This means that Luxottica can increase revenue by lowering price, as they sell more sunglasses. According to the law of demand, as price falls, quantity demanded increases. In Figure 8.1b the global demand for sunglasses is shown. Consider what implications this has on revenue. If Luxottica decides to lower price, it must do so for ALL buyers. Whereas the competitive firm was a small player in the aggregate market, the monopolist dictates both the final price and the quantity. Let’s consider what would happen if Luxottica only sold one kind of sunglasses at the same price to all consumers, and if they owned 100% of the market. Notice that Luxottica is not a single price monopoly, as it practices a form of price discrimination by having multiple brands aimed at different consumers. This is fairly close to a monopoly, as with that high of a market share, Luxottica dominates the market price. That’s right, Luxottica, an Italian based eyewear company, produces about 70% of all name brand eyewear. What do Oakley, Ray-Ban and Persol have in common? They are all owned by the same brand. In this case, the aggregate demand is the firm’s demand! To explore monopoly, consider the sunglasses market. So we know a competitive market faces an elastic demand, what about a single-priced monopoly? This is distinct from other monopolies in that the firm must charge the same price to all consumers. This brings the market to equilibrium at the break-even point, where ATC is minimized and profit = 0. Why don’t they drop price and sell more units? Remember that the firm produces where P = MR = MC, so if they sell beyond this point, they are losing money. If they raise the price, they will sell no units if they drop the price, they will sell an infinite amount of units. Since the firm cannot deviate from the market price dictated by aggregate supply and demand, they face an elastic demand curve. In Figure 8.1a the competitive market for an individual firm is re-created. Notice in the competitive market, demand is downward sloping, but how does demand behave for the individual firm? Figure 8.1a Competitive Market Recapīelow is Figure 7.3a to remind us how the competitive firm operates. Rather, it exercises power to choose its market price. As a result, a monopoly is not a price taker like a perfectly competitive firm. While a monopoly must be concerned about whether consumers will purchase its products or spend their money on something altogether different, the monopolist need not worry about the actions of other firms. Some new drugs are produced by only one pharmaceutical firm-and no close substitutes for that drug may exist. While a monopoly, by definition, refers to a single firm, in practice, the term is often used to describe a market in which one firm has a very high market share.Įven though there are very few true monopolies in existence, we deal with some every day, often without realizing it: your electric and garbage collection companies for example. Since a monopoly faces no significant competition, it can charge any price it wishes. In the case of monopoly, one firm produces all of the output in a market. Whereas perfect competition is a market where firms have no market power and they simply respond to the market price, a monopolistic market is one with no competition at all, and firms have complete market power. Explain why monopolies cause deadweight loss.Calculate the profits of a monopolist and explain why profits do not cause entry.Describe how a monopoly chooses price and quantity.Understand the Marginal Revenue curve and its significance for a monopolist.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |