Notesale: Turn your study into money

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HULT International Business School
Economic Theory and Application (ECN102) - A
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- Said to be the polar ≠ of competition
- Monopoly can be exerted through:
- legal barriers (eg
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A monopolistic firm takes into account that its output
decision can affect price; its marginal revenue is not its
price
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Firms are too small to affect the
price, it does not take into account
the effect of its output decision on
the price it receives

In M markets, the firm faces no competitors and does chat
is in the best interest of the sole firm
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• One firm
• Entry barriers (legal, social, economic) prevent
competition
• No close substitutes for the firms products
• Abnormal profits are possible, the firm faces downward
sloping demand curve and has room to choice (price or
supply)
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• Products are perfect substitutes
• Firms face a horizontal demand
curve
• So economic forces have full
reign, firms are productively and
market is is allocatively efficient
and consumer has maximum
benefits

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Market structures vary (a spectrum)
The level of concentration is key
The two extreme models are Monopoly and Perfect Competition
Both are rare

- Concentration Measures:
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The HERFINDAHL-HISCHMAN INDEX

The Concentration ratio

• Squaring the % market share of each firm in the market and
summing these numbers
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The index can be as high as 10,000 if the
market is a pure monopoly (100*)
• The lower the index the more competitive the market

Share of top 4 or 5
companies
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(5) Average total cost ➔
(6) Profit ➔

Both Monopoly and Perfect competition are pure extremes which are rare
Perfect competition model is defined by extreme pre-conditions

↓
Real business and markets have some degree of ‘imperfection’
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and does not try
to model concentration
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think of it dynamically--so that
conditions change over time
- This is expressed as a short and a long run state
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so faces a downward sloping
demand curve
• At profit maximizing output, marginal cost will be less than
price

Competition leads to
striving to gain market/
monopoly power

→

But there are competing
firm (low entry barriers)

Has no economic profit in the
long term because no barriers
to entry

→

With design, advertising
and other methods each
firm is a ‘monopolist’
supplier of what
differentiates its product

↓
But it is also always only
fleeting
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A monopolist will charge the maximum price
consumers are willing to pay for that quantity
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MR < MC ➔ the M gains profit by decreasing
output
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- Most patented goods make a loss; in fact, the cost of getting the patent often exceeds the
revenues from selling the products
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- The Welfare Loss: the cost to society from the existence of the monopoly ➔ one of
the reasons why economists oppose to M
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That distinction means that the MC of increasing output is lower than the
MB of increasing output => Welfare Loss = Deadweight Loss
- The Price-Disciminating Monopolist
- To price-discriminate ➔ to charge ≠ prices to ≠ individuals or groups of individuals
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- Ie
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- Barriers to entry & M
- The existence of a M is due to some type of barrier of entry (social, political economic
impediment that prevents the firms from entering the market)
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- Natural ability ➔ A firm has unique abilities to make the production mire efficient than
all other firms
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The J/unJ distinction raises the question of whether a firm has acquired a M
based on its ability or on a certain unfair tactics such as initially pricing low to force
competitive companies out of business but then price high
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- ATC is below the Demand curve and the MC is a horizontal line !
- Natural M are only natural given a technology
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ie
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- Not only is there no WL from the M, but there can actually be a W gain since a
single from producing is so much more efficient than many firms producing
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- GVT-created Monopoly ➔ Possible economic profits from monopoly lead potential
monopolists to spend money to get government to give them a monopoly
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Pharma companies

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- M competition ➔ A market structure in which there are many Firms selling differentiated products
a few barriers to entry
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There are so
many firms that
one firm can’t
concern itself with
the reaction of
any specific firm
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Soap industry

The "many sellers »
characteristic gives
monopolistic
competition its
competitive aspect
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So in one sense each
firm has a monopoly
in the good it sells
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Product ≠° ➔ attempt to competed on
percieved attributes
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Barriers to entry
create the potential
for long-run
economic profit and
prevent competitive
pressures from
pushing price down
to ATC

- Advertising in Monopolistic competition:
- Firms in Perfectly competitive market have no incentive to advertise (since they can
sell all they want at market price) ≠ Monopolist competition have a strong incentive:
advertising therefore plays an important role in providing with that differentiation
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- Advertising ➔ shifts the ATC curve up ➔ Advertising must be considered in both
benefits and costs
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That waste shows up in the
graph by the fact that monopolist competitors don’t produce at the minimum point
of their ATC curve
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Chamberlin & J
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If consumers are willing to pay that cost, then it’s not a waste
but rather a benefit to them
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