Student ID:2234888
BUSINESS ECONOMICS 504
(CAMPUS SUMMER 23-17) Weekly summary report #6 Summer 2023
Name: Rakshit Banta
Professor Name: yang,charity
Monopoly in business refers to a situation in which a corporation or organization has
complete control over a specific product, service, or industry. This control enables the
firm to set prices, regulate supply, and limit competition, which frequently results in
fewer consumer options and potentially higher prices. Monopolies can be developed
through a variety of techniques, including the acquisition of competitors, control of
critical resources, or ownership of an exclusive patent or license.
Many countries have rigorous regulations in place to maintain fair competition and avoid
market power abuse.
Monopolies are classified into two types:
Monopoly by Nature
When a single company can efficiently supply an item or service to an entire market at a
cheaper cost than several competing enterprises, a monopoly exists. This is common in
businesses with substantial upfront infrastructure expenses, such as water, electricity,
and natural gas delivery. It is more efficient to have a single organization manage and
deliver infrastructure rather than duplicating infrastructure with several competitors.
Monopoly in the Law
The government creates this form of monopoly by providing a single firm the exclusive
right to provide a specific item or service. This might happen for mutual benefit, security,
or control. Governments, for example, can patent innovators, granting them a temporary
monopoly on their creation.
In addition to these two broad categories, there is the concept of "monopoly power,"
which describes a situation in which a company or a small group of companies has
significant market influence even if it does not completely control the market. This could
be due to a large market share, a dominant brand image, a network effect, or other
factors that keep competitors from challenging their position.
Monopoly by nature
When the long-run ATC curve falls indefinitely, a large firm has lower costs than two
small firms. As average LR at very high levels of production continues to fall, a large
company can supply the industry at a lower cost per unit than many smaller firms. A
single supplier with a plant size corresponding to ATC2 can supply the entire market,
whereas several small companies, each with a plant size corresponding to AT Ci,
cannot compete. Due to differential unit costs, smaller firms must compete with larger
firms.
The patent and the fixed cost
LATC will decrease indefinitely with a fixed R&D cost F for the first unit and a constant
MC thereafter. A competitor who imitates this innovator is not F and may be detrimental
to the innovator.
Patents safeguard intellectual property rights and promote R&D. The long-run average
total cost, LATC, decreases indefinitely and becomes asymptotic to the marginal cost
curve with the fixed cost of producing the first unit of output equal to F and the marginal
cost remaining constant thereafter.
Profit = TR - TC = optimum output
When the difference between TR and TC is maximized, profit is maximized.
The profit maximization rule is as follows:
If MR > MC, output should be increased. If MR MC = reduce output If MR = MC, the
output is optimal. Monopolist profits are always maximized on the elastic segment of the
demand curve.
Aside: If the demand curve is linear, the MR curve must intersect the Q axis halfway to
the horizontal intercept of the demand curve.
Profit maximization rule: If MR > MC, output should be increased. If MR MC = reduce
output If MR = MC, the output is optimal. Monopolist profits are always maximized on
the elastic segment of the demand curve. Aside: If the demand curve is linear, the MR
curve must intersect the Q axis halfway to the horizontal intercept of the demand curve.
Monopoly as a source of market failure
Because of its negative impact on competition, consumer welfare, and overall market
efficiency, monopoly is frequently regarded as a market failure. A monopoly can be
viewed as a market failure in the following way:
Reduce the amount of competition:
Because there is no competition in a monopoly, the company has little incentive to
innovate, improve quality, or lower prices. This can result in product or service
stagnation as well as fewer consumer options.
Expensive:- Because consumers have no other option, monopolies may charge higher
prices for their products or services. In a competitive market, this may cost consumers
more.
Inefficient resource allocation:- In a competitive market, prices are determined by supply
and demand, resulting in resource allocation that maximizes consumer satisfaction.
Prices in a monopoly are determined by the monopolist's profit maximization, which can
result in resource misallocation and prevent consumers from reaping the greatest
benefit.
Lost download ;- Monopolies can cause heavy losses, which are potential welfare
losses that occur when the quantity of a good or service is reduced and the price rises
in comparison to a competitive market.
Entry barriers: Monopolies frequently erect entry barriers that make it difficult for new
competitors to enter the market. This reduces the potential for innovation and limits
market dynamism. Governments frequently regulate or dismantle monopolies for these
reasons, in order to promote fair competition, consumer welfare, and efficient resource
allocation. In order to increase profits, price discrimination involves charging different
prices to different consumers.
Price discrimination conditions:
The seller must be able to separate or filter the market. It must be impossible or
impractical to resell. In the case of a monopoly, price discrimination can reduce DWL
because more products can be sold overall.
Perfect price discrimination
Perfect price discrimination, also known as first-degree price discrimination, is a pricing
strategy in which salespeople charge each customer the maximum price for a product
or service that they are willing to pay. As a result, the seller is able to capture the entire
consumer surplus and maximize his profits. It is difficult to put into practice because
detailed information about each customer's willingness to pay is required.
By producing Q, a monopolist who can sell each unit at a different price maximizes
profit. The demand curve becomes the MR curve when each consumer pays a different
price. As a result, the monopoly DWL is eliminated because efficient output is produced,
and the monopolist owns all of the consumer surplus. Total revenue for the perfect price
dis- criminator is OABQ∗.
Cartel behaving monopolistically.
A cartel is a group of suppliers who agree to work exclusively together. The
Organization of Petroleum Exporting Countries (OPEC) cartel is an example of a cartel
that has been successful in achieving its goals over a long period of time. The cartel first
showed its teeth in 1973, when the world oil price rose from $3 to $10 per barrel. As a
result, billions of dollars have been transferred from energy-importing European and
North American countries to OPEC members; because demand for oil is relatively
inelastic, higher spending prices increase total value. A group of companies or
independent firms that agree to act as a monopoly by controlling price, production, and
market behaviour collectively. This enables them to command higher prices and profits
than would be possible in a competitive market. Cartels frequently violate antitrust laws
by limiting competition and harming consumer welfare. Maintaining cartel arrangements,
on the other hand, can be difficult because individual members may be incentivized to
cheat in order to increase their own profits.
Cartel instability: there is an incentive for firms to break the collusion agreement and sell
more a to QM MC for less than the price, and profits for an individual company can
increase if other firms do not increase output as well.
Oligopoly
An oligopoly is a market structure characterized by a small number of dominant large
firms. These firms have significant market power, which allows them to influence prices
and output levels. Monopolistic markets are frequently characterized by fierce
competition and strategic interactions among several key players. In oligopolies, pricing,
product differentiation, and advertising strategies are critical. Companies' collusive or
non-collusive behaviour can influence market outcomes, resulting in a complex and
dynamic competitive landscape.
Game
The term "game" in this context does not refer to a video game, but rather to a strategic
situation in which multiple players (or companies) make decisions that affect the
outcome of a game together. Each player's decisions are influenced by the actions of
the others.
Nash Equation
It is a situation in which each player's strategy is the best response to the other players'
strategies. In other words, no actor has a vested interest in changing his strategy
because he believes he has made the best decision based on what others are doing.
Superior strategy
A strategy is said to be dominant if it is the best option for a player regardless of the
strategy employed by his opponent. In other words, regardless of what others do, this
strategy provides the player with the highest payout.
Matrix of Payoffs
This is a table that shows the payouts (rewards or benefits) to each player based on the
various strategic combinations available to them and their opponents. The victory of
each player is determined by their own choices as well as the choices of others.These
terms assist economists and analysts in understanding how companies or actors in
strategic situations make decisions, how they respond to the choices of others, and
what outcomes are likely based on their strategy. Game theory provides a structured
way to analyze and predict the outcomes of these complex interactions.
Cournot's game of duopoly
A duopoly is a market situation in which only two companies dominate an industry. Each
firm's decisions have a significant impact on the market and the decisions of the other in
a monopoly. Cournot games are a type of game theory model that is frequently used to
analyze monopolistic games. In Cournot's game, two firms choose how much to
produce or how much to produce independently. They then compete in the market
based on these quantities at the same time.
The following are the main assumptions of the Cournot game: 1. Companies choose
quantity over price.
2. Each company believes that the number of competitors is fixed and does not vary
based on its preferences.
3. Businesses strive to maximize profits.
In a duopoly, two firms make optimal quantity choices given the other firm's choice. qB1,
Price firm A's demand curve becomes D if firm B produces. Given firm B's production
level, firm A's best strategy is to select an output level where MC = MRAr.
Functions of Reaction
Reaction functions are an important concept in game theory, particularly when dealing
with strategic interactions such as Cournot competition in monopoly positions.
A response function depicts how an agent (or firm) will modify its strategy in response to
the choices of its competitors. Each firm has a response function in the context of
monopoly and the Cournot game that indicates the optimal quantity it should produce
given the quantity produced by its rival.
In a Cournot monopoly, for example, if firm A tries to maximize its profits, its response
function will show how the firm adjusts its quantity based on the amount firm B has
chosen. Firm A may decide to produce less in response to Firm B's increased output,
and vice versa. The interaction of the two firms' response functions results in a point
where their quantities intersect; this point is the Nash equilibrium. .At this point, neither
firm has a unilateral incentive to change its quantity because both maximize their profits
based on the choices of the other firm. Reaction functions aid in modelling the dynamics
of strategic interactions and provide insights into how businesses may react to the
decisions of others in various situations. We can find the reaction functions by changing
the output level for the competitor and solving for the best choice of the other firm. RA
displays the best output response for A to any b output choice. At the intersection of RA
and RB, the equilibrium occurs.
References:
https://www.myucwest.ca/lms/pluginfile.php/3404822/mod_resource/content/0/CI-Princi
ples-of-Economics.pdf
www.wikipedia.com
