Monopoly â Ž Monopoly Definition â Ž Pricing Strategies in Monopolies
Monopoly Definition •
Monopoly is a market situation where there is a single commodity it produces, there are barriers to entry
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Monopolistic competition is found in the industry where there is a large number of small sellers selling differentiated but close substitute product
For example: The Manila Electric Company Meralco. it is Metro Manila's only electric power distributor and holds the power distribution franchise for 22 cities and 89 municipalities If the electricity distributor decided to raise their prices it is likely that most consumers would continue to purchase electricity
Features of a Monopoly Market Single Seller of the Product The goal of a monopoly
Entry Restrictions
Features producer is price maker
the firm is the industry barriers entry of new firms
Monopoly power in market A pure monopolist is single supplier that dominates the entire market – the market has 100% concentration A working monopoly is any firm with greater than 25% of total sales
Types of monopoly Natural Natural Monopolies
Legal Legal Monopolies Monopolies
Discriminating Discriminating monopolies monopolies
Imperfect Imperfect monopoly monopoly
Public Public Monopolies Monopolies
• The supply of commodity is limited by nature and a single firm acquires complete control over it
• The law prevents duplication or imitation of a particular product, a legal monopoly comes into existence, namely, patents and copyrights
• Are those which charge different prices for the same commodity to different customers
• A perfect monopolist is sure of his position and is confident of his profits • A private monopoly is owned and operated by private individuals or organizations, only for profit but also for economic welfare of the community
Monopoly price
ÂŽ The goal in of a monopoly developing a pricing strategy is to maximize profits. The monopoly wants to set the highest price possible and still be able to sell all goods manufactured The profit maximization formula is MC = MR Marginal Cost is the increase in cost by producing one more unit of the good. Marginal Revenue is the change in total revenue as a result of changing the rate of sales by one unit. Marginal Revenue is also the slope of Total Revenue.
Monopoly Diagram: This graph illustrates the price and quantity of the market equilibrium under a monopoly
Equilibrium & price determination A monopolist is in equilibrium when they produces that much amount of output which yields a maximum total profit • MC=MR • MC must cut MR from below
Pricing Strategies in Monopolies
Price Discrimination
• Price discrimination is the practice of charging different prices to different consumers for the same good or service sold.
Two-Tier (Part) Pricing
• The firm charges a fixed fee for the right to purchase its goods, plus a per-unit charge for each unit purchased.
Block Pricing
• The seller packs units of the same product and sells them as one package
Commodity Bundling
● This pricing practice under bundle pricing the goods or the services are not the same, while they are identical under price discrimination
Price Discrimination First- degree price discrimination (perfect price discrimination) •
This type of prices amounts to charging each customer the maximum price it is willing and able to pay. This price is called the reservation price.
Price Discrimination Second Degree Price Discrimination - discrimination based on quantity This type of price discrimination leaves the consumer with some consumer surplus Example: Electric companies, it works by charging different prices for blocks of the same good or service
Price Discrimination Third-Degree Price Discrimination Customers are divided into few groups with a separat. This is the most prevalent form of price discrimination. Example: If you buy on the day, tickets are usually more expensive. If you book 7 days in advance and stick to a specific time of the day, the price is lower.
Price Discrimination
Two-Tier (Part) Pricing Under this system the monopoly is permitted to charge some users a fixed fee + a supplementary "variable" charge based on units consumed. Example: Taxi fares, a musement park charges discrimination by time, Athletic club memberships.
Price Discrimination Block Pricing The practice of packaging multiple units of an identical product together and selling them as one package. Examples: Block pricing is the package of toilet paper given by supermarkets to the customer bundling the toilet paper into 4 or 8 units to buy or not to buy the pack, there by making larger profits
Optimal quantity to package 4 units
Optimal price of the package 24$
Commodity Bundling The practice of bundling two or more products together and charging one price for the bundle. Consumer 1 2
Valuation of computer 2000 PH 1,500 PH
Valuation of monitor 200 PH 300 PH
Examples: Price separately * charge $1.500 for computer and 200$ for monitor * profit (assuming cost) is 2 x $1.500 + 2 x $200 = $3.400 Commodity bunding *charge $1.800 for bundle consisting of a computer and monitor *profit (assuming zero cost) is 2 x $1.800 = $3.600