the car, thousand rubles; L is the number of janitors, tens of people; PL - the cost of hiring 10 janitors, thousand rubles.
Rice. 12.14. Possible combinations of two resources with the same total cost: K is the number of snowplows;L - number of janitors
On fig. 12.14 three schedules corresponding to three variants of the general costs of firm are represented. For example, graph C1 shows all possible combinations of machines and manual labor that cost 60 thousand rubles; C2 - at 80 thousand and C3 - at 100 thousand. The slope of the graphs depends on the ratio of the price of the car and the salary of the janitor.
To determine what costs will be minimal when performing a given amount of work, let's compare the graphs shown in Fig. 12.13 and 12.14 (Fig. 12.15).
The curve in fig. 12.15 clearly shows that neither at point A1 nor at point A3, the company's costs will be minimal, they will amount to 100 thousand rubles, while at point A2 the costs will be equal to 80 thousand rubles. In other words, the minimum cost will be achieved if the firm uses two snowplows and hires 40 janitors.
Rice. 12.15. Graph of the combination of two resources that minimizes the costs of the firm
How can the firm find this point without resorting to charting? Note that at point A2, the slope of the curve reflecting various combinations of the number of machines and the number of janitors required to perform a given job (see Fig. 12.13), and the straight line showing these combinations corresponding to a given amount of costs (see Fig. 12.14) , match.
The slope of the curve reflects the ratio of the marginal returns of the factors of production used, and the slope of the straight line reflects the ratio of the prices of these factors. From this we can conclude that the firm will minimize costs when the ratios of the marginal profitability of each resource to its price are equal:
where KRPK and KRPL are the marginal returns of the car and the janitor; PK and PL - the price of the car and the salary of the janitor
In other words, the firm will minimize its costs when the cost of producing an additional unit of output or performing an additional amount of work is the same, whether it uses a new set of wipers or a new snow blower.
If the price of one of the factors changes, then the firm will minimize costs with a different combination of them.
conclusions
1. Pure monopoly assumes that one firm is the only manufacturer of this product, which has no analogues. The monopolist has complete control over its price and output.
2. The reasons for monopoly are: a) economies of scale; b) legislative barriers to entry of new firms into the industry, patents and licenses; c) dishonest behavior, etc.
3. The demand curve for the products of the monopoly firm is sloping and coincides with the market demand curve. Costs and market demand are constraints that prevent a monopolist from arbitrarily setting a high price for its product. Maximizing profit, he determines the price and volume of production based on the equality of marginal revenue and marginal cost. Since the monopolist's marginal revenue curve lies below the demand curve, he will sell at a higher price and produce less than under perfect competition.
4. The factor limiting monopoly power in the market is the elasticity of market demand. The higher the elasticity, the less monopoly power, and vice versa. The degree of monopoly power is also affected by the number of firms in the market, concentration, and competitive strategy.
5. Monopoly reduces economic efficiency. Antitrust laws different countries prevent the emergence and strengthening of monopoly power. The subject of state regulation are natural monopolies. In natural monopoly sectors, many enterprises are state-owned.
6. In real life, pure monopoly, like perfect competition, is quite rare. Real markets are very diverse and are characterized by conditions of monopolistic competition, gradually turning into an oligopoly.
7. Under monopolistic competition, many small firms produce a variety of differentiated products; entry of new firms into the industry is not difficult. In the short run, firms choose the price and output that maximize profits or minimize losses. The easy entry of new firms into the industry leads to a tendency to earn normal profits in the long run, when economic profit tends to zero.
8. Oligopolistic industries are characterized by the presence of several large firms, each of which controls a significant share of the market. A feature of the oligopoly is the mutual dependence of the decisions of individual firms in the field of output volume and price. Entry of new firms into the industry is significantly hampered, and economies of scale make the existence of a large number of producers inefficient. There are various models that describe the behavior of oligopolists, including the Cournot model and the curved demand curve model. However, there is no single theory of oligopoly that could explain all the diversity of the behavior of firms.
9. On the part of an individual firm, the demand for resources is determined by their marginal profitability. The marginal profitability of any variable resource slowly decreases in accordance with the law of diminishing returns. The firm will expand the use of the resource as long as its marginal return is higher than the marginal cost of it, i.e. until the two are equal.
In conditions where the firm's demand for a resource is a small fraction of the market demand for it, the marginal cost of the resource for this firm is equal to its price.
10. The firm seeks to choose a combination of resources used, which provides the minimum cost. This is possible if the marginal return of each resource is proportional to its price.
Terms and concepts
Monopoly (market) power
Price discrimination
Marginal yield of a resource
Marginal resource cost
Questions for self-examination
1. What are the reasons for the emergence of a monopoly?
2. What determines the price and volume of production in a monopoly?
3. What factors influence monopoly power? How does the concentration of production affect monopoly power? In which of the two options is the monopoly power higher: a) there are five firms on the market, each of which has an equal share in total sales; b) sales shares are distributed as follows: firm 1 - 25%, 2-10%, 3-50%, 4-7%, 5-8%?
4. Why do monopolies resort to price discrimination? What conditions make it possible? How does price discrimination affect monopoly profits?
5. What is common and what are the differences between perfect and monopolistic competition? What are the advantages and disadvantages of monopolistic competition?
6. Why can we talk about the tendency to receive normal profits in the long run for firms operating in conditions of monopolistic competition?
7. What are the main features of an oligopoly?
8. Why is there no single theory that fully reflects the behavior of firms in the market? Why prefer non-price competition to price competition? What is the Cournot equilibrium?
9. What type of market can be attributed to: the automotive industry, ferrous metallurgy, light industry, the service sector?
10. What types of markets are formed in certain sectors of the Russian economy? It is often said that up to 80% of Russian engineering is monopolized. Is it so?
11. What determines the amount of resource used by the firm?
12. What is the marginal profitability of a resource? What is the difference between the marginal returns of a resource for a competitive firm and a monopoly firm in the finished product market?
13. Let's assume that the firm is a monopolist in the market of finished goods. How many workers will she hire at a wage rate of 1200 rubles?
How many workers would she employ in a perfectly competitive product market? The information required to answer the question is given below:
What happens if the wage rate doubles?
Profit maximization conditions under monopoly.
ANSWER
The behavior of a monopoly firm is determined not only by consumer demand and marginal revenue, but also by production costs.
A monopoly firm will increase output until marginal revenue (MR) equals marginal cost (MC):
A further increase in output per unit of output will lead to an excess of additional costs over additional income. If there is a decrease in output by one unit of output in comparison with this level, then for the monopoly firm this will turn into lost income, the extraction of which would be likely from the sale of another additional unit of the good.
The monopoly firm extracts the maximum profit in the case when the volume of output is such that marginal revenue is equal to marginal cost, and the price is equal to the height of the demand curve at a given level of output (Fig. 28.1).
Rice. 28.1. Monopoly price, output and economic profit in short period
On fig. 28.1 short-run curves of average and marginal costs of firm-monopolist are represented, and also demand for its product and marginal income from a product. The monopoly firm extracts the maximum profit by producing the amount of goods corresponding to the point where MR = MC. Then it sets the price P m, which is necessary to induce buyers to buy the amount of goods Q m. Given the price and volume of production, the monopoly firm extracts profit per unit of output (P m - AC M). The total economic profit is (P m - AC M) x Q m.
If demand and marginal revenue from the good supplied by the monopoly firm fall, then profit making is impossible. If the price corresponding to the release at which MR = MC falls below average costs, the monopoly firm will incur losses (Fig. 28.2).
Rice. 28.2. Monopoly price, output and losses in the short run
When a monopoly firm covers all its costs, but does not make a profit, it is at the level of self-sufficiency.
In the long run, maximizing profit, the monopoly firm increases its operations until it produces a volume of output corresponding to the equality of marginal revenue and long-run marginal cost (MR = LRMC). If at this price the monopoly firm makes a profit, then free entry to this market for other firms is excluded, since the emergence of new firms leads to an increase in supply, as a result of which prices fall to a level that provides only a normal profit.
Profit maximization in the long run is shown in Fig. 28.3.
Rice. 28.3. Optimal output and profit maximization in the long run
When a monopoly firm is profitable, it can expect to maximize profits in both the short and long run.
A monopoly firm controls both output and price at the same time. Inflating prices, it reduces the volume of output.
In the long run, the monopoly firm maximizes profit by producing and selling the amount of goods that corresponds to the equality of marginal revenue and marginal cost in the long run.
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Monopoly- the exclusive right of production, trade and other activities belonging to one person, a certain group of persons or the state.
Pure monopoly- this is a type of market structure, when the company is the only manufacturer of any product that has no analogues.
Character traits pure monopoly:
1) the concepts of "firm" and "industry" coincide;
2) buyers do not have a choice;
3) a pure monopolist, controlling the entire volume of output of goods, is able to control the price, change it in any direction;
4) the demand curve for the monopolist's products has a classical form and coincides with the market demand curve;
5) pure monopoly is protected from competition by high entry barriers.
Barriers to enter the industry These are barriers that stand in the way of entry of new firms into the industry. All barriers are divided into 2 types: natural that arise from economic reasons(economy of scale, control of key resources) and artificial created institutionally, for example, as a result of government actions (patents, licenses or dishonest actions of a monopolist).
Pure monopoly is the extreme form of market structure, the opposite of perfect competition.
Profit maximization and
The output volume (Q m) that maximizes the monopolist's profit is determined by the rule: MR = MC. Then the price (P m) is set.
Graphically, it looks like this: the set price (P m) is determined by the height of the demand curve at the point of release Q m . This price is always higher than MC. Hence: MC = MR< P – условие равновесия чистого монополиста в SR.
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To determine the monopoly profit, it is necessary to know the ratio of price (P m) and average costs (ATS).
If P m > ATC - the monopolist makes a profit (p = (P - ATC) × Q) and maximizes it;
If AVC< Р < ATC – монополист несет убытки и, минимизируя их, продолжает производство;
If P = ATC, the monopolist fully covers economic costs and has zero economic profit.
In the long run, the monopoly firm will achieve equilibrium if it can keep the industry it controls from being invaded by other firms. Using entry barriers, a pure monopoly is able to receive economic profit in the long run.
A pure monopoly has no supply curve because she herself sets the price in accordance with Q m . The monopolist's output decision (Qm) cannot be separated from the demand curve.
20. Price discrimination, regulation of monopolies. What is "Socially Optimum Price" and "Fair Profit Price"
In some situations, a pure monopoly can carry out price discrimination - to set different prices for goods of the same quality and level of costs for different buyers.
Conditions for the implementation of price discrimination:
1) the impossibility for the consumer to resell the goods purchased from the monopoly;
2) the ability to divide all consumers of a given product into groups according to their willingness to pay.
If the firm knows what maximum price each buyer is willing to pay for the product, then perfect price discrimination (or ideal) takes place.
Consequences of price discrimination:
1) a larger volume of products is produced;
2) the seller's profit increases due to consumer surplus;
3) the welfare of society increases, because product becomes available more consumers.
Graphical analysis of price discrimination. (provided that MC is const).
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On fig. 8.1.1 it can be seen that the profit of the monopolist is equal to the area of the rectangle I; the shaded triangle is consumer surplus; the area of triangle II is the irretrievable loss to society due to the monopoly price.
The transition to the policy of price discrimination (Fig. 8.1.2) means that MR=P, and the MR schedule merges with the demand schedule. All consumer surplus goes to the seller, increasing his profit (the area of triangle I in Fig. 8.1.2). Irretrievable social losses also disappear due to the expansion of the sales market (Q ` m > Q m).
Price discrimination can be systematic or temporary. However, in any case, the monopolist takes into account the elasticity of demand for his product. The object of price discrimination is mainly low-elastic goods.
Ways to reduce monopoly power:
1) Antimonopoly law. Directed against the accumulation of socially dangerous monopoly power by firms;
2) Economic regulation of natural monopolies (direct or indirect).
Regulated natural monopoly model.
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An unregulated monopolist would choose a quantity Q m and charge a price P m . Here he would have an economic profit equal to the shaded rectangle.
With perfect competition, P = MC; such a price (P 2) is optimal from the point of view of society, because ensures the most efficient allocation of resources. If the state sets this price for the monopolist's product, then the firm will incur losses. Regulatory agencies may allow a firm fair profit, setting the price P 1 at the level of average costs. Although this price leads to a reduction in Q compared to the optimal case (Q 1< Q 2), потребители получают все же больше в сравнении со случаем нерегулируемо естественной монополии (Q 1 >Qm).
3) Formation of state property, i.e. instead of regulating a privately owned natural monopoly, the state becomes the owner of the monopoly. However, as practice has shown, the desire for profit is a more reliable guarantee of the professional management of a company than a voting booth.
21. Monopolistic competition. Determination of price and volume.
Monopolistic competition- a market structure, when several dozen firms in an industry that produce a differentiated product compete with each other, while none of them has full power to control the market price.
Monopolistic competition is similar to the situation of "pure monopoly" and at the same time to "perfect competition".
Demand curve firms under monopolistic competition are downward elastic.
Demand elasticity factors- the number of competitors; degree of product differentiation.
Differentiate product- this means to distinguish it from other, similar products on any basis: quality, advertising, trademark, terms of sale, packaging, etc.
The additional costs associated with product differentiation can be a barrier to new firms entering the industry.
In the short run, every firm in a monopolistic competition market is much like a pure monopoly. It first chooses the output volume based on the equation MC = MR, and then uses the demand curve to set the price corresponding to this volume (P*).
Whether the firm will make a profit or incur a loss depends on the relationship between price and ATC. However, under conditions of monopolistic competition, economic profits and losses cannot last long.
In the long run, profits attract competitors into the industry, while losses encourage exit. The process of firm migration continues until economic profit reaches zero. This situation is analogous to perfect competition: no profit, no loss.
Graphically, long-run equilibrium looks like this:
Point A is the long-term equilibrium point, where p = 0 (p - profit).
Curve "D" is tangent to LAC. Firms earn only normal profits.
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