Pure monopoly examples of firms. Examination: Pure monopoly (reasons). Determining the price and volume of production in a pure monopoly

University: VZFEI

Year and city: Barnaul 2008

Work plan
Introduction 3
1. Signs of pure monopoly 4
2. Profit maximization in pure monopoly 14
3. Tests 17
Conclusion 18
List of used literature 20

Introduction

The vast majority of real markets are markets not perfect competition... They got their name due to the fact that competition, and hence the spontaneous mechanisms of self-regulation (the "invisible hand" of the market) act on them imperfectly. In particular, the principle of the absence of surpluses and deficits in the economy is often violated, which just testifies to the efficiency and perfection of the market system. If some goods are excessive, and some are not enough, it can no longer be argued that all available resources of the economy are spent only on the production of the necessary goods in the required quantities.

The prerequisites for imperfect competition are:

1. significant market share of individual manufacturers;
2. the presence of barriers to entry into the industry;
3. heterogeneity of products;
4. imperfection (inadequacy) of market information.

Each of these factors separately and all of them together contribute to the deviation of the market equilibrium from the point of equality of supply and demand. So, the only manufacturer of a certain product (monopolist) or a group of conspiring large firms (cartel) are able to maintain inflated prices without risking losing customers - all the more there is nowhere else to take this product.

In imperfect markets, one can single out the main criterion that allows one or another market to be classified in this category. The criterion for imperfect competition is a decrease in the demand and price curve with an increase in the firm's output. Another formulation is often used: the criterion of imperfect competition is the negative slope of the demand curve (D) for the firm's products.

Thus, if in conditions of perfect competition the volume of a firm's output does not affect the price level, then in conditions of imperfect competition such an influence exists.

Imperfectly competitive markets are heterogeneous and include three types of markets: pure monopoly, oligopoly, and monopoly competition.

1. Signs of pure monopoly

Of all the markets of imperfect competition, the most striking opposite of perfect competition is pure monopoly (from the Greek "mono" - one, "polio" - I sell). Under the conditions of pure monopoly, the industry consists of one firm, that is, the concepts of "firm" and "industry" coincide.

A pure monopoly is the industry's only seller of goods that has no substitutes. Indeed, a monopoly usually arises where there are no real alternatives, there are no close substitute products, and the manufactured product is unique. The monopolist has a unique ability to choose how much the entire industry will produce. Moreover, the only firm in the market can choose the price of the good. Thus, the monopolist chooses both the price of its product and the volume of its supply.

The presence of such a right gives him the opportunity to dictate his conditions on the market, primarily in the field of pricing. The price is set higher than the value, not because there is an increased demand for the product, but because the product is in the hands of one seller, who is able to determine the supply of the product, and through it, the price. This price appears to be monopolistically high. Setting the price higher than the value due to the monopoly position of the seller in the market means that the seller receives monopoly profit as the difference between the monopoly high price and the value of the goods. The possibility of obtaining such a profit prompts large companies to establish their monopoly in the market, which gives the right to the exclusive sale of goods. This right to the exclusive sale of a commodity is most often the result of political or economic power.

The state has always had political power, and it has used it for a long time, establishing its monopoly, for example, on the sale of wine, tobacco, salt, and replenishing its treasury at the expense of high prices. Sometimes the state granted such a monopoly to individual traders who became monopolists in the markets for these goods. This was called “outsourcing” the trade in some commodity.

Economic power is established as the size of capital grows and the production of a commodity is concentrated in separate hands. This concentration is the result of the concentration and centralization of production in individual industries, victory over competitors, usually smaller ones. With large competitors, an agreement is often reached on dividing the markets for the goods produced, and sometimes it is possible to combine them, so that the industry is under the control of one large company or a combination of companies, that is, it is monopolized.

The most common way to monopolize an industry is to unite large companies... The companies included in the association appear on the market for the respective product as a single whole, that is, as a monopoly. Such associations can be different, ranging from very simple to very complex forms.

The simplest monopolistic associations are temporary agreements between by individual companies, called pools, rings, conventions, etc. The name of such associations depends on the subject of the agreement. These can be agreements on the price of products manufactured in the industry, on joint actions in relation to competitors that are not included in this association, on the rules of conduct in the market. of this product etc. Since the agreements are temporary in nature, such monopolistic associations are unstable.

A more stable form of monopoly is a cartel - an agreement between individual companies on prices for manufactured products, on markets for these products, on quotas for their production. Cartel agreements can be agreements on the prices of raw materials from which products are made. Such agreements do not yet mean a complete monopolization of the industry, since they are concluded between companies that retain their production and commercial independence and act as sellers in the market, coordinating their actions with each other.

A qualitatively different form of monopoly is a syndicate, which is a combination of individual companies to create joint ventures for the sale of manufactured products. Here, in the full sense, a monopoly arises in the person of one sales company, which gets the opportunity to determine the conditions for the sale of goods, primarily the price.

The next, already completed form of monopoly is the trust. A trust is an association of companies not only for joint marketing, but also for the production of some goods. Companies included in the trust are deprived of not only sales, but also production independence, turning, in essence, into a single company. The formation of trusts is based on the process of centralization of production, which can be both horizontal and vertical.

Horizontal centralization unites enterprises belonging to the secondary sector of production, that is, to industries that produce individual semi-finished products, blanks, nodes, which, when connected, form final product... With him, the trust as a monopolist enters the market. Vertical centralization unites enterprises belonging to all sectors of production. Primary sector enterprises are engaged in the production of raw materials that are processed and converted into finished product at enterprises of the secondary sector. The services of the enterprises of the tertiary sector that are part of the trust ensure the uninterrupted production and sale of goods. This centralization of enterprises in various sectors and industries is also called vertical integration, and trusts based on it - by factories.

IN modern conditions a widespread form of associations capable of monopolizing the production and sale of goods is a concern. A concern is a combination of companies through the purchase of their controlling stakes by a single company that has become the parent company. Companies that have entered the concerns can maintain production and marketing independence, but they are deprived of financial independence. The concern usually includes companies belonging to different industries, but having common technological ties. Therefore, the concern, as a rule, is a diversified one, that is, producing different kinds goods, while they have the main type of product, in the market of which the concern usually acts as a monopolist. So, the oil refining concern, in addition to gasoline as the main product, can produce various oils, equipment for gas stations, equipment for drilling oil wells, etc. The creation of diversified concerns makes it possible to receive not only high, but also stable profits, since under the control of the concern are enterprises of industries with different profit margins, but in aggregate having a rate above the average.

The possibility of obtaining stable profits by finding capital in different industries led to the emergence of such a form of business combination as a conglomerate. The peculiarity of the conglomerate is that it unites enterprises of different industries that are not technologically related to each other. This principle of association is called diversification. Diversification is the process of introducing one, sufficiently powerful company into various industries in order to establish over them financial control and receiving consistently high income. A conglomerate, like a concern, is created through the acquisition of controlling stakes in other companies by one company. Typically, a conglomerate brings together highly profitable companies or companies with real prospects for high profits. If the profit rate of the companies included in the conglomerate begins to decline, then the conglomerate seeks to free itself from such a company. Therefore, in terms of its composition, a conglomerate, unlike concerns, is not permanent. But it is this volatility that allows the conglomerate to have above-average overall profit margins. The high rate of profit of the conglomerate can also be due to the establishment by individual companies of the conglomerate, monopolies in the markets for their goods. Therefore, often all the power and influence of such an association is aimed at ensuring such a monopoly for their companies.

So, a pure monopoly market is a type of market structure characterized by a high degree of seller's bargaining power and lack of competition.

An important feature of the market of perfect competition is standardization, that is, the homogeneity of the product sold on it. The product of a monopoly must be unique in the sense that there are no good and close substitutes for this product. In such a situation, the buyer does not have acceptable alternatives for the consumption of this product: he must buy it from the monopolist or dispense with this product. Suppose that some scientist has invented the elixir of life and sells it at a fabulous price: if you want, buy and live forever; If you cannot pay such a price, then at least die, but you will not buy such an elixir from anyone else. Note that a scientist, being a monopolist, can set the price for the elixir of life himself, therefore, he is a price producer and thus differs from a completely competitive firm taking the market price as given.

Since the monopoly firm makes high profits, other firms will want to enter the industry in order to open their production there. Therefore, to maintain monopoly power it is necessary to establish barriers to entry of new firms into the industry. Among the main types of barriers preventing additional sellers from entering the monopoly firm's market are patents and copyrights.

A patent is a document legal protection intellectual property, confirming both the authorship of the inventor and the exclusive ownership of the invention of the patent holder. The latter means that any other person can use the patented invention only if it is licensed by the owner of the patent. It follows that the patent system actually leads to the formation of monopolies in the market for scientific and technical knowledge.

Of course, patents can provide an inventor with a monopoly position only for the duration of the patent. Patent control has played a prominent role in the growth of many modern industrial giants such as Polaroid, General Motors, Xerox, and DuPont. United Shoe Machinery is a prime example of how patent control can be abused to gain monopoly power. United Shoe Machinery has become the exclusive supplier of some of the most important shoe making machines through patent control. It extended its monopoly power to other types of shoemaking equipment, requiring users of its patented machines to sign a "binding agreement" in which the shoe manufacturers would also agree to rent all other shoe equipment from United Shoe Machinery. This allowed the company to monopolize the market.

Other barriers to the emergence of a monopoly and to help maintain it include the following: exclusive rights received from the government or local authorities, thanks to which the company will receive the status of the only seller; ownership of all the most important sources of any production resource, for example, raw materials (for example, the famous De Beers company owns most of the diamond mines, which allows it to control about 90% of all world sales of rough diamonds); the advantage of low average costs of large-scale production in hotel industries, which leads to the formation of natural monopolies.

One of the main reasons for the emergence and existence of a monopoly is the existence of such significant economies of scale of production that it is possible for only one supplier to be present on the market, receiving a positive profit. In this case, they speak of natural monopoly. Modern technology in some industries is such that enterprises operating in these industries can grow very significantly in size, while continuing to benefit from the growth of production scale. The latter circumstance is expressed in the fact that as the size of the firm increases, the average cost of production decreases. In other words, the more products a firm produces over a certain period of time, the lower are the production costs of one unit of output.

If firms can consistently lower average costs and make profits by expanding production to meet market demand, then ultimately one firm will establish itself as the main supplier. Thus, the cost advantages of very large firms may allow one firm serving the entire market as a single seller to produce products at a lower cost than would be possible if the market was served by two or more sellers. This not only strengthens the strong monopoly power of an established firm in the market, but also becomes an almost insurmountable barrier to entry for other firms.

So, a natural monopoly is a firm that is able to satisfy the entire market demand for a product at less cost than would be possible if two or more firms supplied exactly the same amount of the product.

This type of monopoly is called natural because in this case barriers to entry are based on the features of technology, reflecting the natural laws of production, and not on property rights or government licenses.

Examples of natural monopolies are power grids, pipeline transport (oil and gas pipelines), landline telephony, district heating, city sewerage, and the subway. Obviously, in these industries, competition is either difficult or simply not applicable, since competition would lead here to significantly higher average production costs than those that would have been under the monopoly, because maintaining competition would require the existence of many small firms with small market shares. ... Consider, for example, a city water supply. By laying two pipe systems in parallel to each other, it is possible to ensure that neighboring houses and even neighboring apartments in the same house at the choice of residents can be connected to either of the two water supply companies. Competition has become possible, but at the cost of a significant increase in the cost of each liter of water delivered to the consumer. It is obviously much cheaper to have one plumbing system... Consequently, the forced dispersal of production at several enterprises in this case is inappropriate, since it would lead to an increase in average costs (costs per unit of output), and hence to an increase in the price of a unit of output. In this case, production at one large enterprise turns out to be more efficient from the point of view of society than the production of the same volume of products in several small or medium-sized enterprises. That is why the existence of natural monopolies is not prohibited by antitrust laws. At the same time, the government retains the right to regulate the actions of such monopolies in order to prevent abuse of the monopoly power it has granted. For example, the government can control the quality of services and the prices set by natural monopolies.

So, pure monopoly is a market with only one seller and many buyers. Since the monopoly firm is the only seller of the good, the demand curve for this firm has a negative slope, as shown in Fig. 1a. In conditions of oversaturation of the market with goods, additional products can be sold only if their prices go down. Therefore, the demand curve is descending, the demand for the firm's products is not absolutely elastic, that is, with an increase in prices, the demand for a product falls, with a decrease in prices, it increases. This fundamental difference between a monopolist and a firm operating in perfect competition also largely determines the differences in their behavior. In conditions of perfect competition, the share of firms in the total volume of market supply is negligible, the products are homogeneous and the firm does not have the ability to influence the market price of the goods. The demand for a firm's products in a perfectly competitive environment is absolutely elastic (Fig. 1b), that is, the market price does not change with an increase or decrease in the volume of production of an individual firm.

Rice. 1 Comparison of the demand curves for the firm's products in conditions of perfect and imperfect competition.

A perfectly competitive firm can sell as much as it wants at market prices. Monopoly does not accept price as given. As the volume of output increases, the price must certainly fall, because the demand curve is directed downward. For the sake of raising the price, the monopolist is forced to reduce the volume of production (sales), because consumers always respond to the increase in price by reducing the purchases of this good. Consequently, a competitive profit-maximizing firm has to identify only the optimal output. A monopoly firm pursuing the same goal must not only determine the amount of goods that will maximize profit, but also set a price at which the entire quantity produced would be bought by consumers. In this sense, it is more difficult to manage a monopoly than a competitive firm.

2. Profit maximization in pure monopoly

Marginal revenue shows the entrepreneur how much income the last additionally produced unit of production will bring him, marginal costs - what expenses the entrepreneur must make in order to produce this unit. Comparing income with expenses will help determine: is it worth producing this additional unit at all? If the marginal revenue is greater than the marginal cost, then the income from the last, additionally produced, unit of output exceeds the cost of its production and, therefore, it should be produced. If the marginal revenue is less than the marginal cost, then the cost of producing an additional unit of production is not recouped by the income from its sale. Therefore, it is unprofitable to produce it. The conclusion suggests itself: the entrepreneur needs to increase output until the marginal revenue is equal to the marginal cost. This volume of output will be optimal from the point of view of maximizing profits. The difference from a perfectly competitive firm is that the equality of price to marginal costs will not be a condition for maximizing profits in a monopoly situation, since the marginal revenue of the monopolist is not equal to the price of the product. Even more accurately, it can be argued that for each possible volume of output, the value of the marginal revenue will be less than the price of the product.

As in perfect competition, the firm's optimal production volume is achieved at the point where marginal revenue and marginal cost are equal (MR = MC). But if, in perfect competition, the firm chooses only the volume of production and P = MR, then the monopolist can not only determine the volume of production, but also set the price. Consequently, the marginal revenue becomes less than the unit price (MR< P). Это демонстрирует рис. 2, на котором кривая предельной выручки проходит ниже кривой спроса при любом положительном количестве продаваемого товара. Также монополист старается избегать неэластичного участка спроса, поскольку, когда спрос эластичен, снижение цены ведет к росту совокупной выручки, а когда неэластичен - снижение цены ведет к ее падению.

Rice. 2. Demand and marginal revenue of the firm in a pure monopoly.

In conditions completely competitive market the equilibrium of the firm is achieved at the point of equality of marginal revenue to marginal costs and the unit price (P = MR = MC); under monopoly conditions, while maximizing profits, the firm produces such a volume of production at which the equality of marginal revenue and marginal costs is achieved at more high price compared to the conditions of perfect competition (P> MR = MC). At the same time, under a monopoly, a firm always strives to obtain economic profits that are not available to the market of perfect competition. The optimal ratio of price and average costs for a monopoly is the excess of the unit price over the costs of its production (average costs) (P> AC), which indicates the possibility of a firm receiving economic profit.

Thus, the detailed equilibrium formula under monopoly conditions is: P> MR = MC< AC и характеризует ситуацию, при которой фирма монополист выбирает такой объем производства и цену, при которых возможно получить наибольшую массу прибыли. Действительно, при более высокой цене (P 1) сократится и объем продаж (с Q 0 до Q 1). Значит, наиболее выгодные позиции производителя будут достигаться, если он снизит выпуск продукции до Q 1 и будет продавать его по более высокой цене P 1 . При увеличении цены до P 1 фирма начинает получать экономическую прибыль, так как цена единицы продукции устанавливается выше средних издержек (P 1 >ATC) as shown in fig. 3 with a bold line.

Rice. 3. Profit maximization under conditions of pure monopoly.

Achieving such an equilibrium is preferable for any firm in conditions of imperfect competition, be it a pure monopoly, an oligopoly, or a monopoly competitor. However, in a monopoly environment, long-term economic profit is more likely due to the lack of competition in the market. If competition in the market still exists (as in the case of oligopoly and monopolistic competition), then economic profit in the long run decreases and possibly even disappears.

3. Tests

1. Price discrimination is:

a) selling the same product at different prices to different buyers at the same production costs;

b) differences in wages by nationality and gender;

c) exploitation of workers by setting high prices for consumer goods;

d) higher prices for goods and services of higher quality;

e) all previous answers are incorrect;

f) all previous answers are correct.

The correct answer is: a).

Price discrimination is a way of exercising market power, which consists in selling goods to different buyers at different prices and aimed at increasing profits through redistribution consumer surplus in favor of the manufacturer. By producing products at a higher price, the company loses part potential buyers... When the price rises, gross income can rise (if the demand for a product is price inelastic) or fall (when the demand for a product is price elastic). But in conditions of perfect competition, there is a possibility of price increase without refusal of some consumers from products, that is, a firm can set different prices for the same product for different groups consumers.

2. The type of market in which there is only one seller is:

a) monopsony;

b) monopoly;

c) oligopoly;

d) monopolistic competition;

e) pure competition.

The correct answer is b).

In monopsony, the buyer is the monopolist, that is, with many sellers, there is only one buyer. An oligopoly is characterized by the presence of several sales firms. Monopoly competition arises where dozens of firms operate. In pure competition, the number of buyers and sellers is large. Thus, only the monopoly market has one seller.

Conclusion

Pure monopoly means the only seller of goods in the industry with no substitutes. The product of a monopoly must be unique in the sense that there are no good and close substitutes for this product. The monopolist chooses both the price of its product and the volume of its supply. A pure monopoly market is a type of market structure characterized by a high degree of seller's bargaining power and a lack of competition. To maintain monopoly power, barriers are set for new firms to enter the industry.

The demand curve in conditions of pure monopoly is descending, the demand for the firm's products is not absolutely elastic, that is, with an increase in prices, demand for a product falls, with a decrease in prices, it increases. The marginal revenue curve falls below the demand curve for any positive quantity of the product sold. To achieve equilibrium under monopoly conditions, the monopolist chooses such a volume of production and a price at which it is possible to obtain the greatest amount of profit. In a monopoly environment, long-term economic profit is more likely due to the lack of competition in the market.

List of used literature

1. Economic theory: Textbook for university students / Ed. I.P. Nikolaeva, G.M. Kaziakhmedova. - M .: UNITY-DANA, 2005.
2. Sedov V.V. Economic theory: In 2 hours. Part 1 Introduction to economic theory: Textbook. Allowance / Chelyab. state un-t. Chelyabinsk, 2002.
3. Nikolaeva L.A., Chernaya I.P. Economic theory: Study guide... - Vladivostok: VSUES, 1999. Please inform us about it.

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Monopoly is a form of market (market structure) in which one or more firms are suppliers of a product that does not have close substitutes, and as such, they occupy a dominant position in the market, which allows them to determine prices or significantly influence them.

Being the opposite of competition, monopoly means the exclusive right to production, fishing, trade and other types of economic activity belonging to one person, group of persons or state. Known for a long time natural monopoly ... An industry in which the activities of a single firm are more efficient than in the presence of competitors. There are many examples of natural monopoly: local supply of electricity and gas. In such an industry, the minimum effective scale of production of a good is close to the quantity for which the market is demanding at any price sufficient to cover production costs.

In all other cases, monopolies are artificial, i.e. there are subjective reasons for their formation. It has become characteristic of modern economic life artificial monopoly .

Natural, or pure, monopoly? such a market model, when one firm is the only manufacturer of a product that has no substitutes. Known for her character traits:

1. The only seller, that is, the industry, consists of one firm. Are there "firm" and "industry" here? synonyms. One company is the sole manufacturer of this product, or sole supplier services.

2. There are no substitutes for this product. Product monopolies unique in the sense that there are no good or close substitutes. From the buyer's point of view, this means that there are no viable alternatives. The buyer must buy the product from monopolist or do without it. To such monopolies include government-regulated public utilities or so-called natural monopolies(electric and gas companies, cable TV, water supply and communication companies, etc.). There are also no substitutes for the services provided by utilities. But if they are, then they are either expensive or inconvenient.

Net monopoly may also have a geographic dimension.

A small town is sometimes served by only one airline or railroad. Your local bank, movie theater, or bookstore may be clean monopolies in a small village.

3. The firm dictates the price. An individual firm, operating in a purely competitive environment, has no influence on the price of a product: it "agrees with the price." Clean monopolist exercises significant price control. And the reason is obvious: it releases and therefore controls the total supply.

4. Entry into the industry is blocked in the form of: a) economies of scale; b) lack of substitutes; c) ownership of patents and scientific research. These barriers help explain the existence of pure monopolies and other non-competitive market structures. Barriers to entry into the industry that are very significant in short term, turn out to be surmountable in the long run.

Thus, natural monopoly (monopoly in the narrow sense)? This monopoly for rare and non-reproducible factors of production (land, gas, oil, rare metals, etc.)

). Natural monopolist produces a unique product? there is no substitute for it. For example, gas heating at home. No gas? and there is no heat. And it turns out: being the only gas producer, monopolist occupies a dominant position in the market. Will he commit tyranny? Should we “brute” prices to incredible heights or change the gas supply mode at our discretion? Maybe he would like to, but he is not. And all because the majority natural monopolists created by the government. The government can issue a patent for one of the unique products, copyright for some thing, or a license for the right to do business in a certain market without competition. In addition, municipalities give licenses to power plant, gas and communications companies to prevent duplication of capacity. These companies are very strictly controlled in their activities and in setting prices.

The reasons for the emergence and development of monopolies are associated with the operation of objective economic laws, the development of productive forces and significant changes in technological way production.

Firstly, operation of the law of competition. The law of competition and each of its functions are subordinated to the achievement of the main goal of production - to maximize profits. To maximize profits, a manufacturer must constantly increase production and sales of goods, gradually eliminating its competitors. In the end, the manufacturer, seizing and controlling most of the production and sale of goods, turns into a monopolist. This means that competition gives rise to its antipode - monopoly. Competition and monopoly always exist in a real market economy as two opposite and interdependent characteristics.

Second, the reason for the emergence of a monopoly is the action the law of concentration of capital and production.

Capital concentration is the process of increasing the size of individual capital by capitalizing profit, that is, using a certain part of it to expand production.

Third, the reason creating a monopoly is an the process of centralizing capital.

Centralization of capital - this is an increase in the size of capital due to the absorption or combination of several, previously independent, individual capitals into one larger one.

Fourth, the transformation of individual private property became the reason for the emergence of monopolies.

Fifth, the economic crises of the second half of the 19th century. became a factor in accelerating the concentration and centralization of production and the creation of monopolies on this basis.

The consequence of economic crises is the massive ruin and bankruptcy of small and medium-sized enterprises. Some of them are forcibly absorbed by big capital, while others are forced to agree to unite in order to avoid ruin. The interrelation of these two phenomena - crises and monopolies - shows one of the reasons for the accelerated monopolization of the economy.

Natural monopoly arise as a result of objective reasons.
First, it can appear when the entire volume a specific product or the service is the product of one or more firms. Competition in this case is not possible or not desirable (say, in power supply, the subway).
Secondly, this form of monopoly arises in agriculture and extractive industries.

Administrative monopoly arise as a result of the actions of state bodies, which grant individual firms exclusive rights to perform a certain type of activity.

Economic monopoly which is the most common, grows on the basis of the laws of economic development. The first path that leads to it is through the concentration of production, and the second is based on the centralization of capital.

IN scientific works and textbooks define such basic forms of monopolies as cartels, syndicates, trusts and concerns.

Cartel - This is the union of several enterprises of one branch of production, which does not eliminate their production or commercial independence, but provides for an agreement between them on certain issues: distribution of sales markets, price level, production quotas, and the like.

Syndicate - unification of enterprises of one branch of industry, which create a common gurtovo-sales office. Thus, while retaining industrial independence, the members of the syndicate lose commercial independence.

The extreme opposite is pure monopoly.

Monopoly assumes that one enterprise is the only manufacturer of unparalleled products. At the same time, buyers do not have a choice: they are forced to purchase the products of the monopolist enterprise.

TO branches of pure monopoly it is customary to include the branches of the communal services: heat, water, gas, electricity. Practice shows that pure monopoly usually exists in theory. However, many are very close to the situation of pure monopoly in basic parameters than to any other market model.

The most significant characteristics of the pure monopoly market structure include the following:

1. The only manufacturer(seller) of a specific product or service. In a purely monopoly environment, the firm has no direct competitors, and therefore coefficient of volumetric, or quantitative, cross-elasticity of demand characterizing the interdependence of firms in the market is close to zero. Let me remind you that this coefficient shows the degree of quantitative change in the price of firm X when the volume of output of firm Y changes by 1%.

The higher the cross-sectional volume, the closer the interdependence between firms in the market. If it is equal to or close to zero, then an individual producer (as is the case with a pure monopoly) can himself determine market prices and ignore the reactions of other firms to their actions.

2. There are no close substitute products... A product produced by a monopoly is unique in the sense that not only there are no firms producing a similar product, but also there are no firms that create close (from the point of view of consumers) analogues. This means that the cross price elasticity of demand, which shows the degree of quantitative change in the volume of sales of the monopolist firm i when the price of some other firm j changes by 1%, is also close to zero:

In conditions of pure monopoly, the firm has a special market power allowing it to regulate market prices for its products by changing the volume of sales. At the same time, the firm cannot set any prices, since it is limited by the consumers' ability to pay and by the law of demand.

3. Lack of freedom to enter the market.

Monopoly can only exist when it is virtually impossible or economically ineffective to enter and market other firms.

Among the most important barriers Entry into the industry is distinguished by:

Natural monopoly- based on positive economies of scale of production, which are so significant that one firm can supply all market demand with products at a lower cost than several openly competing firms.

Rice. 1 illustrates the situation in the natural monopoly market.

Rice. 1. Natural monopoly

With a given market demand curve, one firm can provide a volume of 10 units. at average costs equal to 5 USD (total costs of the vehicle = 50 USD). Obviously, the coexistence of two firms in the industry would increase the total costs for the same volume to
TS = 2 (6 * 5) = 60 c.u.

An example of a natural monopoly is the companies Gazprom and RAO UES. Even if it is technically possible for two or more firms to exist in these industries, it is economically inefficient. Usually, natural monopolies receive from the state the right to serve a specific market or geographic area, and in return agree to obey state control and regulation aimed at protecting consumer rights from abuse of monopoly (market) power. Overcoming such a barrier is within the power of only large diversified corporations.

• Company availability patent for products or for technological process used in its manufacture. A patent grants an inventor or innovator the exclusive right to manufacture and sell a product for a period of a certain period time. Examples of this kind of monopoly include General Electric (Edison's invention allowed the firm to dominate the industry from 1892 to 1930) or Xerox (it had approximately 75% of the market copying equipment until the patent expires in the 1970s).
• Ownership and control of deliveries rare or strategically important raw materials (De Beers - 70% of the diamond market).
• Providing the firm with a government licenses be the exclusive manufacturer (seller) in a given geographic area.
• High transport costs, contributing to the formation of isolated local markets and the emergence of local monopolists within a technologically unified industry.
• Offering products that consumers prefer from all other brands (eg Campbell canned soups - 85% of US canned soup sales).

4... Perfect knowledge everyone. All decisions are made in conditions of certainty. This means that the only seller (manufacturer) and all buyers know all the necessary market parameters: prices, physical characteristics of the product, income and cost functions. This assumes (as in perfect competition) that information is distributed instantly and free of charge. The perfectly informed assumption has a very great importance for a monopolist. In perfect competition, the firm is the price recipient, the market price is an external (exogenous) factor, and the individual demand curve is determined by a straight line parallel to the output axis. Under these conditions, in order to maximize its profits, it is enough for a firm to know its cost function. For a monopolist, this information is not enough. He needs to know the demand curve for his products, as well as (when implementing a policy of price discrimination) the demand functions of individual consumers or market segments for his products.

Demand and income of the monopoly firm. Features of the demand curve of a monopolist

The main difference in behavior perfect competitor and pure monopolist due to the nature of the demand curves.

1. When perfect competition the firm is by the price receiver, i.e. it takes market prices as data. The demand curve for its products is completely elastic and looks like a straight line parallel to the volume axis.

Monopoly firm, being the only manufacturer (seller) of its products, faces the aggregate demand of all consumers of its goods, and in this sense the individual demand curve of the monopolist is identical to the market demand curve, i.e. It has negative slope.

2. The demand curve for the products of the monopolist, being at the same time and average income curve (AR)... (The identity of the demand curve and the average income curve can be deduced from the ratio of total and average income.):

• AR = TR / Q = PQ / Q = P,
• AR (Q) = P (Q).

3. Due to the decreasing nature of the demand curve - AR curve of marginal income lies below the demand curve for any value Q> 0.

Let us prove this statement.

Let the price depend on the amount of demand ( inverse function demand), i.e. P = P (Q);

TR = P * Q = P (Q) * Q- total income by definition;

MR = d (TR) / dQ = d (PQ) / dQ- marginal income by definition.

We use the standard formula (uv) "= u" v + uv", and rewrite the marginal revenue equation:

Since under conditions of imperfect monopoly, the extreme case of which is pure monopoly, the demand curve will decrease, then the derivative P "(Q)=

Economic meaning This inequality lies in the fact that with a decreasing demand curve, a monopolist can sell an additional unit of a commodity only by lowering its price. Change in his total income (in other words, his marginal income) with an increase in sales from Q = n to Q = n + 1 will be is equal to the new, reduced price minus the loss in income from the sale of all additional n units of the product:

MRn + 1 = Pn + 1 - (Pn - Pn + 1) Qn,

where MRn + 1- income from sales n + 1 units of goods;

Pn, Pn + 1- selling prices n and n + 1 units of goods;

Qn- the volume of sales in the amount n units.

Because the Рn- Pn + 1> 0(the price decreases as the volume of sales increases),

Marginal income and demand (the case of a linear demand function)

Suppose that the monopolist's demand curve not only has a negative slope, but also linear, as shown in Fig. 2.

Rice. 2. Linear function demand of the monopoly firm

Then the demand function (inverse) can be written in general view equation

P = a-bQ,

where a, b are positive constants.

Accordingly, the function of total income has the form

TR = PQ = (a-bQ) Q = aQ-bQ2.

Since the marginal income is always equal to the first derivative of the total income, the equation for the MR function is

MR = dTR / dQ = a-2bQ.

Both functions start at P = a, but the slope of the MR (-2b) curve is twice the slope of the demand function (-b). Geometrically, the monopolist's MR curve divides the horizontal distance between the monopolist's demand curve and the vertical axis into two equal parts, in other words, segment AB = segment BC.

Conditions for maximizing the profit of a monopolist firm

Suppose that the cost structure of the monopolist firm is given by the ATC and MC and TC curves, and the marginal revenue is determined by the demand curve. What will be the optimal price and volume levels for the monopolist?

In conditions of perfect competition, the current price is set by the market, and the firm cannot influence it, being the price recipient. To maximize profits (or minimize their losses, if making a profit is impossible), the firm must determine the optimal output volume in the given market and technological conditions. In pure monopoly, a firm can maximize profits by choosing either the appropriate volume or price.

Two Approaches to Determining Maximization Conditions

There are two already known to us interconnected approaches to determining the conditions for maximizing profit.

1. The method of total costs - total income.

The total profit of the firm is maximized for such a volume of output, when the difference between TR and TS will be as large as possible:

Rice. 3. Determination of the maximum level of profit

In fig. 3, it can be seen that the monopolist will receive economic at any point of the segment AB, but the maximum profit can be obtained only at the point where the tangent to the TC curve has the same slope as the TR curve. The profit function is found by subtracting TC from TR for each production volume. Peak crooked cumulative profit(n) shows optimal production volume, i.e. volume that maximizes profit in the short run.

The necessary condition for maximizing profit can be written as follows: The total profit reaches its maximum when the volume of production at which the marginal profit is zero.

Marginal profit (Mp) - an increase in total profit with a change in the volume of production per unit. Geometrically, the marginal profit is equal to the slope of the total profit function and is calculated using the formula

Мп = (п) "= dп / dQ.

If Mn> 0, then the total profit function grows, and additional production can increase the total profit. If Mn<0, то функция совокупной прибыли уменьшается, и дополнительный выпуск сократит совокупную прибыль. И только при Мп=0 значение совокупной прибыли максимально.

The second method follows from the necessary condition for maximization (Mn = 0).

2. The method of marginal cost - marginal income.

Мп = (п) "= dп / dQ,

(n) "= dTR / dQ-dTC / dQ.

And since dTR / dQ = MR, but dTC / dQ = MC, then the total profit reaches its maximum value for such a volume of output at which the marginal costs are equal to the marginal income:

MC = MR.

If the marginal cost is greater than the marginal revenue ( MC> MR), then the monopolist can increase profits by reducing production. If the marginal cost is less than the marginal revenue ( MC<МR ), then profit can be increased by expanding production, and only if MC = MR at the point Q * equilibrium is achieved, as shown in Fig. 4.

Rice. 4. Condition of economic equilibrium

The equality MC = MR is a condition for maximizing, and not a condition for minimizing profits only if the second order condition is satisfied:

n "" (Q) = TR "" (Q) -TC "" (Q)<0

or since MR (Q) = TR "(Q) and MC (Q) = TC" (Q),

then MR "(Q) -MC" (Q)<0 .

Graphically, this means that the marginal revenue curve intersects the marginal cost curve from top to bottom (Figure 4). Otherwise the equality MR = MC will minimize profits (Fig. 5).

Rice. 5. Condition for minimizing profit

Example 1. Finding the optimal production volume of a monopolist firm.

It is known that the demand function of a monopolist has the form P = 5000-17Q, the function of total costs TC = 75000 + 200Q-17Q2 + Q3.

Define:

• the volume of production that provides the firm with the maximum profit;
• optimal market price;
• the amount of total profit;

The condition for maximizing profit is the equality MC = MR. Find MC and MR from these equations:

1. TR = PQ = (5000-17Q) Q = 5000Q-17Q2;

MR = (TR) "= dTR / dQ = 5000-34Q;

2. MC = (TC) "= 200-34Q + 3Q2;

3. MC = MR;

200-34 Q+3 Q2=5000-34 Q;

3 Q2=4800;

Q=-40 Q=40 .

Since a negative value has no economic meaning, the optimal production volume is Q * = 40.

The optimal market price is found by substituting Q * into the demand function.

4. P = 5000-17Q;

P = 5000-17 (40) = 4320 rubles.

The total profit can be found as the difference between TC and TR at Q * = 40.

5. n = TR-TC = 52,000 rubles.

The difference between the conditions for maximizing profits under perfect competition and under monopoly

The main difference between the conditions for maximizing profits under perfect competition and under monopoly is as follows.

For a completely competitive MR = P, and for a monopolist MR. Therefore, the equation MC = MR cannot be reduced to the form MC = P as in perfect competition.

Graphically, this means that in perfect competition, the optimum point is determined by the intersection of MC and P, and in monopoly, by the intersection of MC and MR.

Optimum point and profit of the monopolist

The ability of a monopoly firm to influence prices is not unlimited. Highest price, which can be appointed by the monopolist, is determined demand curve... This implies that the market power of the monopolist firm does not guarantee receipt positive economic profit.

To determine the total profit, the firm compares the average total costs (ATC) and the price (P *) at which it can realize the optimal output Q * (based on the market demand curve).

n = (P * -ATS) Q *.

If demand for your products drops sharply (from D to D ", as shown in Fig. 6 b), then the profit may be zero (especially for local monopolists operating within a small town or district).

Rice. 6. Positive and zero economic profit

However, the conditions for closing production under perfect competition and under monopoly differ from each other. If the closing point of a completely competitive enterprise is the min AVC point (minimum average variable costs), then for a monopolist enterprise such a single closing point does not exist at all. The monopolist will stop production only if the demand is so significantly reduced that the price will be lower than the average variable costs at optimal output, i.e. if

In any other situation, the monopoly remains in the market, even if it cannot cover its fixed costs in the short term.

Elasticity of demand and the optimum point of the monopolist

There is a close relationship between marginal revenue, price, and the elasticity of demand for the firm's products, which can be represented as an equation. In order to write the formula for this equation, we use the equations of total income (TR) and the point coefficient of price elasticity of demand (Ed).

MR = d (TR) / dQ = d (PQ) / dQ.

Because the P = f (Q), then you can write:

MR = d (PQ) / dQ = P (dQ / dQ) + Q (dP / dQ),

MR = P + Q (dP / dQ).

The coefficient of price elasticity of demand is calculated using the formula:

you can write:

(dQ / dP) = Ed: (P / Q),

dQ / dP = (EdQ) / P,

dP / dQ = P / (EdQ).

Substitute the resulting expression into the marginal revenue equation:

MR = P + Q (dP / dQ),

MR = P + Q (P / (EdQ)),

MR = P + P / Ed,

MR = P (1 + 1 / Ed),

where Ed Is the coefficient of price elasticity of demand for the products of the monopolist firm (Ed<0 в силу убывающего характера кривой спроса).

An important proposition follows from this equation: a monopoly firm always chooses a volume of production at which demand is price elastic.

If the demand is inelastic. those. 0<|Ed|<1 (Ed<0) , then the marginal income MR<0 (Fig. 7) and lies below the volume axis. At the same time, marginal costs are always positive, i.e. MS> 0, and, therefore, the condition for maximizing profit (MC = MR) is not met.

Rice. 7. Elastic and inelastic demand sections

The profit of a monopolist can be maximum only with elastic demand, when | Ed |

This point is important to keep in mind when choosing from several combinations of prices and volumes that provide the same total income for the firm. For example, selling 500 units. for 20 rubles. or 200 units. 50 rubles each? In both cases, the total income is 10,000 rubles. If we assume that the demand curve is linear, then most likely the firm will sell no more than 350 units. Let's take a look at this example.

Example 2. Choosing the optimal sales volume.

We know that at Р1 = 20, Q1 = 500, at Р2 = 50, Q2 = 200. Determine the optimal sales volume of the company.

The demand function in general form can be written as P = a-bQ. Let's find the values ​​of the coefficients a, b using the simplest transformations.

20= a-500 b,

a=20+500 b.

Substitute the value for a into the equation 50 = a-200b and solve it for b.

50=(20+500 b)-200 b,

300 b=30 ,

b=0.1 .

Knowing b, find but.

a=20+500 b,

but=20+500(0,1)=70 .

Thus, the demand function has the form P = 70-0.1Q.

The monopolist's profit reaches its maximum at MR = 0.

TR= PQ=70 Q-0,1 Q2 ,

MR=(TR)"=70-0,2 Q=0 ,

Q=350 .

Elasticity of demand and pricing under imperfect competition

In practice, the heads of firms have, as a rule, limited information about the functions of the market - AR, and marginal income, which complicates the choice of the equilibrium point. We use the already known ratios of marginal income and elasticity coefficient ( MR = P (1 + 1 / Ed)), as well as the condition for maximizing profit ( MC = MR) to find a universal pricing rule.

Let us be given:

MR = P (1 + 1 / Ed)- the marginal income of the firm depends on the price and the coefficient of price elasticity of demand for the firm's products.

MC = MR- the condition for maximizing profit.

Consequently:

P (1 + 1 / Ed) = MC,

P + P / Ed = MC,

P-MC = -P / Ed,

(P-MC) / P =-1 / Ed.

This formula Pindike and Rubinfeld call the rule of thumb for pricing (by analogy with the rule of thumb in physics, in Russian-language textbooks - the rule of the "right hand"). Left side of the equation (P-MC) / P shows the degree of influence of the firm on market prices, or the monopoly power of the firm, and is determined by the relative excess of the firm's market price of its marginal costs.

In the topic "Perfect competition" we have already mentioned that this method of assessing the monopoly power of a firm was first proposed in 1934 by an economist
Abba Lerner and was called "the indicator of Lerner's monopoly power." The quantitative value of the Lerner coefficient ranges from 0 to 1. The higher the result obtained, the more the firm can influence the market price and thereby receive additional profit.

The equation shows that this excess is equal to the inverse of the coefficient of elasticity of demand, taken with a minus sign. Let's rewrite the equation to express the price in terms of marginal cost:

Example 3. Finding the optimal price.

Elasticity of demand for the products of a monopolist firm Ed = -2... The total cost function is given by the equation TC = 75 + 3Q2... Find the price that provides the firm with the maximum profit for the volume of production Q = 10.

Let's find the value of marginal costs for a given volume.

MS = (TC) "= 6Q = 6 (10) = 60.

Substitute the resulting value MC and the coefficient E into a universal pricing formula:

P = 60: (1-1 / 2) = 120 rubles.

Thus, the optimal price that provides the firm with the maximum profit is 120 rubles.

Common misconceptions about monopoly pricing

The analysis of the conditions for maximizing profits by a monopolist, presented in Fig. 5.5 and 5.6, allows you to reveal several of the most common misconceptions about the behavior of a monopolist in the market:

• The monopolist does not charge the highest possible price... The monopoly power of the firm is limited by market demand, setting a price above P * will entail a decrease in the total profit of the monopoly.
• Monopolist demand curve is not inelastic... Typically, most demand curves are elastic at the top and inelastic at the bottom. A linear demand curve is half elastic and half inelastic (Ed = 1 at MR = 0). The optimum point of a monopolist always lies in the elastic interval of the demand curve.
• Monopolist profits are not always super high... Market demand can be so weak that the monopolist will receive only normal profits. In addition, production inefficiencies and high costs can significantly reduce a firm's profitability.

Monopoly firm supply and costs

In analyzing the competitive market, we infer that the individual firm's supply curve coincides with the increasing portion of the marginal cost curve above the minimum short-run average variable cost (SAVC). The function of supply on the price is traditionally defined as the dependence of the volume of supply of a good or service on the price, all other things being equal (i.e., with a given technology, given prices for resources, etc.). In a monopolistic market there is no such dependence, since the amount of products that the monopolist is ready to offer to the market does not depend on price, but on changes in demand.

Depending on the nature of changes in demand, three supply models are possible.

In fig. 8 shows possible changes in price and supply volume depending on changes in the demand function.

Significant increase in demand with D1 before D2 causes an increase in the optimum point from Q1 before Q2 and an increase in the corresponding price from Р1 before P2... The connection of these points, as it might seem at first glance, defines the supply curve. S1 having traditional increasing character.

However, let us see how the monopolist's output will change if the demand function changes otherwise. Let the demand curve shift to the right to a lesser extent and take the position D3... As can be seen from Fig. 5.9, the optimum point will not change, since MR3 crosses over MC at the same point as MR2, but the price will be slightly lower ( P3<Р2 ). If we now connect the obtained points, then the new supply curve S3 will be already decreasing.

Rice. 8. The increasing nature of the supply curve

Rice. 9. The declining nature of the supply curve

Thus, from Fig. 9 shows that the form of the supply curves we obtain depends on how the market demand changes. However, from the analysis of market supply and demand, we know that supply curves are independent of the demand function (s).

That's why supply curve model as a one-to-one correspondence between prices and volumes production is used only in the theory of perfect competition. For other market structures (monopoly, oligopoly, monopolistic competition), the supply curve does not exist in this sense. For the analysis of the behavior of imperfect competitors, including monopolists, it is not the ratio of supply and demand that is decisive, but the ratio of demand and costs. The intersection of supply and demand curves, the famous Marshall cross, determine equilibrium prices and equilibrium output only in a hypothetical market of perfect competition.

Monopoly and Perfect Competition: Key Differences. Consequences of market monopolization

Analysis of market conditions with pure monopoly and perfect competition reveals the following differences between these market structures:

1. With pure monopoly the market price is usually higher and the volume of production is lower than with perfect competition. As seen in Fig. 10, in perfect competition, the optimum point (K) of a typical firm is determined by the intersection of supply and demand (coinciding with MC above min SAVC).

Rice. 10. Equilibrium conditions: pure monopoly and perfect competition

At pure monopoly the optimal volume of production (Qm) is obtained by comparing marginal costs and marginal income (lying below the demand curve), and price (Pm) is obtained as a result of the ratio optimal volume and demand curve... Based on our model, we can conclude that monopolization of a completely competitive industry (while maintaining market demand and cost structure unchanged) will inevitably reduce the total output and increase market prices. This has as its consequence both direct damage from underproduction of goods or services, and indirect damage from the redistribution of part of the consumer surplus in favor of a monopoly due to an increase in the market price.

2. On a monopoly market resource efficiency is usually lower than with perfect competition. Since the monopoly firm is interested in reducing the total output, some of the resources are unclaimed.

3. The monopolist has special market power, which allows him to dictate prices and volumes of output.