Price and Output Determination in Monopoly Markets

Price and Output Determination in Monopoly Markets

Introduction

A monopoly refers to a market structure consisting of a single seller or producer who controls the entire market. The products associated with the individual seller have no close substitutes and have a direct supply, demand, and product price. Since monopolies are the only producer of a product, they may influence the price of the product by changing the supply. Monopolies might decide to reduce the price of a product when they are willing to sell more or increase it when they are willing to sell less. This paper will discuss price and output determination in monopoly markets………

Literature Review     

            Price discrimination is a pricing strategy used by monopolies as they allow identical goods or services to be transacted by the same provider at different prices in different markets. Some literature examined what would happen if firms with market power were required to set a set profit market in every market, with a regulator determining the level of the margin based on an average of the initial margins. A study done by Cowan (2018), examines and compares uniform margin regulation and uniform price-cost ratio, and analyzes a uniform margin when initially the firm is compelled to set an equal price and when costs differ. Cowan found out that simple regulation forms of the structure and level of monopolistic prices have yielded clear results for consumer surplus and social welfare under general circumstances. The author emphasized that equal margins rise consumer surplus when the firm initially sets an equal price and costs differ. Moreover, profits also increase when demands are convex, thus giving a strong argument against equal pricing in such conditions.

The Internet industry is also known for its monopolistic nature as firms struggle to obtain market power and control a sizable market, but this would not benefit the consumers due to lack of competition. According to research by Sun, Jing, Zhao, and He (2017), the internet industry should not be controlled by monopolies with more than 50% of the market share since the consumers might be forced to adhere to price discrimination imposed by the monopoly. The authors used new empirical industrial organization methods to measure the economies of scale and market power of internet platform companies, with the e-commerce market as an example. The authors found out that internet platform enterprises have economies of scale but lack market power hence making the industry competitive. Moreover, the rise of large enterprises may increase the customer’s welfare. The government is required to step in and put antitrust laws to prevent monopolies from taking advantage of unfair competition or market power to engage in activities that may reduce the customer’s welfare, including price discrimination.

Price discrimination prevalent in intermediate goods across resale markets, rather than across buyers, has not received much attention. According to Miklós-Thal & Shaffer (2019), in a condition with competing retailers operating in multiple markets, a monopolist supplier would opt to discriminate against the resale of products in markets with a higher cluster of cross-seller diversion ratio. This type of price discrimination takes place when monopoly suppliers charge different wholesale prices for services and goods resold by the same downstream firms in different geographic positions. The duo measured the market power of each downstream market to determine if they fall on the realm of monopolies or perfect competition, based on the restrictions and policies put in place. The authors found out that removing control over online sales by doing away with activities like dual wholesale pricing can increase overall sales in certain geographic locations, with price discrimination in mind. In this case, the assumptions are that online and offline terms of the market match. Further research on their study should analyze the resale market’s input price discrimination by contracting inefficiencies that could come up due to information asymmetries and available tariffs.

Cournot competition refers to an economic model that describes the structure of an industry where competition among companies is based on the number of outputs produced with decisions made independent of each other. Spulber (2017), studied how competition among complementary-input monopolies can be consistent with the joint maximization of profit. The author used a two-stage strategic model where complementary-input monopolies offered producers supply schedules, then took part in bilateral bargaining with them. Spulber found out that a unique weakly dominant strategy equilibrium existed and led to an outcome that involved joint-profit-maximization, with an output similar to that of a bundling monopoly. In contrast to the Cournot effect, prices do not surpass monopoly levels since restrictions are not modeled on competitive strategies but rather on input monopolies. When complementary monopolists take part in overall competitive interactions with price negotiations and supply schedules, the Cournot effect does not hold.

Among the sources of monopoly power are intellectual rights, where intellectual property can be patented for a certain period, not exceeding 20 years. Any potential monopoly, including intellectual property, can accelerate or stimulate the development of innovation. Research by Kurz (2017), focused on the formation of capital and wealth in the perspective of monopoly power, IT, and rising inequality. Kurz did his research by examining surplus wealth and testing it with firms that are IT transformed to establish the empirical link between monopoly power and IT. The author then theoretically studied IT properties that facilitated the creation and maintenance of barriers to entry after the establishment of monopoly power. Lastly, the author links inequality to rising monopoly power. The author uses a general equilibrium model involving firms with rising monopoly power and finds out that the share of monopoly output profits was around 21%-23% as of 2015 from 0 in the 1980s. The research proves that rising monopoly powers reducing equilibrium investment, wage rate, and capital stock permanently.

Other sources of monopoly power can be land ownership, which is perceived as a perpetual monopoly due to its permanent nature. Monopolist landowners are known to maximize profits by setting rents hence dictating their market power. A study by Watson and Oren (2019), focused on the scope, sources, and implications of landowner market power. The duo model pricing power stemming from horizontal differentiation of buildings and sorting as a novel mechanism. The authors show how zoning regulations can create spillovers via increased markups and establish conditions where restricting the concentration of land ownership can reduce rents. The study uses a new building level dataset involving Manhattan rents to estimate their model. The results of the study found that market power is substantial, and markups averagely account for 21% of the rent. The model predicts that under the same conditions, concentrations can further raise markups.

In monopolies, CSR is a substitute for product quality and is often used by under common market conditions where a sizeable segment of the consumer’s value product quality. A study by Fanti & Buccella (2017), investigated the bargaining agenda selection involving a socially concerned unionized monopoly that produces a network good. The study shows that firms in network industries prefer sequential efficient bargaining (SEB) and right-to-manage (RTM). RTM, however, may be paradoxical since it is often welfare-inferior, thus higher social responsibilities often result in lower social welfare. The authors compare SEB to RTM to determine the more profitable negotiation agenda. The study found out that since consumers and unions tend to prefer SEB, network effects may act as a solution to traditional conflicts of interest. Further research on the study should involve investigations on whether a monopoly should hire managers to take charge of the negotiations with the union and its implications on the findings of the research.

Gains in the global supply chain under a bilateral monopoly model can be made to ensure the maximization of profits is realized. A study by Jim & Scaramozzino (2017), focused on the firm-level division of gains in global supply. The authors developed a theoretical model involving a bilateral monopoly framework to explain how, and based on what conditions, do gains from global trade end up being distributed unevenly. The duo used the quantity fixing vertical restraint method to do away with double marginalization, where the final demand of the finished products solely depends on the final prices. The study found out that the downstream retailer incurred more profits that upstream retailers under the condition that both the cost effect and capacity of the retailer dominates the manufacturer’s two counterpart effects. Further research on the study should focus on using other contracting choices, rather than quantity fixing, as resale price maintenance.

Price determination in monopolistic competition selling differentiated goods can be critical in determining the market share of the individual firm. Bertoletti and Etro (2017), study monopolistic and imperfect competition with similar preferences over the variety of goods produced by heterogeneous firms. The authors use the Morishima elasticities of substitution (MES) to compute equilibria. The MES is used to measure the change in relative factors to determine difference in price. Defining monopolistic competition as the market structure arising when market shares are termed as insignificant, the authors obtained a well-defined characteristic of pricing under monopolistic competition. The study found out that closed-form solutions and simple pricing rules emerged under monopolistic competition when common aggregators determined the demands. Future directions on the study should examine markup viability over time and among goods, including its influence across countries and along the business cycle.

Other studies on the relationship between upstream and downstream monopolies have also been established. A study by Laussel & Resende (2019), was done to find out how asymmetric information on the final demand can influence the critical interaction between upstream and downstream monopolists who produce complementary inputs independently. The authors study a constitutive private common agency game, where each supplier suggests a pricing schedule contract independently, and the assembler’s purchase of input specific to the supplier’s payment. The authors apply the Pareto-undominated Nash equilibrium to satisfy the condition and are based on the supplier’s perspective. The study found out that the equilibrium contained unavoidable efficiency losses as a result of extremely low sales of the goods. Further research on the study should focus on imperfect complement inputs in explaining the relationship between each input and the final downstream sales.

Conclusion

In summary,

References

Bertoletti, P., & Etro, F. (2017). Monopolistic competition, as you like it. University Ca’Foscari of Venice, Dept. of Economics Research Paper Series No, 8.

Cowan, S. (2018). Regulating monopoly price discrimination. Journal of Regulatory Economics, 54(1), 1-13.

Laussel, D., & Resende, J. (2019). Complementary Monopolies with asymmetric information. Economic Theory, 1-39.

Fanti, L., & Buccella, D. (2017). Bargaining agenda in a unionised monopoly with network effects: when corporate social responsibility may be welfare-reducing. Economia Politica, 34(3), 471-489.

Jim, H. S., & Scaramozzino, P. (2017). A bilateral monopoly model of profit sharing along the global supply chain. In Forum For Research in Empirical International Trade Working Paper Series (No. 1252).

Kurz, M. (2017). On the formation of capital and wealth: IT, monopoly power and rising inequality. Monopoly Power and Rising Inequality (June 25, 2017).

Miklós-Thal, J., & Shaffer, G. (2019). Input price discrimination by resale market. Available at SSRN 3191951.

Spulber, D. F. (2017). Complementary monopolies and bargaining. The Journal of Law and Economics, 60(1), 29-74.

Sun, B., Jing, W., Zhao, X., & He, Y. (2017). Research on market power and market structure. International Journal of Crowd Science.

Watson, C. L., & Ziv, O. (2019). Is the Rent Too High? Land Ownership and Monopoly Power.