University: VZFEI

Year and city: Barnaul 2008

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

Introduction

The vast majority of real markets are imperfectly competitive markets. They got their name due to the fact that competition, and therefore 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, which precisely indicates the efficiency and perfection of the market system, is often violated. If some goods are abundant and some are in short supply, it can no longer be said 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. presence of barriers to entry into the industry;
3. heterogeneity of products;
4. imperfection (inadequacy) of market information.

Each of these factors individually and all of them together contribute to the deviation of market equilibrium from the point of equality of supply and demand. Thus, a single manufacturer of a certain product (monopolist) or a group of large firms colluding with each other (cartel) is able to maintain inflated prices without the risk of losing customers - there is simply nowhere else to get this product.

In imperfect markets, one can identify the main criterion that allows one or another market to be classified in this category. The criterion of imperfect competition is a decrease in the demand curve and prices as the firm's output increases. 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 under conditions of perfect competition the volume of a firm's output does not affect the price level, then under conditions of imperfect competition such an influence exists.

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

1. Signs of a pure monopoly

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

A pure monopoly is the only seller of a product in an industry that has no substitutes. Indeed, a monopoly usually arises where there are no real alternatives, there are no close substitute products, and the product produced is unique. A monopolist has the unique ability to choose how much an entire industry produces. 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 terms in the market, primarily in the area of ​​pricing. The price is set above the cost 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 him the price. This price appears to be monopolistically high. Setting a price higher than the cost due to the monopoly position of the seller in the market means that the seller receives a monopoly profit as the difference between the monopoly high price and the cost of the product. The possibility of obtaining such a profit encourages large companies to establish their monopoly in the market, giving the right to the exclusive sale of goods. Such a right to the exclusive sale of a product is most often the result of political or economic power.

The state has always had political power, and it has used it since ancient times, establishing its monopoly, for example, on the sale of wine, tobacco, salt, and replenishing its treasury through high prices. Sometimes the state granted such a monopoly to individual traders, who became monopolists in the markets for these goods. This was called “farming out” the trade of some product.

Economic power is established as the size of capital grows and the production of a commodity is concentrated in individual hands. This concentration is the result of the concentration and centralization of production in certain industries, victory over competitors, usually smaller ones. An agreement is often reached with large competitors on the division of markets for the goods produced, and sometimes their merger is possible, so that the industry ends up under the control of one large company or association of companies, that is, it is monopolized.

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

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

A more stable form of monopoly is a cartel - an agreement between individual companies on prices for manufactured products, markets for these products, and quotas for their production. Cartel agreements can be agreements on prices for 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 on the market as sellers, coordinating their actions with each other.

A qualitatively different form of monopoly is a syndicate, which is an association of individual companies to create joint ventures for the marketing of manufactured products. Here, in the full sense, a monopoly arises in the person of one sales enterprise, 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 sales, but also for the production of some goods. The 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 either horizontal or vertical.

Horizontal centralization unites enterprises belonging to the secondary sector of production, that is, to industries producing individual semi-finished products, blanks, components, which, when connected, form the final product. With it 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, which are processed and turned into finished products in secondary sector enterprises. The services of tertiary sector enterprises included in the trust ensure uninterrupted production and distribution of goods. This centralization of enterprises in various sectors and industries is also called vertical integration, and trusts based on it are called combines.

In modern conditions, a common form of association that can monopolize the production and sale of goods is a concern. A concern is an association of companies through the purchase of their controlling stakes by one company, which becomes the parent company. Companies included in the concerns can maintain production and sales independence, but they are deprived of financial independence. The concern usually includes companies belonging to different industries, but having common technological connections. Therefore, the concern, as a rule, is multi-industry, that is, producing various types of goods, while they have a main type of product, in the market of which the concern usually acts as a monopolist. Thus, an 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 obtain not only high, but also stable profits, since under the control of the concern are enterprises in industries with different profit rates, but in the aggregate having a rate above average.

The possibility of obtaining stable profits by finding capital in different industries led to the emergence of such a form of association of companies as a conglomerate. The peculiarity of the conglomerate is that it unites enterprises from different industries that are not technologically related to each other. This principle of unification is called diversification. Diversification is the process of introducing a single, fairly powerful company into various industries in order to establish financial control over them and obtain consistently high incomes. A conglomerate, like a concern, is created by one company acquiring controlling stakes in other companies. Typically, a conglomerate unites highly profitable companies or companies with real prospects for high profits. If the profit margin of the companies included in the conglomerate begins to decline, then the conglomerate seeks to get rid of such a company. Therefore, the composition of a conglomerate, unlike concerns, is not constant. But it is precisely this volatility that allows the conglomerate to have an above-average overall profit margin. The high rate of profit of a conglomerate may also be due to the establishment of a monopoly in the markets for their goods by individual companies included in the conglomerate. 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 market power of the seller and the absence of competition.

An important feature of a perfectly competitive market is the standardization, that is, the homogeneity of the product sold on it. A monopoly's product must be unique in the sense that there are no good or close substitutes for the product. In such a situation, the buyer has no acceptable alternatives to consuming this product: he must buy it from the monopolist or do without this product. Suppose that some scientist has invented the elixir of life and sells it at a fabulous price: if you want, buy it and live forever; If you can’t pay that price, then even if you die, you won’t be able to buy a similar elixir from anyone else. Note that the scientist, being a monopolist, can set the price for the elixir of life himself; therefore, he is a price maker and thus differs from a perfectly competitive firm that takes the market price as given.

Since a monopoly firm receives high profits, other firms will want to enter this industry in order to open their production there. Therefore, to maintain monopoly power, it is necessary to establish barriers to entry for new firms. Among the main types of barriers that prevent the emergence of additional sellers in the market of a monopoly firm are patents and copyrights.

A patent is a document of legal protection of intellectual property that confirms both the authorship of the inventor and the exclusive right of 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 of scientific and technical knowledge.

Of course, patents can provide the 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 achieve monopoly power. United Shoe Machinery became 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 by requiring users of its patented machines to sign a “binding agreement” in which shoe manufacturers would also agree to lease all other shoemaking equipment from United Shoe Machinery. This allowed the company to monopolize the market.

Other barriers that contribute to the emergence of a monopoly and help maintain it include the following: exclusive rights obtained 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 the majority of 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 presence of such significant economies of scale that there may be only one supplier on the market making a positive profit. In this case we speak of a natural monopoly. Modern technology in some industries is such that enterprises operating in these industries can increase in size quite significantly, while continuing to benefit from the benefits of increased scale of production. 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 the costs of producing one unit of output are.

If firms can consistently reduce average costs and generate profits by expanding production to meet market demand, then eventually one firm will establish itself as the primary supplier. Thus, the cost advantages of very large firms may allow one firm, serving an entire market as a single seller, to produce at a lower cost than would be possible if the market were 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 all market demand for a product at a lower cost than would be possible if two or more firms supplied exactly the same quantity of the product.

This type of monopoly is called a natural monopoly because in this case, barriers to entry are based on features of technology that reflect the natural laws of production, rather than on property rights or government licenses.

Examples of natural monopolies are electrical networks, pipeline transport (oil and gas pipelines), wired telephone communications, centralized heating, city sewerage, and the metro. It is obvious that in these industries competition is either difficult or simply inapplicable, since competition would lead to much higher average production costs than those under a monopoly, since maintaining competition would require the existence of many small firms with small market shares . Consider, for example, city water supply. By laying two pipe systems parallel to each other, it is possible to ensure that neighboring houses and even neighboring apartments in the same building can be connected to either of the two water supply companies at the choice of the residents. Competition has become possible, but at the cost of a significant increase in the cost of each liter of water delivered to the consumer. Obviously, it is much cheaper to have one plumbing system. Consequently, the forced dispersal of production across several enterprises in this case is inappropriate, since it would lead to an increase in average costs (costs per unit of production), and therefore to an increase in the price of a unit of production. 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 at 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 such monopolies to ensure that the monopoly power it has granted is not abused. For example, the government can control the quality of services and prices set by natural monopolies.

So, a pure monopoly is a market with only one seller and many buyers. Since the monopolist firm is the only seller of the product, 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 decrease. Therefore, the demand curve is downward sloping, the demand for the company's products is not completely elastic, that is, when prices increase, the demand for a product falls, and when prices decrease, it increases. This fundamental difference between a monopolist and a firm operating in conditions of perfect competition 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 produced are homogeneous and the firm does not have the opportunity to influence the market price of the product. The demand for a firm's products under conditions of perfect competition 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 demand curves for a company’s products under conditions of perfect and imperfect competition.

An ideally competitive firm can sell as much as it wants at the market price. A monopoly does not take price as a given. As output increases, the price must decrease because the demand curve slopes downward. In order to increase prices, the monopolist is forced to reduce the volume of production (sales), because consumers always respond to price increases by reducing purchases of this good. Therefore, a competitive profit-maximizing firm must identify only the optimal output level. A monopolist firm pursuing the same goal must not only determine the quantity of goods that maximizes profit, but also set a price at which the entire quantity produced would be purchased by consumers. In this sense, managing a monopoly is more difficult than managing a competitive firm.

2. Profit maximization in a pure monopoly

Marginal revenue shows the entrepreneur what 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 even worth producing this additional unit of output? If marginal revenue is greater than 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 marginal revenue is less than marginal cost, then the cost of producing an additional unit of output is not compensated by the income from its sale. Therefore, it is unprofitable to produce it. The conclusion suggests itself: the entrepreneur needs to increase output until marginal revenue equals marginal costs. This output volume will be optimal from the point of view of profit maximization. The difference from an ideally competitive firm is that equality of price to marginal costs will not be a condition for maximizing profit in a monopoly situation, since the monopolist’s marginal revenue is not equal to the price of the product. It can be even more accurately stated that for each possible volume of output, the value of marginal revenue will be less than the price of the product.

As in conditions of perfect competition, the optimal volume of production for the firm is achieved at the point of equality of marginal revenue and marginal cost (MR = MC). But if, under 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. Therefore, 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 a firm under pure monopoly.

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

Thus, the expanded formula for equilibrium under monopoly conditions looks like: 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 bold line.

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

Achieving such an equilibrium is preferable for any firm under imperfect competition, be it a pure monopoly, an oligopoly, or a monopolistic competitor. However, under a monopoly, long-term economic profit is more likely due to the lack of competition in the market. If competition does exist in the market (as in the case of oligopoly and monopolistic competition), then economic profits in the long run are reduced and perhaps even disappear.

3. Tests

1. Price discrimination is:

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

b) differences in wages by nationality and gender;

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

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

e) all previous answers are incorrect;

f) all previous answers are correct.

Correct answer: a).

Price discrimination is a way of exercising market power, which consists in selling a good to different buyers at different prices and aimed at increasing profits by redistributing consumer surplus in favor of the producer. By producing products at a higher price, the company loses some potential buyers. As prices rise, gross income may rise (if demand for the product is price inelastic) or fall (when demand for the product is price elastic). But in conditions of perfect competition, it is possible to increase prices without some consumers refusing the product, that is, a company can set different prices for the same product for different groups of consumers.

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

a) monopsony;

b) monopoly;

c) oligopoly;

d) monopolistic competition;

d) pure competition.

Correct answer: b).

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

Conclusion

A pure monopoly means that there is only one seller of a product in the industry who has no substitutes. A monopoly's product must be unique in the sense that there are no good or close substitutes for the 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 power and a lack of competition. To maintain monopoly power, barriers to entry of new firms into the industry are established.

The demand curve under conditions of a pure monopoly is downward sloping, the demand for the company's products is not completely elastic, that is, when prices increase, the demand for the product falls, and when prices decrease, it increases. The marginal revenue curve lies below the demand curve for any positive quantity of a good sold. To achieve equilibrium under monopoly conditions, the monopolist chooses the volume of production and price at which it is possible to obtain the greatest amount of profit. Under monopoly conditions, long-term economic profit is more likely due to the lack of competition in the market.

List of used literature

1. Economic theory: A 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. Benefit / Chelyab. state univ. Chelyabinsk, 2002.
3. Nikolaeva L.A., Chernaya I.P. Economic theory: Educational and methodological manual. - Vladivostok: VGUES, 1999. let us know about it.

Pure monopoly is a market organization in which there is a single seller of a product, and there is no close substitute for this product in other industries. Along with oligopoly and monopolistic competition, monopoly is an example of imperfect competition.

Signs of a pure monopoly

A pure monopoly usually arises where there are no alternatives, no close substitutes, and the product produced is to a certain extent unique.

Monopolists are utility companies, without whose services no enterprise, for example RAO UES, can do. The existence of natural monopolies is justified by the fact that they best satisfy public interests. In rural areas, such monopolists can also be enterprises that supply agricultural machinery, chemical fertilizers, seed-growing and breeding farms, and enterprises providing repair services.

The main features of a pure monopoly can be identified:

• one seller (there is only one firm on the market that influences prices by regulating supply);
• uniqueness of the product (there are no identical types of products on the market);
• ownership of the main types of raw materials (by controlling the market for raw materials in its industry, a monopolist firm does not allow the emergence of new producers).

The monopolist can determine the volume of production and set the price. To maximize profits, the monopolist produces the volume of output at which marginal revenue equals marginal cost (MR = MC), point E on the graph. This point is the equilibrium of the firm. But to make a profit, the price will be set at point E1. This is due to the fact that it is the price P1 for a given volume of production (Q1) that is higher than the average costs (AC) of the monopolist. In conditions of imperfect competition, the following inequality must be observed:

(MR = MC)< AC < P

Similar articles

The structure of market imperfection is the forms of market organization that form imperfect competition on it.

Three main types can be distinguished in increasing order of their degree of imperfection.

Monopolistic competition - a large number of sellers offering differentiated products.
Oligopoly - several sellers offering either identical products (the first type of oligopoly) or differentiated products (the second type of oligopoly).
A pure monopoly is the only seller on the market that offers a product that has no absolutely identical substitutes in other industries.

Perfect competition is competition in a market where there are a large number of sellers offering homogeneous products, who do not have the opportunity to influence the prices of their products, and which any company can enter. In other words, this is a type of market structure where the market behavior of sellers and buyers is to adapt to the equilibrium state of market conditions.

Monopsony is a situation where there is only one buyer and many sellers in the market.

If a monopoly is a certain phenomenon of market price control by a monopolist firm, when there is only one seller, then in the case of a monopsony, the power over the price belongs to a single buyer.

Special merits in the study of this market belong to the English economist D. Robinson. It is generally accepted that the concept of “monopsony” was introduced into scientific circulation by D. Robinson, however, in her work “The Economic Theory of Imperfect Competition” she refers to B.L. Halvard, who suggested this term to her.

Monopolistic competition is a type of market structure consisting of many small firms producing differentiated products, and characterized by free entry into and exit from the market. The products of these companies are close, but not completely interchangeable, i.e. Each of the many small firms produces a product that is slightly different from that of its competitors.

Distinctive features of monopolistic competition

Through product differentiation, a monopolistic competitor reduces the price elasticity of demand. By raising the price, a monopolistic competitor does not lose all consumers, as happens under conditions of perfect competition. The market will narrow somewhat, but there will remain those who consistently prefer the products of only this manufacturer.

We will begin our analysis of the behavior of an enterprise under conditions of imperfect competition with a pure monopoly. First of all, let's define signs of a pure monopoly.

• 1. A pure, or absolute, monopolist is an industry consisting of one manufacturer.
• 2. The product produced by a pure monopoly is unique in its properties, and there are no close substitutes for it. For the consumer, this means that he is faced with an alternative - either buy a product from a monopoly, or do without it altogether.
• 3. If in a competitive market the producer agrees to the price determined by the market, then the monopoly itself determines the price. This is due to the fact that the monopolist, being the only producer, controls the total volume of supply and, if necessary, can influence the price by changing the supply of the product.
• 4. The monopoly is maintained due to the presence of economic, technological and legal barriers.

Let's look at some of the existing barriers. First of all, they are related to the features technologies, which determines that in some industries the most efficient use of resources is with very large enterprise sizes and large production volumes. At such enterprises, the production cost curve will be downward over a long period. This ensures the efficient functioning of these enterprises. In principle, existing demand can be satisfied in two ways: either by having a large number of small enterprises, or by having one, or at least 2-3 large enterprises. In certain industries, such as the automotive, steel, and aluminum industries, the second option prevails. It is more efficient from an industry perspective. And when there are several largest manufacturers in these industries, it is virtually impossible for them to have competitors, since a start-up company, as a rule, is small, cannot reduce production costs and will be defeated in the fight against the monopoly.

Monopolies are enterprises that satisfy the needs of society in cases where competition is generally impossible. These are the so-called natural monopolies. If, for example, the water supply of one city is concentrated in the hands of a large company, it means that it acts as a monopolist in this area. It is very difficult to compete with it, and it is simply irrational from the consumer’s point of view. The water supply system requires very large capital expenditures to create the necessary production capacity. Construction of reservoirs, sedimentation tanks, water supply systems, etc. costs a lot of money, so small businesses cannot compete. In addition, if a small enterprise began to supply the city with water on its own, it would need to re-create the entire system. As a result, production costs and prices would rise sharply, and ultimately the consumer would suffer. Therefore, from the point of view of society, it is more rational to have one company serving a certain region with its goods or services. In this regard, when speaking about monopoly, we mean not only a monopoly in an industry on the scale of the national economy. A monopolist enterprise can exist in any city, in any region, and in relation to the city or regional market it will behave as a monopolist.

The government grants certain privileges to such monopolies serving the population; creates a system of patents and licenses for the right to engage in this activity, i.e., establishes legal barriers that prevent entry into the industry.

The existence and preservation of monopolies is also facilitated by the ownership of certain types of raw materials. Thus, based on control over the largest deposits of bauxite and nickel, the monopolies “Aluminum Company of America” and “International Nickel Company of Canada” were created at one time.

And finally, a monopoly can arise and exist through the use of unfair competition methods and non-economic methods of competition. Having destroyed its rivals, the winning firm becomes a monopolist and, to the extent possible, maintains its monopoly position.

How does a monopolist firm behave when determining prices and optimal production volumes?

A competitive firm knows that it cannot influence the price and that its additional income from each unit of production will be equal to the price of this product. For a pure monopolist, the demand curve is always the industry aggregate demand curve. It is descending, i.e. volumes increase as prices decrease.

Let's see what changes happen to a monopoly under the influence of price changes. To do this, we summarize all the data in a table. 9.2.

The table data confirms that the demand curve of a monopolist enterprise is downward-sloping: at a price of 152, 2 products are sold, at a price of 112-6 products, at a price of 82-9 products. The second thing to note is that price always exceeds marginal revenue. A pure monopoly can increase sales only by lowering the price of products.

Table 9.2

This causes marginal revenue to be lower than price for every quantity of output except the first unit. For the second unit it is already equal to 142 at a price of 152, for the third -122 at a price of 142, etc. This is explained by the fact that the reduction in price and, accordingly, income from the second product applies not only to the second product, but also to all subsequent ones . It kind of accumulates. This is clearly seen from Fig. 9.1.

When the price decreases, the company receives income from an increase in sales volume, but at the same time incurs a loss from the price decrease. With a further price reduction, everything is repeated, but the loss is already taken into account both from this reduction and from the previous one.

Since marginal revenue is the change in gross revenue from the sale of a subsequent unit, as long as gross revenue increases, marginal revenue is positive. When gross income has reached its maximum, marginal income will be zero. In our case, the maximum gross income is achieved at the ninth unit, when it is equal to 738. True, in our case the marginal income is not zero, but a little more - two, but already at the tenth unit the marginal income will have a negative value. This happens because gross income begins to decline from the tenth unit.

Rice. 9.1.

When calculating production costs, we assumed that a monopolist producer buys the necessary resources in a regular competitive market, where there are many producers and relatively stable prices. Therefore, in our table we used the same cost figures as when analyzing the behavior of a competitive enterprise.

Having the ability to influence prices, the monopolist decides how much income he needs to receive and, based on it, sets the price for the product. But this does not mean that he is absolutely free to choose prices and volumes: they are interconnected, interdependent, and a certain price is possible only for a given volume.

A monopoly is subject to the same rule as a competitive producer: it will produce each additional unit as long as its marginal revenue is greater than its marginal cost. If we compare marginal revenues and marginal costs in our table, we will see that the last product where marginal revenue 82 is greater than marginal cost 70 is the fifth unit of the product. There is no point in producing the sixth unit, since the marginal income from it is 62, and the marginal costs of its production are equal to 80. Therefore, the amount of profit received from the production of the fifth product is maximum: +140.

A monopolist firm can change prices because it has monopoly power in the market. The degree of pressure of this power on the market characterizes the level of its monopolization. Two main indicators are used to measure monopoly power: the Lerner index (Ij) and Herfindahl-Hirschman index

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The Lerner index is calculated using the following formula:

Where I L - Lerner index;

R - price;

MS - marginal costs.

In a perfectly competitive market, price is equal to marginal cost, so the value of the numerator, and indeed the entire fraction, is 0, i.e. the firm does not have monopoly power. Under imperfect competition, price is greater than marginal cost, hence monopoly power exists. And the higher the value of the Lerner index, the greater the gap between price and marginal cost, which means the greater monopoly power the firm has.

The Herfindahl-Hirschman index shows the dependence of monopoly power on the market share dominated by a firm. And all firms operating in the market are ranked according to their shares of market dominance. This index looks like this:

Where S v S 2 , S 3 ,...S n - the percentage share of a firm's sales in an industry, defined as the ratio of the firm's sales volume to the volume of all industry sales.

Analysis of the behavior of a monopoly in determining volumes and prices allows us to determine Peculiarities of pricing for monopolistically produced products.

• 1. A feature of pricing in monopolies is that, contrary to generally accepted opinion the monopoly price is not the highest price. IN in our case this is not 162 and not 152, but only 122.
• 2. IN Unlike the generally accepted point of view, a monopoly ensures an increase in profits for the entire volume of products produced, and not for its individual unit.
• 3.A monopoly is not guaranteed against losses. In our example, starting from the eighth product, the monopoly loses profit and incurs losses.

The functioning of monopoly enterprises has both positive and negative sides. First of all, it is striking that for the same production costs, the total profits of the monopoly are lower than those of competitive enterprises. IN In our case, the profit of competitive enterprises at the same costs reached 299 (see Table 8.5), and in a monopoly its maximum value was 140 (see Table 9.2). This is due to the fact that the monopoly’s production volume does not reach the point where average gross costs are minimized. IN In our example, this is the seventh product, where the product sells for 102, and the profit is 74. The monopoly prefers to limit the production of products to five units, but set a higher price of 122 and receive a large profit of 140.

The lower efficiency of monopolies compared to a competitive firm is also explained by the fact that In a monopoly, total costs increase. An example of such costs is the large costs of purchasing a license to operate. They add nothing to the volume of production, but overall costs increase. In addition, the very monopoly position of such a firm reduces the incentive to increase production efficiency by reducing costs. In a competitive market, every manufacturer, surrounded by rivals, must constantly think about such savings, since for him it is a matter of survival. A monopoly can afford to pay less attention to such issues, knowing that it has the power to change prices if necessary, which it does.

A monopoly, knowing that its products are consumed by different segments of the population, charges different prices for the same products to different groups of consumers. This phenomenon of assigning different prices to different buyers is called price discrimination. It occurs when different prices for a product are not associated with different costs of its production. For price discrimination to exist, certain economic conditions must be present:

• 1) the company must have a monopoly on the production and sale of a given product in order to completely control market prices;
• 2) the ability to group all consumers into several groups. The greater the number of such groups, the higher the level of price discrimination, the greater the profit of the monopoly;
• 3) the buyer must be a direct consumer and must not have any opportunity to resell the purchased product or service.

Based on the above, one can understand why there are different prices for transport, although the costs for different types of places differ practically very little, why lawyers, doctors, teachers can charge different fees for services provided, why payments for water, electricity, gas, telephone differ legal entities and individuals.

The consequences of discrimination are twofold. On the one hand, it serves the benefit of monopolists, allowing them to sell more goods, and on the other hand, it also serves the consumer, allowing them to more fully satisfy their needs. The benefit for monopolies is clear - discrimination brings them a large amount of gross income and profit, but it can also be beneficial to the consumer. When prices fall rapidly, production costs are not covered. This should lead to higher prices and limit the consumption of this product by low-income groups of the population. But with price discrimination, this does not always happen, since the manufacturer has a reserve: he can raise prices for a high-income group and thereby cover all production costs. Thus, it remains possible to sell goods at relatively low prices to certain groups of the population.

Most purely monopoly industries are natural monopolies. They must be under state control. First of all, the state protects the monopoly from possible competitors by issuing it a license to engage in certain activities. The state, interested in ensuring that the monopoly's products can be consumed by all segments of the population, controls prices: as a rule, the price for the consumer is set at the level of marginal costs. Such a price can reduce the monopoly’s profits or even turn its activities into unprofitable ones. In this case, the monopoly will begin to reduce or even stop production. To prevent this from happening, the state pays subsidies to natural monopolies to ensure normal profits.

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 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 of production, fishing, trade and other types of economic activity owned by one person, group of persons or the state. Has long been known natural monopoly . An industry in which a single firm operates more efficiently than competitors. There are many examples of natural monopoly: local provision of electricity and gas. In such an industry, the minimum efficient scale of production of a good is close to the quantity for which the market demands at any price sufficient to cover production costs.

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

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

1. A single seller, i.e., an industry, consists of one firm. Are there “company” and “industry” here? synonyms. One company is the only manufacturer of a given product or the only provider of a service.

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 acceptable alternatives. The buyer must purchase the product from monopolist or do without it. To such monopolies include state-regulated public utilities or so-called natural monopolies(electric and gas companies, cable television, water supply and communications companies, etc.). There are also no substitutes for the services provided by public utilities. But if they exist, they are either expensive or inconvenient.

Clean monopoly may also have a geographical dimension.

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

3. The company dictates the price. An individual firm operating under conditions of pure competition has no influence on the price of a product: it “agrees with the price.” Clean monopolist exercises significant control over price. And the reason is obvious: it issues 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, which are very significant in the short term, turn out to be surmountable in the long term.

Thus, natural monopoly (monopoly in the narrow sense)? This monopoly on rare and irreproducible 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 arbitrariness? “increase” prices to incredible levels or change the gas supply regime at your discretion? Maybe he would like it that way, but it is not so. And all because the majority natural monopolists are created by the government. The government can issue a patent for a unique product, a copyright for something, or a license to do business in a certain market without competition. In addition, municipalities license power plant companies, gas companies, and communications companies to prevent duplication of capacity. These companies are very strictly controlled in their activities and pricing

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

Firstly, operation of the law of competition. The law of competition and each of its functions are subordinated to achieving the main goal of production - profit maximization. To maximize profits, the manufacturer must constantly increase production and sales of goods, gradually eliminating its competitors. In the end, the manufacturer, capturing 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 opposing and interdependent characteristics of it.

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

Concentration of capital is the process of increasing the size of individual capital through the capitalization of profits, i.e., using a certain part of it to expand production.

Thirdly, the reason creating a monopoly is process of centralization of 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.

Fourthly, the reason for the emergence of monopolies was the transformation of individual private property.

Fifthly, 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 unification in order to avoid ruin. The relationship between 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 may appear when the entire volume of a particular product or service is the product of one or more firms. Competition in this case is neither possible nor desirable (say, in energy supply, metro).
Secondly, this form of monopoly occurs in agriculture and extractive industries.

Administrative monopoly arise as a result of the actions of government bodies that 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.

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

Cartel - this is an association of several enterprises of the same industry, which does not eliminate their production or commercial independence, but provides for an agreement between them on certain issues: the distribution of sales markets, price levels, production quotas, and the like.

Syndicate - an association of enterprises from the same industry that create a common herd sales office. Thus, while retaining production independence, syndicate members lose commercial independence.

Introduction

A pure monopoly is a rare phenomenon, but in many markets only a few firms compete with each other. Firms can influence price and make profits by setting marginal costs. Such firms have monopoly power. It is a form of market power. Market power refers to the ability of a seller or buyer to influence the price of a product. The subject of this work is monopoly. The purpose of the work is to examine the behavior of a company under conditions of a pure monopoly. To achieve this goal, it is necessary to solve the following tasks:

• 1. Give the concept of pure monopoly.
• 2. Consider the behavior of the company in the short term.
• 3. Study the behavior of the company in the long term.
• 4. Find out the essence of monopoly power.

pure monopoly market

Pure monopoly in a market economy

Characteristics of a pure monopoly. Barriers to entry into the industry

A pure monopoly is a market in which a product that has no close substitutes is sold by one seller, i.e. one seller versus many buyers.

The goal of a monopoly is to obtain excess profits through control over price (establishing monopoly high or monopoly low prices) or volume of production in a monopolized market.

The concept of monopoly has a double meaning: firstly, a monopoly is understood as a large enterprise that occupies a leading position in a certain industry (Coca-Cola, Xerox, Ford, etc.); secondly, a monopoly refers to the position of a firm in the market, allowing it to dominate it. As M. Friedman notes, “A monopoly exists whenever... an enterprise has control over some product or service, allowing it to largely dictate the conditions under which other persons have access to it.” A monopoly position in the market can be occupied not only by a large, but also by a small enterprise, if only it supplies the market with the bulk of products of this type; on the other hand, a large enterprise may not be a monopolist in the market if its share in the total supply is small. A pure monopoly on the scale of a national market is a rather rare phenomenon, but for local markets it is quite typical. Characteristics of a pure monopoly:

• 1. the only seller;
• 3. there are no substitutes for this product (i.e. the product is unique);
• 4. the company dictates the price;
• 5. entry into the industry is blocked.

Monopoly power is manifested in a reduction in sales, the formation of an artificial deficit, inhibition of the scientific and technical process, and the creation of artificial barriers (patents, licenses, criminalization). Monopoly power when price elasticity of demand is low, when buyers continue to buy goods when prices rise. The meter of monopoly power is the Lerner index t1=1: E elasticity of demand for a product. It increases along with the growth of the share of industry products. It is considered achievable if the share of the company's products in the industry exceeds 35%. The profits earned by sellers in the market serve as a signal to entrepreneurs about whether to enter a given market or not. Naturally, the high economic profit received by the monopolist will attract potential producers of this product to the market. Maintaining a pure monopoly therefore requires the existence of conditions that prevent new sellers from competing with the monopolist. A barrier to entry into an industry is a limiter that prevents new additional sellers from entering the market of a monopoly firm. Barriers to entry are necessary to maintain a monopoly over the long term. Thus, if free entry into the market were possible, then the economic profits received by the monopolist would attract new sellers to the market, which means supply would increase. Monopoly price controls would disappear altogether as markets would eventually become competitive. There are several main types of barriers to entry into the industry:

• · Exclusive rights received from the state. Sometimes, the government deliberately goes to the extent of granting an individual firm monopoly status in a given industry or in a certain sector of the national market. Often the state itself can act as such a monopolist.
• · Patents and copyrights. Patents and copyrights provide creators of new products or works of art, literature, music, exclusive rights to sell, use, and license the use of their inventions and creations. Patents may be issued for manufacturing technologies. But patents and copyrights only provide a monopoly position for a limited number of years, depending on local laws. Once the patent expires, the barrier to entry into the industry disappears. The idea of ​​patents and copyrights encourages firms and individuals to invent new products, since the inventor is guaranteed in advance the exclusive rights to sell the product.
• · Ownership of the entire supply of productive resources. A monopoly can also be maintained by owning all sources of a particular resource needed to produce the monopolized good.
• · Unique abilities and knowledge can also create a monopoly. So singers, artists, athletes have a monopoly on the use of their services. A company that has a technological secret, provided that other companies cannot reproduce this technology, has a monopoly on this product. Although, as a rule, such a monopoly is not pure, since there may be close substitutes for a given product.

The low cost advantage of large production resulting from market monopolization. The cost advantages available to very large firms may allow one firm, serving the entire market as a single seller, to produce at a lower cost than would be possible if the market there would be more sellers. This can contribute to monopolization of the market, since the monopolist has the ability to set low prices corresponding to its costs, which will make this market inaccessible to potential sellers, since they will not be able to make a profit at this price. So, if firms can consistently reduce average costs and at the same time make a profit by expanding production, satisfying long-term market demand, then in the end there will only be one firm left in the market - a monopolist. Once a dominant firm emerges, new firms cannot enter the market because they are initially too small to achieve the average costs of the monopolist firm. The latter can use price control to eliminate competitors from its markets. A firm that can supply all the market demand for a good at a lower average cost than would be possible if two or more firms supplied the same quantity of the good is called a natural monopoly.