Monopoly is a type of industry market in which there is a single seller of a product that has no close substitutes. A monopoly also means the seller himself. Unlike a perfectly competitive market, in which a large number of competing sellers offer a standardized product, a pure monopoly has no competitors in the market for its product. Pure monopoly V real life It is quite rare and is more often found in local markets rather than national or global markets. 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. Since the monopoly firm is the only seller, the demand curve for this firm will be nothing more than the curve market demand. From this it is clear that this curve has a negative slope. 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.

An absolute or pure monopoly occurs when one firm becomes the sole producer of a product for which there are no close substitutes or substitutes. A pure monopoly is characterized by a number of specific features.

A monopolist enterprise represents an entire industry, i.e. the latter is represented by only one company. This company is the only manufacturer or sole supplier of this product. Consequently, the laws of supply and demand operate in the same way and their manifestation is unambiguous, for an individual enterprise, for an industry and as a whole.

Pure monopoly, like perfect competition, is a theoretical abstraction; In reality, a situation where there is only one producer of goods that have no substitutes on the market is practically impossible. In a pure monopoly, there is only one seller of a product in the market that has no close substitutes. Under imperfect competition, the monopolist has some power over price (depending on the type of monopoly);

he consciously seeks and sets the price level at which profit would be maximized.

At the same time, the monopolist is not able to set the volume of demand;

According to the law of demand, when the price rises, the quantity demanded falls, and when the price falls, it increases. The demand curve for the product of a pure monopolist is the industry demand curve.

Conditions for maximizing profits by a monopolist

Monopoly is such market structure, in which there is only one firm selling a product on the market. Due to the fact that a monopoly firm controls the entire market, the residual demand for its products is relatively inelastic. The monopolist is a price taker - the volume of its sales affects the price at which this volume can be sold. Consider the problem of maximizing profit for a monopolist. The more quantity of goods a monopolist wants to sell, the lower the price per unit of goods should be. Because of the law of demand, marginal revenue—the increase in revenue when sales increase by one unit—decreases as sales increase. To ensure that the monopolist's total revenue does not decrease, the price reduction (that is, the monopolist's loss on each additional unit of goods sold) must be compensated by a large percentage increase in sales volume. Consequently, it is advisable for the monopolist to conduct its operations in the elastic part of demand.

As output increases, the monopolist's marginal costs increase (or at least remain constant). The firm will expand output as long as the additional revenue from selling an additional unit of output exceeds, or at least is not less than, the additional costs associated with its production, because when the cost of producing an additional unit of output exceeds the additional revenue, the monopolist suffers a loss.

Let's formalize what has been said. Let π be the profit of the monopolist (π = TR-TC, where TR is the total revenue of the monopolist, TC is its total costs). Both revenue and costs depend on the number of products produced and sold. Therefore, profit is a function of quantity π = f(Q). Conditions for maximizing profit:

The first condition: MR = MC, where MR is marginal revenue, MR =ΔTR/ΔQ and MC is marginal cost, MC = ΔTC/ΔQ.

Second condition: ΔMR/ΔQ = ΔMC/ΔQ.

rice. 1.3.1 Profit maximization

Profit is maximum if, if marginal revenue is equal to marginal cost, marginal revenue decreases with increasing output to a greater extent than marginal cost. In conditions of profit maximization by a monopolist, marginal costs, in contrast to the perfect competition market model, can decrease. A monopolist can, while maximizing profits, refuse to increase output, even if the marginal and average costs of production decrease. This, as is known, serves as one of the arguments in favor of the thesis about the production inefficiency of a monopoly.

Let's find the price that the profit-maximizing monopolist will set. To do this, we show the dependence of marginal revenue on price:

MR = Q*(ΔP/ΔQ) + P

By multiplying the first term by P/P and Q/Q, since ΔQ/ ΔP * P/Q = Ed, where Ed is the price elasticity of demand, the resulting expression can be rewritten as: MR = P (1+1/ Ed)

From the condition of maximum profit it follows that the price of the monopolist and the marginal costs of production are related by the relationship:

P = MC/(1+1/ Ed);

Since Ed< -1 (спрос эластичен), цена монополиста всегда будет больше его предельных издержек. Процентное превышение цены над предельными издержками, как мы знаем, отражает уровень монопольной власти.

Does this mean that a monopolist cannot incur losses? Whether the monopolist will make a profit or incur losses depends on the ratio of the maximum willingness of buyers to pay and the average cost of production at the optimal volume of output (when the condition MR = MC is satisfied). If the firm’s average production costs Qm are higher than the demand price, then, despite the fact that the monopolist produces the optimal volume of products and sets a price above marginal costs, its profit is negative (Fig. 2.3.1)

Rice. 2.3.1 Losses under monopoly conditions

Qm - amount of losses

The main difference between a perfectly competitive market and an imperfectly competitive market is that in the former, firms do not have market (monopoly) power, while in the latter, they do. Monopoly power means the ability of a firm to influence the price of its products, i.e. install it at your own discretion. Firms with monopoly power are called price producers (in another translation - price seekers). Firms operating in a perfectly competitive market, on the other hand, can be characterized as price takers because they accept the market price as externally determined by the market itself and outside their control, and therefore do not have monopoly power.

A market such as a monopoly is a market with imperfect competition, and, therefore, the firms operating in it have monopoly power, although for different reasons.

So, a firm has market power when it can influence the price of its product by changing the quantity it is willing to sell. The latter means that the demand curve for the products of such a company cannot be a horizontal line, but must have a negative slope. Once price becomes a function of the quantity sold, marginal revenue will be less than price for any positive output. Therefore, the profit maximization condition for any firm will be exactly the same as for a pure monopolist: the profit-maximizing output level is achieved when marginal revenue equals marginal cost.

From this we get an extremely important conclusion: a firm has monopoly power if the price at which it sells the optimal quantity of output exceeds the marginal cost of producing that quantity of output. Of course, the monopoly power of a firm operating under conditions monopolistic competition or in an oligopoly market, less than the market power of a pure monopolist, but it still exists.

This raises two questions. First, how can we measure monopoly power so that we can compare one firm to another from this perspective? Second, what are the sources of monopoly power and why do some firms have more monopoly power than others?

Recall the important difference between a perfectly competitive firm and a firm with monopoly power: for a competitive firm, price equals marginal cost; for a firm with monopoly power, price exceeds marginal cost. Therefore, the way to measure monopoly power is the amount by which the profit-maximizing price raises the marginal cost of optimal output.

In particular, we can use the rate of excess of price over marginal cost. This method definition was proposed in 1934 by the economist Abba Lerner and was called the Lerner monopoly power index:

1.3 Conditions for maximizing profits by a monopolist

A monopoly is a market structure in which there is only one firm selling a product on the market. Due to the fact that a monopoly firm controls the entire market, the residual demand for its products is relatively inelastic. The monopolist is a price taker - the volume of its sales affects the price at which this volume can be sold. Consider the problem of maximizing profit for a monopolist. The more quantity of goods a monopolist wants to sell, the lower the price per unit of goods should be. Because of the law of demand, marginal revenue—the increase in revenue when sales increase by one unit—decreases as sales increase. To ensure that the monopolist's total revenue does not decrease, the price reduction (that is, the monopolist's loss on each additional unit of goods sold) must be compensated by a large percentage increase in sales volume. Consequently, it is advisable for the monopolist to conduct its operations in the elastic part of demand.

As output increases, the monopolist's marginal costs increase (or at least remain constant). The firm will expand output as long as the additional revenue from selling an additional unit of output exceeds, or at least is not less than, the additional costs associated with its production, because when the cost of producing an additional unit of output exceeds the additional revenue, the monopolist suffers a loss.

Let's formalize what has been said. Let π be the profit of the monopolist (π = TR-TC, where TR is the total revenue of the monopolist, TC is its total costs). Both revenue and costs depend on the number of products produced and sold. Therefore, profit is a function of quantity π = f(Q). Conditions for maximizing profit:

The first condition: MR = MC, where MR is marginal revenue, MR = ΔTR/ΔQ and MC is marginal cost, MC = ΔTC/ΔQ.

Second condition: ΔMR/ΔQ = ΔMC/ΔQ.

rice. 1.3.1 Profit maximization

Profit is maximum if, if marginal revenue is equal to marginal cost, marginal revenue decreases with increasing output to a greater extent than marginal cost. In conditions of profit maximization by a monopolist, marginal costs, in contrast to the perfect competition market model, can decrease. A monopolist can, while maximizing profits, refuse to increase output, even if the marginal and average costs of production decrease. This, as is known, serves as one of the arguments in favor of the thesis about the production inefficiency of a monopoly.

Let's find the price that the profit-maximizing monopolist will set. To do this, we show the dependence of marginal revenue on price:

MR = Q*(ΔP/ΔQ) + P (1.3.1)

By multiplying the first term by P/P and Q/Q, since ΔQ/ ΔP * P/Q = Ed, where Ed is the price elasticity of demand, the resulting expression can be rewritten as: MR = P (1+1/ Ed)

From the condition of maximum profit it follows that the price of the monopolist and the marginal costs of production are related by the relationship:

P = MC/(1+1/ Ed); (2.3.1)

Since Ed< -1 (спрос эластичен), цена монополиста всегда будет больше его предельных издержек. Процентное превышение цены над предельными издержками, как мы знаем, отражает уровень монопольной власти.

Does this mean that a monopolist cannot incur losses? Whether the monopolist will make a profit or incur losses depends on the ratio of the maximum willingness of buyers to pay and the average cost of production at the optimal output volume (when the condition MR = MC is satisfied). If the firm’s average production costs Q m are higher than the demand price, then, despite the fact that the monopolist produces the optimal volume of products and sets a price above marginal costs, its profit is negative (Fig. 2.3.1)

Rice. 2.3.1 Losses under monopoly conditions

Qm - amount of losses

The main difference between a perfectly competitive market and an imperfectly competitive market is that in the former, firms do not have market (monopoly) power, while in the latter, they do. Monopoly power means the ability of a firm to influence the price of its products, i.e. install it at your own discretion. Firms with monopoly power are called price producers (in another translation - price seekers). Firms operating in a perfectly competitive market, on the other hand, can be characterized as price takers because they accept the market price as externally determined by the market itself and outside their control, and therefore do not have monopoly power.

A market such as a monopoly is a market with imperfect competition, and, therefore, the firms operating in it have monopoly power, although for different reasons.

So, a firm has market power when it can influence the price of its product by changing the quantity it is willing to sell. The latter means that the demand curve for the products of such a company cannot be a horizontal line, but must have a negative slope. Once price becomes a function of the quantity sold, marginal revenue will be less than price for any positive output. Therefore, the profit maximization condition for any firm will be exactly the same as for a pure monopolist: the profit-maximizing output level is achieved when marginal revenue equals marginal cost.

From this we get an extremely important conclusion: a firm has monopoly power if the price at which it sells the optimal quantity of output exceeds the marginal cost of producing that quantity of output. Of course, the monopoly power of a firm operating under monopolistic competition or in an oligopoly market is less than the market power of a pure monopolist, but it still exists.

This raises two questions. First, how can we measure monopoly power so that we can compare one firm to another from this perspective? Second, what are the sources of monopoly power and why do some firms have more monopoly power than others?

Recall the important difference between a perfectly competitive firm and a firm with monopoly power: for a competitive firm, price equals marginal cost; for a firm with monopoly power, price exceeds marginal cost. Therefore, the way to measure monopoly power is the amount by which the profit-maximizing price raises the marginal cost of optimal output.

In particular, we can use the rate of excess of price over marginal cost. This method of determination was proposed in 1934 by the economist Abba Lerner and was called the Lerner monopoly power index:

(3.3.1)

The numerical value of the Lerner coefficient is always between 0 and 1. For a perfectly competitive firm, P = MC and L = 0. The larger L, the greater the monopoly power of the firm.

This monopoly power coefficient can also be expressed in terms of the elasticity of demand faced by the firm. There is a special formula for monopolistic pricing:

(5.3.1)

This formula represents universal rule pricing for any firm with monopoly power, given that E d p is the elasticity of demand for an individual firm, not market demand.

Determine the elasticity of demand for the firm than for the market, because the firm must take into account the reaction of its competitors to price changes. Basically, the manager must calculate the percentage change in the sales of the company's products by 1%. This calculation can be based on a mathematical model or on the intuition and experience of the manager.

By calculating the elasticity of demand for his company, the manager can determine the appropriate cape. If the firm's elasticity of demand is high, this cap will be minimal (and we can say that the firm has little monopoly power). If the firm's elasticity of demand is small, this cap will be large (the firm has significant monopoly power).

(6.3.1)

Now let’s substitute (6.3.1) into formula (7.3.1):

(7.3.1)

Recall that now the coefficient of elasticity of demand for the products of an individual company, and not the entire market demand.

Note also that significant monopoly power does not guarantee high profits. Profit depends on the relationship between average costs and price. Firm A may have more monopoly power than Firm B but earn less profit if it has a significantly higher average cost of producing its optimal output.

Sources of a firm's monopoly power. Expression (7.3.1) shows that the less elastic demand is for a firm, the more monopoly power the firm has. The ultimate cause of monopoly power is therefore the elasticity of demand for the firm. The question is why do some firms face a more elastic demand curve while others face a less elastic demand curve?

At least three factors determine the elasticity of demand for a firm. The first of these is the availability of substitute goods. The more a product of a certain company has substitute goods and the closer they are in their quality characteristics to the product of our company, the more elastic is the demand for this product, and vice versa. For example, a perfectly competitive firm has perfectly price-elastic demand for its product because all other firms in the market sell exactly the same product. Therefore, none of these firms has monopoly power. Another example: the demand for oil is weakly price elastic, so firms involved in oil production can quite easily raise prices for their products. At the same time, please note that oil has substitutes, such as coal or natural gas, if we are talking about oil as an energy resource. This leads to another interesting conclusion. The vast majority of goods or services have substitutes that are more or less close. It is no coincidence that economists say that we live in a world of substitutes. Therefore, pure monopoly is a phenomenon in nature as rare as Bigfoot: everyone has heard about him, everyone talks about him, but practically no one has seen him.

The second determining factor of monopoly power is the number of firms operating in the market. Other things being equal, the monopoly power of each firm decreases as the number of firms in the market increases. The more firms compete with each other, the more difficult it is for each of them to raise prices and avoid losses from a decrease in sales volume.

Of course, what matters is not just the total number of firms, but the number of so-called “major players” (that is, firms with a significant market share). For example, if two large firms account for 90% of sales in a market, and the remaining 20 firms account for 10%, then the two large firms will have greater monopoly power. The situation when several firms capture a significant part of the market is called concentration.

We can safely assume that when there are only a few firms in the market, their managers will prefer that no new firms enter the market. Increasing the number of firms can only reduce the monopoly power of the main firms in the industry. An important aspect The competitive strategy is therefore to create barriers to the entry of new firms into the industry. This will be discussed in the next chapter.

There is a special Herfindahl-Hirschman index (IHH) that characterizes the degree of market concentration and is widely used in antitrust practice. It is calculated as follows:

The Herfindahl-Hirschman index is used by government economic regulators as a legal guideline for antitrust policy. Thus, in the USA, since 1982, IHH has become the main guideline when assessing the admissibility of various types of mergers of enterprises. This index (and its variation) is used to classify mergers into three broad classes.

If IHH< 1000 рынок оценивается как неконцентрированный («достаточно многочисленный») и слияние, как правило, беспрепятственно допускается.

At 1000< IHH <1800 рынок считается умеренно концентрированным, но если IHH >At 1,400 it is rated as "dangerously few in number." This may trigger additional review of the permissibility of the merger by the Department of Justice.

In the market economy, the position of monopolistic firms is not as “cloudless” as it seems at first glance. 3. Monopolistic competition Two extreme types of markets were considered: perfect competition and pure monopoly. However, real markets do not fit into these types; they are very diverse. Monopolistic competition is a common type of market, closest to...

There is no oligopoly model. A number of models can be developed to explain the behavior of firms in specific situations, based on what assumptions firms make about how their rivals will react. There are two main reasons why it is difficult to use formal economic analysis when explaining the price behavior of an oligopoly. First of all, there is the fact that oligopoly...

Rice. 1.2.2 Losses under monopoly conditions The main difference between a perfectly competitive market and an imperfectly competitive market is that in the former, firms do not have market (monopoly) power, while in the latter, they do. Monopoly power means the ability of a firm to influence the price of its products, i.e. install it at your own discretion. Firms with monopoly power are called price producers (in another translation - price seekers). Firms operating in a perfectly competitive market, on the other hand, can be characterized as price takers because they accept the market price as externally determined by the market itself and outside their control, and therefore do not have monopoly power. A market such as a monopoly is a market with imperfect competition, and, therefore, the firms operating in it have monopoly power, although for different reasons. So, a firm has market power when it can influence the price of its product by changing the quantity it is willing to sell. The latter means that the demand curve for the products of such a company cannot be a horizontal line, but must have a negative slope. Once price becomes a function of the quantity sold, marginal revenue will be less than price for any positive output. Therefore, the profit maximization condition for any firm will be exactly the same as for a pure monopolist: the profit-maximizing output level is achieved when marginal revenue equals marginal cost. From here we get an extremely important conclusion: a firm has monopoly power if the price at which it sells the optimal amount of output and exceeds the marginal cost of producing that amount of output. Of course, the monopoly power of a firm operating under monopolistic competition or in an oligopoly market is less than the market power of a pure monopolist, but it still exists. This raises two questions. First, how can we measure monopoly power so that we can compare one firm to another from this perspective? Second, what are the sources of monopoly power and why do some firms have more monopoly power than others? Recall the important difference between a perfectly competitive firm and a firm with monopoly power: for a competitive firm, price is equal to marginal cost; for a firm with monopoly power, price exceeds marginal cost. costs. Therefore, the way to measure monopoly power is the amount by which the profit-maximizing price raises the marginal cost of optimal output. In particular, we can use the rate of excess of price over marginal cost. This method of determination was proposed in 1934 by the economist Abba Lerner and was called the Lerner monopoly power index: (1.2.3)
(1.2.4)The numerical value of the Lerner coefficient is always between 0 and 1. For a perfectly competitive firm, P = MC and L = 0. The larger L, the greater the monopoly power of the firm. This coefficient of monopoly power can also be expressed in terms of elasticity of demand that the company faces. There is a special formula for monopolistic pricing:
(1.2.5) This formula is a universal pricing rule for any firm with monopoly power, given that Edp is the elasticity of demand for an individual firm, not market demand. Determine the elasticity of demand for the firm than for the market, because the firm must take into account the reaction of its competitors to price changes. Basically, the manager must calculate the percentage change in the sales of the company's products by 1%. This calculation can be based on a mathematical model or on the intuition and experience of the manager. By calculating the elasticity of demand for his company, the manager can determine the appropriate cape. If the firm's elasticity of demand is high, this cap will be minimal (and we can say that the firm has little monopoly power). If the firm's elasticity of demand is small, this cap will be large (the firm has significant monopoly power). Note also that significant monopoly power does not guarantee high profits. Profit depends on the relationship between average costs and price. Firm A may have more monopoly power than Firm B but earn less profit if it has a significantly higher average cost of producing its optimal output. The ultimate cause of monopoly power is therefore the elasticity of demand for the firm. The question is why do some firms face a more elastic demand curve while others face a less elastic demand curve? At least three factors determine the elasticity of demand for a firm. The first of these is the availability of substitute goods. The more substitute goods a product of a certain company has and the closer they are in their quality characteristics to the product of our company, the more elastic is the demand for this product, and vice versa. For example, a perfectly competitive firm has perfectly price-elastic demand for its product because all other firms in the market sell exactly the same product. Therefore, none of these firms has monopoly power. Another example: the demand for oil is weakly price elastic, so firms involved in oil production can quite easily raise prices for their products. At the same time, please note that oil has substitutes, for example, coal or natural gas, if we are talking about oil as an energy resource. This leads to another interesting conclusion. The vast majority of goods or services have substitutes that are more or less close. It is no coincidence that economists say that we live in a world of substitutes. Therefore, a pure monopoly is a phenomenon in nature as rare as Bigfoot: everyone has heard about it, everyone talks about it, but almost no one has seen it. The second determining factor of monopoly power is the number of firms operating in the market. Other things being equal, the monopoly power of each firm decreases as the number of firms in the market increases. The more firms compete with each other, the more difficult it is for each of them to raise prices and avoid losses from a decrease in sales volume. Of course, what matters is not just the total number of firms, but the number of so-called “major players” (that is, firms with a significant market share). For example, if two large firms account for 90% of sales in a market, and the remaining 20 firms account for 10%, then the two large firms will have greater monopoly power. The situation when several firms capture a significant part of the market is called concentration. We can safely assume that when there are only a few firms in the market, their managers will prefer that no new firms enter the market. Increasing the number of firms can only reduce the monopoly power of the main firms in the industry. An important aspect of competitive strategy is therefore the creation of barriers to the entry of new firms into the industry. There is a special Herfindahl-Hirschman index (IHH) that characterizes the degree of market concentration and is widely used in antitrust practice. It is calculated as follows:
(1.2.6) at
Where
number of firms in the industry;
% sales volume
oh firm in total industry sales. The Herfindahl-Hirschman Index is used by government economic regulators as a legal guideline for antitrust policy. Thus, in the USA, since 1982, I HH has become the main guideline in assessing the admissibility of various types of mergers of enterprises. This index (and its variation) is used to classify mergers into three broad classes.If I HH< 1000 рынок оценивается как неконцентрированный («достаточно многочисленный») и слияние, как правило, беспрепятственно допускается.При 1000 < I HH <1800 рынок считается умеренно концентрированным, но если I HH >At 1,400 it is rated as "dangerously few in number." This may trigger additional review of the permissibility of the merger by the Department of Justice. When I HH > 1800, the market is considered highly concentrated, or “small.” In this case, two rules apply. If a merger increases I HH by 50 points, it will generally be allowed. If after the merger I HH increases by more than 100 points, it is prohibited. An increase in I HH by 51-100 points is the basis for additional study of the admissibility of the merger. 1.3. Monopoly equilibrium The most favorable position in a pure monopoly market is the equilibrium position of the monopolist. This extreme case, however rare it may be in its purest form, lends itself easily to graphical analysis. In order to monitor the state of monopoly equilibrium, consider a graphical representation of the pure monopoly market: Fig. 1.3.1 Equilibrium of a monopolist On the graph: G - price based on marginal costs F - regulated price E - monopoly price Under monopoly conditions, the price is set too high high level. The equilibrium position of maximum profit for a monopolist is determined by point E, located above the point of intersection of the MR and MC curves for a long period and on the same vertical with it. In this case, P exceeds MC, and monopoly profit is shown as a shaded rectangle. Control over the monopoly in the interests of society will reduce the price to level F, where the demand line intersects the line of average long-term costs, thereby eliminating excess profits. But more importantly, this control brings the price closer to the level of marginal costs at point G, at which social costs and benefits to society more or less balance. In Fig. Figure 1.4.1 shows the long-term equilibrium of a monopolist. His optimal price exceeds average costs, and therefore he constantly receives "monopoly profits." His P is also higher than his MS. Why? Because his downward sloping demand curve (the source of his price control) is equivalent, as has already been explained, to his marginal revenue being below price. Maximum profit when MR=MC implies that P is above MC. We again recognize that this difference between the price that things cost society and the marginal cost of producing them means that social resources are not allocated in the best possible way. Society, recognizing that a monopoly disrupts the pricing process, is hostile to monopoly profits, or for other reasons, can declare the monopoly a “socially useful enterprise” and establish controls over its prices. The equilibrium position depriving the monopoly of excess profits is determined in Fig. 1.3.1 point P. Here P and AC are equal. In equilibrium under control conditions, at point P the difference between price and marginal costs is less than at point E in the absence of control; but in this case of decreasing costs, this difference will still remain, unless the state uses its tax levers to cover the deficit that arises if P decreases to the MC level at point O. If we talk about the factors that determine market equilibrium in the market pure monopoly, then they are as follows: 1. The monopoly enters into relations only with the buyer of its products; 2. Entry into the industry is almost impossible, material and artificial barriers are established (also in some monopolies there is a so-called state barrier) One of effective ways preventing competitors from entering the industry is a sharp reduction in the price of products (in some cases, the monopolist may allow prices to be reduced below production costs (production at a loss) to prevent a competitor from entering the industry); 3. Information about this market is closed;4. A main feature is the specificity of pricing; Also this type market depends on the elasticity of demand. If demand for products in the market is elastic, then as prices rise, income decreases. If demand is inelastic, then as the price rises, the monopolist's income increases. Therefore, monopolies often appear in markets characterized by inelastic demand.

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:

1. method of total revenues and costs for profit maximization;
2. 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.

There are the following reasons why monopolies are formed:

• unique products are produced that have no analogues;
• lower production costs appear, a connection with economies of scale;
• there is 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 $Q2$ > $QM$, the decrease in profit is associated with output large quantity product, but sold at a low price ($P_2$).

Therefore, in order to maximize profits, a monopoly firm always chooses the output level when $MC = MR$. Also, this point of intersection of 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 conditions 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.

A natural monopoly determines production volume based on three principles: costs, demand and profit maximization.

The difference between a pure monopolist and a purely competitive seller lies on the market demand side. In conditions of pure competition, the seller faces perfectly elastic demand, and marginal revenue is constant and equal in price to the product. A monopolist firm is in a unique economic position, since it completely controls the volume of output of the entire industry. When deciding to increase the price of a product, she is not afraid of losing part of the market and does not worry about competitors setting lower prices. However, this does not mean that a monopolist firm can charge very high prices for its products in order to maximize profits. The demand curve of a monopolist, like the demand curve of any seller operating under conditions of imperfect competition, is an industry demand curve, since pure monopolist is always an industry. Therefore, the industry demand curve is not completely elastic, but on the contrary, it is downward sloping (Fig. 1).

Figure 1 “Demand Curve Graph”

There are three meanings of a downward sloping demand curve.

1. Price exceeds marginal revenue.

A pure monopolist, or in fact any producer, in conditions of imperfect competition with a downward sloping demand curve, must reduce the price in order to sell more products. As a result, marginal revenue will be less than price.

2. The monopolist dictates the price and volume of production.

The second meaning of a downward-sloping demand curve is that the monopolist inevitably determines the price by deciding how much to produce. General rule is as follows: a monopoly will never choose such a combination: price - quantity, at which gross income decreases, or marginal income is negative. This depends not only on the demand for marginal revenue, but also on costs.

3. Profit maximization.

A profit-seeking monopolist will produce each subsequent unit of output as long as its sales provide a greater increase gross income than an increase in gross costs. The firm will increase production to the level at which marginal revenue equals marginal cost.

To maximize profits, a monopoly firm must determine:

• -- market demand;
• - costs of producing your products;
• -- volume of production and sales;
• -- price per unit of production.

Since the monopolist firm is the only producer of a given product, the demand curve for its product will coincide with the market demand curve. Price and quantity of output change according to the demand curve. In this case, the price is not a given value; The more products a monopolist firm produces, the lower the possible selling price will be. The demand curve for a monopolist has a negative slope. This means that the monopolist can increase the number of sales, but it must set a price per unit of goods sold, and not just the last one.

To determine maximum profit, a monopolist firm chooses price and production volume based on a comparison of total income and total costs, or marginal costs with marginal revenue.

By comparing total revenue and total costs, a firm determines total profit. Using the “marginal approach,” based on the principle that marginal revenue equals marginal cost, the firm determines the price-output combination that generates maximum profit. But unlike a firm operating in conditions of perfect competition, where marginal revenue was a constant value and MR = P, for a monopolist firm it is important that marginal revenue exceeds marginal costs, i.e., an increase in output by one unit increases total income more, than total costs.

The optimal price lies at the intersection of the demand function and marginal cost:

P(Q) = MC(Q). (1)

The price set in accordance with (1) is usually called “first

The best solution."

However, in a situation of natural monopoly, equal prices to marginal costs will mean direct losses for the company. Since in this case fixed production costs are not taken into account. For a natural monopoly, where economies of scale exist, marginal costs are less than average costs up to very large output levels. Therefore, the revenue received from selling the product to consumers at price (2) will not cover all the costs of the monopoly. In Fig. 2 shows the “first” (point A) and “second” (point C) best solutions when determining the price for the products of a natural monopoly, the demand function D and “dead losses” (DABC) when setting a price at the level of the “second best solution”.