Monopoly is where controlling of goods or service in a particular market and control to make possible the price of commodities. Furthermore, Monopoly industries are concerned with the power of the Public, policy-makers and economists.
Monopoly industry must to have following features.
• No Existed closer substitute for the product of firm
• No Existed competitor for the product
• high barriers to entry keep other companies from entering the industry
• Price maker
The Market Power of Monopolies
Monopolistic industries are able to earn high profits because of the ability of monopolist to increase price of its product above the competitive level by decreasing output. However, computation between companies usually takes price setting and lack of chances of firms in other industries.
Profit Maximizing Price for a monopoly firms
The progress of profit maximization is determining price and output level which return highest profit in the long or short run. In order to maximize profit, a firm have to set production where marginal cost equals to marginal revenue (MC=MR). Moreover maximizing the price, the monopolist must aware market demand which allow consuming and producing how much is. Thus maximizing profit of monopolist firm is the problem which firm will solve to determine where to locate output, given costs and demand for the goods to be sold.
In addition, the main goal of monopoly industries is earn the most revenue they can and the highest revenue leads to highest profit in this case. So the question for many monopolistic companies is what price will the monopolistic firms set for their product in the market? Because of price that leads to the highest revenue.
A perfect example for profit maximizing comes is the following argument. Let’s assume that a monopolistic firm may set $2 or $5 or $10 for its product so in this case which price is the profit maximization? It can be seen that $ 10 which is highest price is not a revenue maximizing price. Otherwise, $5 brings the highest profit that much less than the highest price of the product. The point of the monopolist firm’s view is that the $ 10 price is too much high while $2 price is too low. By this point is that the highest price will not generally lead to greatest revenue in the market.
Price Sales Revenue
$10 100 $1000
$5 250 $1250
$2 600 $1200
The criticism of monopoly, then, isn’t that it charges the very best worth possible. Rather, the criticism of monopoly is that the worth it sets is higher than that that. Would occur during a additional competitive setting. Suppose that the $1,250 may be a smart. Amount of profit. If this trade suddenly lost its barriers to entry, corporations would enter the trade hoping to grab a component of this high profit. As competition breaks get in the trade, the worth can fall. The worth can still fall until the profits within the trade reach the lower level found elsewhere within the economy.
Pricing strategy which charges clients at different prices for the same manufactured goods or service is known as price discrimination. In the real price discrimination, all producers and sellers set a maximum price and sell each customer who he or she will pay. In common case of price decimation, the consumers in groups of seller places in groups based on certain attributes and charges each group a different price.
The revenue from separating the markets is better than the profit from keeping the markets combined which can lead to most valuable of price determination and this hang on the relative elasticity of demand in the sub-market. Otherwise costumers pay higher price in the relatively inelastic clients can pay lower price while in the relatively elastic sub-market and this is known as breaking down “price discrimination”
Degrees of Price discrimination
Price discrimination has main three types of price discrimination.
• First degree price discrimination is known as perfect price discrimination and occurs whenever a firm set the maximum possible price its goods and costumers are ready to pay. However companies seldom practice this type of discrimination
• Second degree price discrimination is when a company charges a different price per unit for different quantities consumed of the same good or service.
• Third degree price discrimination is that a company divides clients into 2 or more groups and charges a different price to each group. This price discrimination is the most common. For instance, the theatre moviegoers may divide into 3 groups: seniors, adults and children, each of them purchase its ticket for a different price for the same movie and at the same time.( Nolan Miller. 2006)
In order to maximize production, monopoly industries must manufacture quantity at which marginal supply and marginal cost are equals. In a pure monopoly atmosphere, monopoly firms can reduce production in order to change to higher market price because of this rather than finding the purpose wherever the differential cost curve intersects a horizontal marginal revenue curve (which is such as good’s price), we tend to should notice the purpose wherever the differential cost curve see a downward-sloping marginal revenue curve. Moreover, monopolist firms may manufacture less but charge their goods more than competitive firms in a competitive market.
Market fails when failure of market to allocate its resources efficiently. In term of monopolies, abusing of power and price mechanism fails to take into account all of the benefits of pr?viding and c?nsuming a pr?duct can c?use to m?rket failure. As a consequence, the m?rket f?ils to supply s?cially perfect amount of a product. Usually monopoly industries are in the imperfect market which can produce less output to make an effort to maximize income. Lack of the good is made available and price of good is too high can lead to market failure in a monopoly.
Economies of scale
In economics, deadweight loss is known as a loss of economic efficiency and this happens when equilibrium for a product or service is not Pareto optimal (it is an economic state and occurs where at least one person better off without making other individual end up worse off). The economic efficiency will not at equilibrium point if a product or service is not a Pareto optimal, As a consequence, making any an individual better off without making at least one individual worse off is not an incredible when resources are distributed. If there is a deadweight loss, damage in economic surplus within the market will occur. When Deadweight loss, this can lead to unable the market to make naturally clear also.
The supply and demand of a product or service are not at equilibrium point when deadweight loss.
Different economic situation can cause deadweight loss includes:
• Imperfect market
• Price floors
• Taxes and subsides
Furthermore, the equation of P=MC is used to determine deadweight loss in a market and change in price multiplied by change in quantity demanded equals to deadweight loss which is used for showing the cause of inefficiency within a market.