Profit maximization under monopoly conditions. Maximization of firm profits under conditions of perfect competition and monopoly. Losses to society from monopoly (dead loss)

Basic conditions for maximizing profits

Profit maximization refers to the firm's desire to obtain the greatest profit. For this purpose, calculation methods of economic theory are used.

Calculations are made using the following mutually influencing indicators:

fixed costs;
variable costs;
income;
output volume.

The indicators listed above can be calculated in aggregate or marginal terms. There are two main methods for calculating profit maximization:

method of total revenues and costs for profit maximization;
method of marginal revenues and costs for maximizing profits.

In order to understand the characteristics of the behavior of a monopolist firm in terms of profit maximization. Let us consider the essence of a monopoly firm.

Monopoly firms

A monopoly firm is an organization that occupies a large market share and has few substitute products in the market. This firm dominates the market and can set prices.

Note 1

Monopoly is the opposite of perfect competition.

Exist following reasons, according to which monopolies are formed:

produced unique products, which has no analogues;
lower production costs appear, a connection with economies of scale;
have a unique right to use any resources: Natural resources, labor, capital;
There are state licenses, licenses that provide the right to inventions, trademarks, know-how.

Note 2

All the above prerequisites help a firm become dominant in the market. And also such factors act as an obstacle for other organizations that are not monopolists and seek to gain market share.

Features of profit maximization in a monopolist company

Let's consider what features appear when maximizing profits in a monopolist company.

In order to obtain maximum profit, an organization needs to achieve a volume of output at which the value of marginal revenue equals the value of marginal cost.

Look at diagram 1 below.

The market demand line, designated $D$, is the line of average income of a monopoly organization. The value of $P$ is the price of one unit of output received by the monopolist firm, and this value is also a function of output volume. $MR$ in Chart 1 is marginal revenue and $MC$ is marginal cost.

The diagram shows that equality of marginal revenue and marginal costs is achieved at the production level - $QM$. Using the demand line $D$, it is possible to find the price $P$ that corresponds to $QM$. Look at diagram 2 below.

The diagram shows that when the output volume becomes higher (lower) than $Q_M$, the firm receives less profit. This happens because at $Q_1$

When the value $Q2$ > $QM$, the decrease in profit is associated with the release of a large amount of product, but with sales at a low price ($P_2$).

Therefore, in order to maximize profits, a monopoly firm always chooses the output level when $MC = MR$. Also given point the intersection of the lines is called the Cournot point.

Therefore, a monopolist firm will usually produce less than could be produced under conditions of perfect competition, however, sales prices will be set higher. Monopoly does not always guarantee the greatest profits. The firm will suffer losses if demand is insufficient. This is how a monopoly firm behaves in the short term.

However, in the long run, equilibrium can be achieved in terms of output at a level below the volume value at the point $LACmin$, but also with output that exceeds the minimum of the $LAC$ curve. This can be seen in Figure 2. Long-run profit-maximizing prices are lower than short-run profit-maximizing prices. This situation occurs because the demand for the manufactured product is more elastic in the long run.

1. Pure (perfect) competition. A large number of firms produce similar products, no individual firm can influence the market price. The demand curve of an individual firm is horizontal line. For the entire market, the demand curve has a negative slope.

2. Pure (absolute) monopoly. The only manufacturer of the product. The product has no close substitutes. The boundaries of the industry and the company coincide. The demand curve has a negative slope.

3. Monopolistic competition. There are many manufacturers, but there is product differentiation. The demand curve has a negative slope.

4. Monopsony. There is only one buyer who sets the price.

5. Bilateral monopoly: one buyer, one seller.

6. Oligopoly: A small number of large firms produce the majority of the market's output. Duopoly – two producers. Special case oligopolies.

The manufacturer is not interested in profit per unit of production, but in maximum total mass profit received. In conditions of free competition, the manufacturer cannot influence the level of the market price and sells any quantity of its products at the same price. Hence, additional income from the sale of an additional unit of production will be the same for any volume and will be equal to the price. Thus, to determine the point where the firm maximizes its profit, it is necessary to determine the firm's equilibrium point, i.e. the point where it stops increasing production, having achieved the maximum possible profit at a given price. As long as marginal cost is less than marginal revenue, the firm can expand production. Thus, the equilibrium condition of the firm can be formulated as follows.MR=P=MC

Shaded rectangle - gross profit companies!

Solve the problem of profit maximization in conditions imperfect competition can be done in two ways:

· By comparing gross income and gross costs. As the price decreases, gross income increases to a certain level reaching a maximum value. The monopolist reduces the price, but expands production. But starting from a certain price, gross income begins to decline, since the loss from the price reduction is no longer compensated by the gain from expanding sales. Maximum total profit will be achieved when the difference between gross revenue and gross costs is maximum.

· Method of comparing marginal costs and marginal revenue. Under imperfect competition, marginal revenue is less than price. After all, in order to sell an additional unit of output, an imperfect competitor reduces the price. Following the demand curve, the monopolist can reduce the price and increase sales. However, he can reduce the price only to the point where marginal revenue equals marginal cost. It is in this case that the amount of profit will be maximum. Under conditions of imperfect competition, the firm's equilibrium is achieved at the level of production at which average costs reach their minimum. The price is higher than average costs: (MC=MR)

(small rectangle of vertices P 1 and E 1 – monopoly profit)

Dead loss – triangle EE 1 E 2. Due to inflated prices, part of the consumer's surplus is eaten up, part of it goes to the monopolist, and part, like part of the producer's surplus, goes to no one, and represents the destroyed wealth of society.

Types of imperfect competition (pure monopoly, oligopoly, monopolistic competition). The degree of market concentration and its measurement (Lerner index, Herfindahl index). Pricing policy of an oligopolist (prisoner's dilemma).

Economists such as Antoine Cournot, Edward Chamberlin, Joan Robinson, John Hicks and others made outstanding contributions to the analysis of imperfectly competitive markets.

Table. Market structures of imperfect competition
Nes market models. competition	Number of firms in the industry	Product Description	Entry barriers	Price control
Pure monopoly	One company (the industry is represented by one company)	Homogeneous products with no substitutes	High	Full
Duopoly	Two companies	Homogeneous	High	Partial
Oligopoly	Small number of companies	Homogeneous or with insignificant differentiation	High	Partial
Monopolistic competition with product differentiation	Many companies	Heterogeneous products	Low	Weak

In reality, there is no only perfect competition or only pure (absolute) monopoly. We observe a mixture of various elements of the market structures discussed in the table.

The problem of entry barriers was first discussed in the works of the American economist Joe Bain. An entry barrier to entering a market is a condition that makes it difficult for new firms to enter an industry where the “old-timers” of the industry operate. The main types of entry barriers include the following:

1. The government gives the company exclusive rights (issuing a government license for a certain type of activity, for example, postal service, cable television, transportation services). Many of these types of barriers are closely related to the activities of natural monopolies.

2. Ownership of non-renewable and rare resources. A classic example is the power of De Beers in the diamond market.

3. Copyrights and patents. A company whose activities are protected by a patent has the exclusive right to sell licenses, and this gives it monopoly advantages. Often this type of monopoly is called a closed monopoly, in contrast to an open monopoly, which does not have protection from competition in the form of patents, copyrights, or the benefits of a natural monopoly.

4. Economies of scale, i.e., the advantages of large-scale production, which make it possible to reduce costs while increasing the volume of production.

5. Illegal methods of fighting new potential competitors, up to the threat of physical destruction (mafia structures), can also hinder entry into the industry.

To measure the degree of monopoly power, the Lerner index (English economist proposed this indicator in the 30s of the 20th century):

L=(P-MC)/P the greater the gap between price and marginal cost, the greater the degree of monopoly power. (0

The Herfindahl index (H) shows the degree of market concentration and is calculated by summing the squares of the market shares of each firm in the industry. In the case of a monopoly H=10000, the lower the H, the higher the concentration.

In the case of an oligopoly, competition is non-price. The number of oligopolists depends on the technology that determines the min. The scale of production beginning to make a profit.

The price behavior of oligopolists is constrained by interdependence. The situation is similar to the "prisoner's dilemma". Let's say two prisoners X and Y are accused of a joint crime, which is punishable by 10 years in prison. But, if one confesses and blames the other for the crime, he will only get 3 years. If both confess, then both will be given 5 years. If both deny everything, they will be released. They can't come to an agreement.

Possible solutions:

It is rational to count on the worst case scenario (that your partner will confess) and confess. Then both will get 5 years.

Two equilibrium solutions. Pareto efficient, maximizing the utility of each when both are unaware. Nash equilibrium, when no one can change their position unilaterally (when both have confessed). The same is true in the case of oligopoly.

	Company A
Low prices	High prices
Company B	Low prices	70;70	130;10
High	10;130	100;100

There are 2 firms A and B in the market: if they come to an agreement and set high prices, they will receive a profit of 100. If one unilaterally violates the agreement, then they receive excess profits. And if both decide to cheat each other, then both lose with a profit of only 70. Since they cannot act together, firms make a choice based on the logic of the competitor’s pricing behavior - the result is a Nash equilibrium.

Models of price behavior of oligopolists:

Broken demand curve. Two options for the reaction of oligopolists to price changes on the part of one of them (firm A). 1) do not react. Then the demand line for firm A becomes flatter (elasticity increases). This means that if the price is lowered, it can greatly increase the volume of sales. 2) they will change in the same direction. Then price changes will not affect sales volumes so significantly. In real life, it will most likely be like this: if company A raises the price, then option 1, if it lowers it, then option 2.

Discriminatory prices, conditions and principles of their formation.

3. Pricing strategies in a monopolistic market.

Profits and losses under monopoly conditions. Conditions for profit maximization and equilibrium in a monopolistic market.

The equilibrium condition of the firm in the short run: M.R. =M.C. .

In Fig. Figure 26 shows the equilibrium points of a monopolist firm - point A and the point at which profit is maximized is the point IN .

Rice. 26. Points of balance and maximum profit.

Example. Consider the following table and find the maximum profit value of a monopolist firm:

Q	P	TR	TC	M.C.	M.R.	A.C.	P

Profit is maximum at P = 122,Q = 5.M.C. =M.R.

– a condition for maximizing profit in the short term, M.R. AR,M.R. R
– additional conditions for maximizing profits in a monopoly market.

A firm maximizing profit under monopoly conditions simultaneously determines two parameters: output volume and price, taking into account the form of its cost function and a demand curve with a negative slope. To determine the price under monopoly conditions, they often use "big ring" rule why you need to know M.C. and price elasticity of demand E R (D ) :

Task. Given: E R (D ) = -4,MS = 9. Find the price value.

Solution. RUR/piece

Task. Based on this table, find and build graphs M.R. , AR And TR .

Solution. From the table it is clear that P = 6 – Q . Because TR =PQ , then we get:

Based on these equations, we will construct a graph:

At a certain price elasticity of demand, the lower part of the curve M.R. falls below the axis Q , so the monopolist will not be interested in operating in the highly elastic portions of the demand curve. Depending on the location of the price, average costs AVC and marginal costs, the monopolist can either have a profit (Fig. 27a), or a normal profit, or a loss (Fig. 27b).

Rice. 27. Profits and losses of a monopolist firm.

The indicator of monopoly power is determined through price and marginal costs ( Lerner exponent):

where 0< L < 1.

To set prices under monopoly conditions, determine:

market demand characteristics;

firm costs ( A.C. , AVC , M.C. );

volume of production;

price that maximizes profit.

The monopolist does not charge the highest price, since profit may not be maximum in this case.

For a monopolist, what is important is not the profit per unit of output, but the maximum total profit.

A monopolist may experience losses due to falling demand and high costs.

The monopolist avoids the region of elastic demand.

A monopolist can reduce output and increase price.

A monopolist can increase its profits by introducing discrimination or the so-called. discriminatory prices.

For a monopolist, it is impossible to construct one supply curve, since at the same equilibrium point there may be several demand curves, and, consequently, several different prices.

Topic: Pure monopoly. Profit maximization in pure monopoly

University: VZFEI

Year and city: MOSCOW 2008

1. Pure monopoly 4

2. Profit maximization in pure monopoly 8

3. Tests 14

Introduction

Any market, regardless of its specific type, is based on three main elements: price, supply and demand, and competition. It is known that the market mechanism operates most effectively under conditions of free or perfect competition. In a perfectly competitive market, there are enough buyers and sellers of a good that no individual seller or buyer can influence the price of the good. Price is determined by market rules of supply and demand. Firms take the market price as given when deciding how much to produce and sell, and consumers take it as given when deciding how much to buy.

The subject of this work is monopolies, as well as profit maximization in a pure monopoly. Monopoly and monopsony are concepts directly opposite to the concept of ideal competition. Monopoly is a market situation characterized by many buyers and only one seller.

It is clear that, like perfect competition, pure monopoly is a kind of abstraction. Firstly, there are practically no products that do not have substitutes. Secondly, it is rare that there is only one seller in a national (or global) market. Even the complete absence of competitors within the country does not exclude their presence abroad.

However, the analysis of pure monopoly is necessary for two reasons. The first is that a significant amount of economic activity (according to American economists, in the USA it is 5-6% of GDP) is carried out under conditions close to a pure monopoly. By the way, pure monopoly is more often characteristic of local markets than national ones. We encounter local monopolies in small towns and villages: a single telephone company, a single physician or dentist, a single bookstore, etc.

The second reason is that the study of pure monopoly provides an opportunity to better understand other real market structures in which there is imperfect competition, where the market power of individual firms allows them to influence price and limit the volume of production and sales in order to increase economic profit. Such structures include monopolistic competition and oligopoly.

Pure monopoly

Monopoly (from Greek μονο (mono)- one and πωλέω (poleo)- sell) - a market situation when there is only one seller of a given product who has no close substitutes. A monopolistic market is the exact opposite of a perfectly competitive market. For buyers there is only one source of supply - the monopolist. A market dominated by a monopoly stands in sharp contrast to a fully competitive market in which many competing sellers offer a standardized product for sale. Buyers who want to consume a monopoly firm's product have only one source of supply. A pure monopoly has no rival sellers competing with it in its market.

A pure (perfect) monopoly requires the following conditions to be met:

the monopolist is the only producer of this product;
the product is unique in the sense that it has no close substitutes;
the penetration of other firms into the industry is blocked by a number of circumstances, as a result of which the monopolist holds the market in its full power and completely controls the volume of production output;
the degree of influence of a monopolist on the market price is very high, but not unlimited, because he cannot set any arbitrarily high price (any company, including a monopoly, faces the problem of limited market demand and a reduction in sales volume in direct proportion to the rise in prices).

By the way, Adam Smith also wrote about the prices set by a monopolist firm for goods on the market: “The price of a monopoly is in all cases the highest that can be extorted from the purchasers, or which it is expected they will be willing to pay.”

In other words, monopoly means the loss of economic equality between producer and buyer. Essentially, in such a market, a stronger seller forces the buyer to pay more for goods. To obtain maximum profit, the monopolist uses non-price factors to influence market demand, such as advertising, improving the quality of the product and its appearance, expanding the range of services offered and differentiation. The possibility of obtaining monopoly profits due to a special market position inevitably attracts new producers to the industry, and this implies fierce competition between the monopoly and outsiders.

A monopoly position is desirable for every entrepreneur or enterprise. It allows them to avoid a number of problems and risks associated with competition, take a privileged position in the market, concentrating certain economic power in their hands, they have the opportunity, from a position of power, to influence other market participants and impose their conditions on them. However, it is very difficult to capture the market and become a monopolist on it, but it is even more difficult to keep this market in your hands. Therefore, monopolists have long learned to erect barriers to entry into the markets they control. It is these barriers that prevent new competitors from penetrating monopolized markets and changing the situation there for the better for buyers.

Barrier to entry into the industry Barrier entry - a limiter that prevents the emergence of new additional sellers in 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 that supply would increase. Monopoly price controls would disappear altogether as markets would eventually become competitive.

There are several types of barriers that prevent new firms from entering monopolized markets.

1. Legal barriers . Entry into a monopolized market can usually be greatly limited by legal barriers. For example, the state implements licensing certain types of activities, and without obtaining a state license it is simply impossible to engage in such activities. The activities of radio stations and television companies, notaries, auditors, banks, hunting for certain breeds of valuable animals (in particular, fur-bearing animals), the production of alcoholic beverages or trade in them, etc. are licensed. Naturally, licensing was not invented to create monopolies - it solves completely different problems. For example, preventing the adulteration of alcoholic beverages by unlicensed and therefore uncontrolled companies, whose products can poison people. However, an economically literate person cannot help but notice the side effects of licensing as a factor in increasing monopolization.

The most important type of legal barriers that give rise to and protect a monopoly are patents for inventions and scientific and technological developments. Patents and copyrights provide creators of new products or works of literature, art and music with exclusive rights to sell or license the use of their inventions and creations. Patents may also be issued for manufacturing technologies. Patents and copyrights provide monopoly positions only for a limited number of years. Once the patent expires, the barrier to entry into the market disappears. The idea of patents and copyrights is to encourage firms and individuals to invent new products and processes by guaranteeing inventors the exclusive rights to market the fruits of their efforts. However, exclusive rights are guaranteed only for a limited period. The monopoly thus created is temporary.

2. Natural barriers . In some cases, the birth of a monopoly turns out to be almost inevitable for purely objective reasons. Such monopolies are usually called natural. As a result, there is natural monopoly- an industry in which the production of goods or the provision of services is concentrated in one company due to objective (natural or technical) reasons, and this is beneficial to society.

Depending on the type of natural monopoly, there are two types of natural barriers:

when the birth of monopolies occurs due to barriers to competition erected by nature itself (for example, a company whose geologists discovered a deposit of unique minerals and which bought the rights to the land plot where this deposit is located can become a monopolist).
a monopoly, the emergence of which is dictated by either technical or economic reasons related to the manifestation of economies of scale (it is technically almost impossible, or rather, extremely irrational, to create two sewerage networks in the city, gas or electricity supply to an apartment.

3. Economic barriers . Such barriers are erected by monopolistic firms themselves or are a consequence of the unfavorable general economic situation in the country. Also, ownership of the entire supply of production resources can serve as barriers to entry into an industry controlled by a monopolist. De Beers has monopoly power in the diamond market thanks to its control over the sales of about 85% of rough diamonds suitable for jewelry. The Aluminum Company of America had a monopoly on the US aluminum market until the end of World War II. Its monopoly was maintained partly by its control over the locations of bauxite ore, which is the raw material for aluminum production, and partly by its control of several excellent sources of cheap energy.

2. Profit maximization in pure monopoly

To maximize profits, a monopolist must first determine both the characteristics of market demand and its costs. Assessing demand and costs is crucial in a firm's economic decision-making process. Having such information, the monopolist must make a decision on production and sales volumes. The unit price received by the monopolist is set depending on the market demand curve (this means that the monopolist can set the price and determine the volume of production according to the nature of the market demand curve).

Demand for a monopolist's product.

If the demand curve for the products of a competitive firm is horizontal (each additional unit of production adds a constant value equal to its price to the firm’s gross income), then the demand curve for the monopolist’s products is different. The demand curve for the output of a monopoly firm coincides with the downward sloping curve of market demand for the product sold by the monopoly (Fig. 1). This allows us to draw three important conclusions.

1. A pure monopoly can increase its sales only by reducing its price, which directly follows from the downward sloping shape of the curve. This is the reason that the firm's marginal revenue MR (marginal revenue) becomes less than the price P (price) for each output except the first. If the monopolist lowers the price, then this applies to all units of production, which means that marginal revenue - the income from one additional unit of production - will be less.

2. A monopolist can set either the price of his product or the quantity offered for sale for any given period of time. And once he has chosen a price, the required quantity of goods will be determined by the demand curve. Similarly, if a monopolist firm chooses as a set parameter the quantity of a good it supplies to the market, then the price that consumers will pay for this quantity of the good will determine the demand for that good.

3. Demand will be price elastic (price elasticity of demand is the degree of change in the quantity of demand with a change in the price of a product), if when the price decreases, the quantity of demand increases, and therefore the gross income TR (total revenue). Consequently, a profit-maximizing monopolist will seek to produce the quantity and price that corresponds to the elastic portion of the demand curve D.

A monopolist seeking to maximize profits in the short term will follow the same logic as the owner of a competitive firm. He will produce each subsequent unit of output as long as its sale provides a greater increase in gross income than an increase in gross costs. That is, a monopolist firm will increase production to a volume at which marginal revenue equals marginal costs (MR = MC).

Graphically it looks like this (Fig. 2):

Q m is the quantity of products that the monopolist will produce; Р m - monopoly price.

It also shows the marginal revenue curve MR and the average total and marginal cost curves - ATC and MC. Marginal revenue and marginal costs coincide when output volume Q m. Using the demand curve, we can determine the price P m, which corresponds to a given quantity of production Q m.

How can we check that Q m is the profit-maximizing output? Suppose a monopolist produces a smaller quantity of product - Q' and, accordingly, receives a higher price P'. As Fig. 2 shows, in this case, the monopolist’s marginal revenue exceeds marginal costs, and if he produced more products than Q’, he would receive additional profit (MR - MC), i.e. would increase your total profit. In fact, the monopolist can increase production volume, increasing its total profit up to the production volume Q m, at which the additional profit received from producing one more unit of output is zero. Therefore, producing less Q' does not maximize profits, although it does allow the monopolist to charge a higher price. With production volume Q' instead of Q m, the total profit of the monopolist will be less by an amount equal to the shaded area between the MR curve and the MC curve, between Q' and Q m.

In Fig. 2, a larger production volume Q” is also not profit maximizing. At a given volume, marginal cost exceeds marginal revenue, and if the monopolist were to produce less quantity than Q”, he would increase total profit (by MC - MR). The monopolist could increase profits even further by reducing output to Q m . The increase in profit due to a decrease in production volume Q m instead of Q” is given by the area below the MC curve and above the MR curve, between Q m and Q”. We can also show algebraically that output Q m maximizes profit. Profit is equal to the difference between income and costs, which are a function of Q.

In Fig. 2, the total profit received by the monopolist will be equal to the area of the quadrilateral AR m BC. The segment AP m reflects the profit per unit of production. Total profit can be obtained by multiplying profit per unit of output by the profit-maximizing volume of production.

Since a monopoly firm is an industry, the equilibrium in the short run will be the equilibrium in the long run. The firm will maximize profits as long as it remains a monopolist, i.e. will be able to put up reliable barriers to the entry of other firms into this industry.

This approach to the study of monopoly destroys some of the unfair accusations against it. Firstly, the monopolist does not at all seek to “break” its monopoly price. It, as in the case of free competition, is established under the condition MR = MC. And if the monopolist sets a price above P m, then, as already mentioned, this will entail a decrease in the quantity of production below Q m, as well as profit. This is disadvantageous for the monopolist. Secondly, the monopolist is always concerned with maximizing total profit, not profit per unit of output. And for this reason, he would rather sell more and cheaper for the sake of a larger total profit than less and more expensively for the sake of a smaller total profit. Third, a pure monopoly does not always make a profit. She can also suffer losses (Fig. 3).

When costs are so high that demand does not cover them, the monopolist suffers losses, the size of which is determined by the area P m ABC. But the company will continue to operate until its losses exceed its fixed costs. In Fig. 3 with Q = Q m P m > AVC, therefore, the monopolist will continue to work, since its total loss is less than its average fixed costs AFC (AFC = ATC - AVC).

But what is “bad” about a monopoly?

If we talk about pure competition, we can note its efficiency, both production and in the field of resource distribution. This cannot be said about a pure monopoly. The monopolist will find it profitable to sell a smaller volume of products (Q m) and charge a higher price (P m) than a competing producer would do (Q c and P c) (Fig. 4).

If the monopolist's profit-maximizing price is higher than the competitive price, this means that society values the monopolist's products more highly. If the profit-maximizing volume of production of the monopolist is less than the competitive volume, this means that the monopolist is not producing an insufficient amount of product.

Consequently, the distribution of resources turns out to be irrational from the point of view of society. There is an underdistribution of resources - the monopolist considers it profitable to limit output, and therefore use fewer resources than is justified from the point of view of society.

There is another way to explain the fact of a decrease in the welfare of society as a result of the functioning of monopolies. It is known that in a competitive market the price is equal to the marginal cost, and in a monopoly power the price exceeds the marginal cost. The conclusion follows: since a monopoly leads to higher prices and a decrease in production volumes, there is a deterioration in the welfare of consumers and an improvement in the welfare of firms. But how does this change the well-being of society as a whole? Due to the higher price, consumers lose a portion of the surplus equal to the area of the trapezoid (A + B). The producer, however, makes a profit equal to the area of rectangle A, but loses part of his surplus, indicated by triangle C. Therefore, the net profit of the producer is (A - C). Subtracting the loss of consumer surplus from the producer's profit, we get: (A + B) - (A - C) = B + C. These are the net losses of society from monopoly power, or the dead weight of a monopoly - a decrease in welfare corresponding to a decrease in the value of consumer surplus and producer surplus by compared to the equilibrium situation in a free market. Its value corresponds to the area of the triangle (B + + C). The first who, in the mid-50s, tried to determine the dead weight of a monopoly was A. Harberger, therefore the triangles corresponding to the costs to society from the existence of a monopoly were called Harberger triangles.

The next question is: is it true that monopolists strive for technological improvements and, with their help, reduce production costs? If so, are they doing it better than competing manufacturers?

Competitive firms, of course, have a strong incentive to innovate. But we already know that free competition deprives firms of economic profits. And innovations are very quickly copied by other competing companies.

A monopolist, thanks to the existence of barriers to entry into the industry, can receive economic profit. This means that it will have more financial resources for scientific and technological progress. But does he have the desire for this?

On the one hand, the lack of competitors will not push the monopolist to innovate. On the other hand, research work and technical innovations can become one of the barriers to entry into the industry. And it cannot be denied that scientific and technological progress is a means of lowering production costs, and therefore increasing profits.

It turns out that it is difficult to draw a conclusion about the effectiveness of a monopoly. But there is a conclusion. And he is like this:

1. If the economy is static, if the effect of scale is equally available to all firms (both purely competitive and monopoly), then pure competition is more effective than pure monopoly, since it stimulates the use of the best known technology and distributes resources in accordance with the needs of society.

2. If the economy is dynamic, if the effect of scale is available only to the monopolist, then a pure monopoly is more efficient.

3. Test.

3.1. Price discrimination is...

When studying the demand for the monopolist's products and pricing, it was assumed that the monopolist sets a single price for all buyers. But a monopolist, under certain conditions, can take advantage of the peculiarities of its market position (he is the only seller) and increase his profits by charging different prices for the same product to different buyers. This behavior of a monopolist is called price discrimination.

Price discrimination is a sale at more than one price when the price differences are not justified by differences in costs. This is the most consumer-unfavorable form of imperfect competition.

Price discrimination is possible under certain conditions:

the seller has monopoly power, allowing him to control production and prices;
the market can be segmented, i.e. buyers can be divided into groups, the demand of each of which will differ in the degree of elasticity;
a consumer who purchases a product cheaper cannot sell it at a higher price.

Price discrimination has three forms.

According to buyer's income. A physician may accept a reduced fee from a low-income patient with fewer resources and less health insurance, but charge a larger bill to a high-income client with high-cost insurance.

By volume of consumption. An example of this type of price discrimination is the pricing practices of electricity supply companies. The first hundred kilowatt-hours is the most expensive, as it provides the most important needs for the consumer (refrigerator, minimal necessary lighting), the next hundreds of kilowatt-hours become cheaper.

By the quality of goods and services. By dividing passengers into tourists and businessmen going on business trips, airlines diversify ticket prices: a tourist class ticket is cheaper than a business class ticket.

By time of purchase. International and long-distance telephone calls are more expensive during the daytime and cheaper at night.

In all cases, firms engaged in price discrimination not only receive the usual monopoly profits, but also appropriate part of the consumer surplus.

Correct answer: A . selling the same product to different buyers at different prices with the same production costs.

3.2. A type of market in which there is only one seller is...

Correct answer: B . monopoly.

A. Monopsony- a market in which there is only one buyer of a product, service or resource, including the employer of labor.

B. Oligopoly is a market structure in which very few sellers dominate the sale of a product, and the emergence of new sellers is difficult or impossible.

G. Monopolistic competition- a type of industry market in which there is a fairly large number of firms selling differentiated products and exercising price control over the selling price of the goods they produce.

D. Perfect competition- an idealized state of the commodity market, characterized by: the presence on the market of a large number of independent entrepreneurs (sellers and buyers); the ability for them to freely enter and leave the market; equal access to information and a homogeneous product.

1. Pure (perfect) competition. A large number of firms produce similar products; no single firm can influence the market price. An individual firm's demand curve is a horizontal line. For the entire market, the demand curve has a negative slope.

3. Monopolistic competition. There are many manufacturers, but there is product differentiation. The demand curve has a negative slope.

4. Monopsony. There is only one buyer who sets the price.

5. Bilateral monopoly: one buyer, one seller.

6. Oligopoly: A small number of large firms produce the majority of the market's output. Duopoly – two producers. A special case of oligopoly.

The manufacturer is not interested in profit per unit of production, but in the maximum total amount of profit received. In conditions of free competition, the manufacturer cannot influence the level of the market price and sells any quantity of its products at the same price. Consequently, the additional income from the sale of an additional unit of production will be the same for any volume and will be equal to the price. Thus, to determine the point where the firm maximizes its profit, it is necessary to determine the firm's equilibrium point, i.e. the point where it stops increasing production, having achieved the maximum possible profit at a given price. As long as marginal cost is less than marginal revenue, the firm can expand production. Thus, the equilibrium condition of the firm can be formulated as follows.MR=P=MC

The shaded rectangle is the firm's gross profit!

There are two ways to solve the problem of profit maximization in conditions of imperfect competition: