What are the main four reasons why monopolies exist? In Germany, Deutsche Bahn is dominating the market for personal rail transport. Which of the reasons apply in this case in your opinion?
● A key resource is owned by a single firm. (F.e. Water on a small island)
● The government gives a single firm the exclusive right to produce some good or service. (F.e. Alcohol in Sweden & patents)
● The costs of production make a single producer more efficient than a large number of producers. (Distribution of water, pipelines)
● A firm is able to gain control of other firms in the market and thus grow in size.
Number 3 applies to this case or 1. The Deutsche Bahn is operating the railway network in Germany. They demand high prices from companies if they intend to use the network, which is, in this case, a key ressource which is under control of DB.
Why is a monopolists marginal revenue less than the price of its goods? And why is it not the case in a competitive market?
Because the price on all units sold must fall if the monopoly increases production, marginal revenue is always less than the price.
The competitive market however is a price-taker and has no market power. It therefore has a horizontal demand curve. It doesn´t have to accept a lower price if it wants to sell more output, unlike the monopoly.
Demand for the product of a monopolist is described by the following function:
P(x) = -1/6 x + 19/6
The production function of the monopolist is given as:
C(x) = 1/12 x^2 + 2/3 x + 3
What is the profit maximizing price and production quantity? What would it be if the market was perfectly competitive?
Maximizing profit in a monopoly when —> MR = MC and P>MR
Discuss the advantages and disadvantages of patents. What would change if the duration of a patent was shortened or extended?
Advantages: acceleration of innovation in the economy, creates a time-limited monopoly, exclusive rights, Easily commercialized.
Disadvantages: Difficult to acquire, Dealing with Infringers, Limited Time.
If the patent is too short it may not cover the competitor´s products and if its too long it may fail to maximizes innovation in a company or country because patent owners most likely won´t feel pushed or orged towards working and studying o the licensed product.
What´s an imperfect competition?
= firms have some influence over price, they are not simply price- takers. We then say that companies have market power.
(imperfect competition exists where firms can differentiate their product in some way and so have some influence over price).
- The larger the market share a firm has the more market power it has.
- in an imperfect competition a firm is not a price-taker its a price-maker. (The firm can change the price and still retains his sales.)
Which different degrees does imperfect competition have?
Degrees of imperfect competition
- Monopoly: only one company producing the product and no substitutes.
- Oligopoly: only few sellers, each offering an identical product.
- Monopolistic Competition : Many firms selling products that are similar but not identical.
- Dominating position: One or few companies having a high share in the market but far below 100%.
- As little as 25% could be sufficient to have some level of market power.
Give an example of a monopoly.
Why is Microsoft a Monopoly even though there are other sellers?
- rules 88% of the market, although also successful suppliers like Apple ´s IOS and Linux exist.
- dominant player in the market, but also not immune to pressure from competition —> see microsofts mobile devices in comparison to Apple. (Market share has fallen)
- buyers have little choice but to buy the system —> ability to control market
—> therefore it is a monopoly
- microsoft has secured its market power, which is why they behave different than a perfectly competitive firm
- market price of a windows system is many many times the marginal cost of it
How does a natural Monopoly occur?
A natural monopoly occurs when there are economies of scale, implying that average total cost falls as the firms scale becomes larger.
When does a monopoly maximizes its profit?
A monopoly maximzes its profit by producing only that much products until the marginal cost equal the marginal revenue. It then uses the demanc curve to find the price at which consumers will buy that quantity.
This leads to lower quantity but higher prices and thus, to an economic profit.
What´s meant with the welfare cost of monopoly?
• In contrast to a competitive firm, the monopoly charges a price above the marginal cost.
• For consumers, this high price makes monopoly undesirable.
• For the owners of the firm, the high price makes monopoly very desirable.
• The monopolist produces less than the socially efficient quantity of output.
• The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax.
• The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit.
MONOPOLY LEADS TO MARKET INEFFICIENCY !!!
Name 4 solutions for how to deal with monopoly.
How to deal with Monopoly
- Making monopolized Industries more competitive (preventing mergers, forcing to split)
- Regulating the behaviour of monopolies – setting prices equal to the competitive market equilibrium
- Turning some private monopolies into public enterprises
- Doing nothing at all (Problems could get bigger than they already were)
What´s an oligopoly & duopoly
competition among the few – a market structure in which only a few sellers offer similar or identical products and dominate the market
Example = Chocolate in Europe, whereas this industry is dominated by these three very large firms: Nestlé, Mars and Cadbury.
They determine the quantity produced and Products prices. These firms are also interdependent, meaning „voneinander abhängig sein“.
- The group of oligopolists is best off cooperating and acting like a monopolist – producing a small quantity of output and charging a price above marginal cost.
- Profit provides an incentive to go alone which limits the group to act as a monopoly.
-A duopoly is an oligopoly with only two members. It is the simplest type of
- The duopolists may agree on a monopoly outcome.
- Competition laws prohibit explicit agreements among oligopolists as a matter of public policy.
What´s the difference between a collusion and a cartel?
- Collusion: An agreement among firms in a market about quantities to produce or prices to charge.
- Cartel: A group of firms acting in unison.
Strategic behaviour of oligopolists.
Strategic Policy of Oligopolists
- Each firm knows that its profit depends not only on
how much it produces but also on how much the other
Give an example of the game theory: a Prisoner´s Dilemma
The game theory is the study of how people behave in strategic situations
What are the consequences of oligopolies?
Oligopolies can but don’t have to reduce welfare. It depends on the Nash equilibrium in the market.
• However, in the long term, cooperation between companies is more likely, because short-term gains can be offset by future losses.
• As the number of sellers in an oligopoly grows larger, cooperation is becoming more and more difficult and an oligopolistic market looks more and more like a competitive market.
• International trade increases the number of producers compared to protectionist markets.
• Lower concentration ratio and market share on a global scale. • Increased competition keeps prices down.