What are the characteristics of the monopoly market

monopoly pricing

Monopolistic pricing models are differentiated according to whether the market is homogeneous (simple monopoly) or heterogeneous (composite monopoly), whether potential competition is taken into account or not, whether price uniformity is assumed or price differentiation (monopolistic price differentiation) is assumed.

1. Monopolistic pricing without considering potential competition (on a closed market): a) If one assumes that the monopolist knows his price-response function and his cost function exactly, the price formation in the monopoly can be in One product case represented by Cournot's solution (with the solution index c). Since the deterministic pricing models generally assume profit maximization, the target function applies

the profit maximization condition marginal profit = 0 or marginal sales = marginal costs:

or.

In the graphical determination of the profit-maximum monopoly price, this condition is fulfilled by the intersection S of the marginal turnover and marginal cost curve. The (maximum profit) Cournot set x is found vertically below itc, vertically above on the price-sales curve the Cournot point C, which in turn is horizontally on the price axis the (profit-maximum) Cournot price pc assigned.

The Cournot point can also be determined graphically via the maximum difference between the revenue and cost curve (see figure "Monopolistic pricing") by determining the sales volume at which the slopes of the (dashed) tangents to the revenue and cost curve are have the same slope. Since the tangent of the slope angle indicates the marginal revenue and the marginal costs, the profit maximization condition (marginal revenue = marginal costs) is also fulfilled by the parallelism of the tangents.

This solution applies regardless of whether constant, increasing or decreasing marginal costs are assumed, depending on the production and cost function, or whether this is a short-term or long-term marginal cost function (with partial or isoclinic factor variation). In the latter case, a short-term (only by chance also cost-minimal) or a long-term (in any case also cost-minimal) monopoly equilibrium can be distinguished. In the case of a natural monopoly (due to increasing economies of scale), marginal costs can be assumed to decrease in the long term, which, for example, in a Cobb-Douglas production function with a degree of homogeneity of 2 (α = β = 1) are combined with marginal costs that are constant in the short term.

If the monopolist's buyers for the same product have different payment widths, the monopoly profit can usually be further increased if a monopoly price differentiation is pursued instead of the uniform price policy.

b) The principles of the above pricing can be applied to the heterogeneous monopoly market (Multi-product case) transferred under the assumption that the monopolist offers different but functionally interchangeable products in the course of a product differentiation (composite monopoly). When setting prices, the monopolist then takes into account that the goods it offers compete with one another and that their conjectural price-sales functions are dependent on the self-determined “competitive price”. Prices and quantities are determined taking into account the individual product demand and product-specific marginal costs in such a way that the total profit of all products is maximized.

2. Monopolistic pricing taking into account potential competition: The pricing according to 1. generally leads to to above-average profits, which attracts new providers to the market, either temporarily (hit-and-run campaigns, contestable markets) or permanently. The monopolist who anticipates this basically has two strategies to react to.
(1) He can hold onto the high price for once and make corresponding profits and basically accept the market entry. This is only recommended if potential providers are prevented from entering the market immediately for certain reasons (e.g. because of a monopoly patent).
(2) The other strategy is to build barriers to entry against the risk of latent competition. Both strategies can be observed in goods markets. After Entry-preventing price theory the monopolist will lower the current price to such a level that the potential supplier will only have residual demand in terms of quantity at the prevailing price, which is below his minimum optimal company size (Limit Pricing). It is assumed that the monopolist's supply volume remains unchanged (Sylos-Labini assumption) and that the potential supplier also anticipates this. However, the monopolist's strategy of preventing market entry by setting correspondingly low prices (without effective self-commitment) is implausible. In the event of market entry, the monopolist will in fact reduce its own sales volume, namely in its own interest, namely to prevent the price from falling too sharply. However, the potential competitor will anticipate this fact so that he is not really deterred. If the monopolist for his part anticipates this, he will stick to the original setting of the Cournot price.

On the other hand, the monopolist can credibly deter them sunk costs(Sunk Costs), e.g. by having Reserve capacity that can be mobilized when entering the market (price war). This creates an effective Entry barrier.