Profit maximization under monopoly.

1. Monopoly:
1. There is only one firm in the industry
2. There’re strict barriers to entry(economic, legal, etc…)
3. A monopol. firm has complete market power, it’s a price-maker.
4. The product, in most cases, is unique(no close substitutes)
5. The dem for the prod. of the monopoly is the dem. of the whole market or industry è D-curve is downward sloping.
2. Dem. and MR of the monopolistic firm.
1. To sell more à P↓
2. P>MR for all the levels of output, except the first unit(MR_{first unit} = P)
3. MR-curve is located below the D-curve.
4. TRà Max, when MR=0; MR>0à TR↑.
5. E>1 – elastic, <1 – inelastic; =1 – unitary elastic.
6. !!! A monopoly will produce only in the elastic part of the D-curve, where MR>0.
7. !!! In fact a monopoly is restricted be the D(Q₂ can’t be sold with the price of P₁)
8. Conclusion: a monopoly chooses a combination of P/Q, not only P.

Oligopoly.

1. The basic characteristics of an oligopoly:
1. There are few firms in the market or few are dominating (concentrated industry).
2. There is a big market power influence on price.
3. Product can be both homogeneous and differentiated.
4. There are strict barriers to enter the market, but still it is possible.
5. The Demand curve for the product is downward sloping, but flatter then in case of pure monopoly.
6. A great degree of independence(??? Может быть, interdependence) of the firms; performance of one firm will depend on the behavior of the rivals.

Collusion models. It is very difficult to predict the outcome for a firm – lots of theories.

i. Explicit collusions:

Concentration ratio.

HHI – Herfindale – Hirschman Index. S –share of a firm in industrial output. n – number of firms.

First cartels – end of 19 cent. In many countries they are forbidden – antitrust laws. OPEC – international cartel.

Requirements to be efficient:

1. Demand for product should be inelastic.

2. All the members should play to the rules. There is always an incentive to violate the rules.

ii. Implicit collusions. When there are few firms they know each other very well so it is not necessary to meet, so they work out a mutual behavior concerning price policy.

1. price leadership model. One firm is dominating, it sets a price and other firms follow suit (agree with the policy); if the firms are approximately equal they will become price leaders in turn.

2. barometric form price leadership. Price leader is not always the biggest firm – the most reliable with a good image. Price leader may want to get rid of the rivals à decreases price to the level which is not acceptable to the rivals and keeps at the low level until the weaker rivals go bankrupt and exit the market. Then the price is increased to high level according to the monopolistic position of the price leaderà predatory pricing policy.

Дата добавления: 2015-10-28