chapter 15 monopoly. objectives 1.) learning the source of monopoly 2.) understand how a monopolist...
TRANSCRIPT
Chapter 15
Monopoly
Objectives1.) Learning the source of monopoly
2.) Understand how a monopolist sets price and output to maximize profits
3.) Evaluate the efficiency of monopoly
4.) Learn some of the various public policies toward a monopoly
5.) Understand how and why a monopolist would price discriminate
MONOPOLY Monopoly is a market structure
characterized by
1. One seller
2. Homogeneous product
3. Very much control over price(pricemaker)
4. Very great difficulty in entering or exiting the market .
Monopoly
A Pure Monopoly exists when a single firm is the only producer or seller of a product that has no close substitute.
Why Learn About Monopolies?
It is estimated that about five (5) percent of domestic output issupplied under monopoly conditions
It helps to understand morecommon market structures suchas monopolistic competition and oligopoly.
Why Monopolies Arise The fundamental cause of a monopoly
is Barriers to Entry.
Monopoly: Barriers to Entry
Ownership of Key Resource
Monopoly: Barriers to Entry
Ownership of Key Resource
Legal Barriers By Government
Monopoly: Barriers to Entry
Ownership of Key Resource
Legal Barriers By Government
Large Economies of Scale
Barrier: Monopoly Resources
A single owner of an important resource
that cannot be readily duplicated,
as with some natural resources.
Government-Created Monopolies Patent and copyright laws are a major
source of government-created monopolies.
– Certain new pharmaceutical drugs
Governments also restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.
– Local cable television
Natural Monopolies An industry is a natural monopoly
when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
– The minimum efficient scale of one firms plant is so large that only one firm can supply the market efficiently.
Cost
Quantity of Output
Averagetotal cost
0
Economies of Scale as aCause of Monopoly
Quick Quiz!
What are the three reasons that a market might have a monopoly?
Give two examples of monopolies, and explain the reason for each.
Monopoly BehaviorMonopoly verses Competitive Firm
Monopoly Sole Producer
Downward Sloping Demand Curve
Price Setter
Reduces Price to Increase Sales
Marginal Revenue curve below demand
Monopoly BehaviorCompetitive Firm verses Monopoly
Competitive Firm One of many Horizontal Demand
Curve Price Taker Sells a lot or a little
at same price Marginal Revenue
curve is horizontal
Quantity of Output
Demand
(a) A Competitive Firm’s Demand Curve
(b) A Monopolist’s Demand Curve
0
Price
0 Quantity of Output
Price
Demand
Demand Curves for Competitive and Monopoly Firms...
Monopoly’s Revenue
Total Revenue: Q x P = TR Average Revenue: TR ÷ Q = AR Marginal Revenue: TR ÷ Q = MR A monopolist’s Marginal Revenue is
always less than the price of its good, because of the downward sloping demand curve.
The Marginal-Revenue curve lies below its demand curve.
Price
1
2
3
4
5
6
7
8
9
10
1 2 3 4 5 6 7 8 9 10
$P1110
9876543210
Q0123456789
1011
$TR0
10182428303028241810
0
$MRN/A
1086420
-2-4-6-8
-10
Quantity
MarginalRevenue
Demand
Quality Price TotalRevenue
AverageRevenue
Marginal Revenue
12345678
Total, Average, and Marginal Revenue for a Competitive Firm
Q P (TR=P*Q) (AR=TR/Q)
$66666666
$612182430364248
$66666666
$66666666
gallon
(MR= TR / Q)
Demand
MarginalRevenue
$
inelasticportion
$
elasticportion
Quantity
Quantity
TotalRevenue
along the elasticalong the elasticportion of theportion of thedemand curve, demand curve, lower prices andlower prices andgreater quantitiesgreater quantitiesresult in risingresult in risingtotal revenuetotal revenue
along the inelasticalong the inelasticportion of theportion of thedemand curve,demand curve,lower prices andlower prices andgreater quantitiesgreater quantitiesresult in decliningresult in decliningtotal revenuetotal revenue
Monopoly’s Marginal Revenue
When a monopoly drops price to sell more product, the additional revenue received from previous amounts sold will decrease.
Two effects on revenue when price is dropped:
–The Output Effect
–The Price Effect
Profit Maximization of a Monopoly
The monopolist’s profit-maximizing quantity of output is determined by the intersection of the Marginal-Revenue curve and the Marginal-Cost curve.
Same rule of profit maximization as perfectly competitive firm
MR = MC
Monopoly’s Profit Maximization
Price
Quantity
D
MR
Monopoly’s Profit Maximization
Price
Quantity
MC = Supply
D
MR
Monopoly’s Profit Maximization
Price
Quantity
MR=MC
MC = Supply
D
MR
Profit Maximization of a Monopoly
In competitive markets, price equals marginal cost. In Monopolized markets, price exceeds marginal cost.
– As long as Average Total Cost is below the monopolist’s price, economic profits will be earned.
Monopoly’s Profit Maximization Price
Price
Quantity
MC = Supply
D
MR
Monopoly’s Profit Maximization Price
Price
Quantity
PM
QM
MC = Supply
D
MR
Price consistent with profit
maximizing quantity
Profit Maximization of a Monopoly
In competitive markets, price equals marginal cost. In Monopolized markets, price exceeds marginal cost.
– As long as Average Total Cost is below the monopolist’s price, economic profits will be earned.
Monopoly’s Profit Maximization
Price
Quantity
PM
QM
Monopoly Price
Monopoly Quantity
MC = Supply
D
MR
Monopoly’s Profit Maximization
Price
Quantity
PM
QM
Monopoly Average Cost
Curve
MC = Supply
D
MR
Monopoly’s Profit Maximization
Price
Quantity
PM
QM
Monopoly Profit!
MC = Supply
D
MR
Comparing Monopoly and Competition
For a competitive firm, price equals marginal cost.
P = MR = MC For a monopoly firm, price exceeds
marginal cost.
P > MR = MC
A Monopoly’s Profit
Profit equals total revenue minus total costs.
Profit = TR - TC
Profit = (TR/Q - TC/Q) x Q
Profit = (P - ATC) x Q
Quick Quiz!
Explain how a monopolist chooses the quantity of output to produce and the price to charge.
The Welfare Cost of Monopoly
A monopoly leads to an inefficient allocation of resources, leading to a failure to maximize total economic well-being,
The monopolist produces less than the socially efficient quantity of output.
The Welfare Cost of Monopoly
At monopoly prices, some potential consumers value the good at more than its marginal cost but less than the monopolist’s price.
These consumers do not end up buying the good.
Monopoly pricing prevents some mutually beneficial trades from taking place.
The Welfare Cost of Monopoly: Deadweight Loss
Because a monopoly sets price above MC it places a wedge, similar to a tax.
The wedge causes the quantity sold to fall short of the social optimum.
Monopoly’s Profit Maximization
Price
Quantity
PM
QM
Monopoly Price
Monopoly Quantity
MC = Supply
D
MR
Monopoly’s Profit Maximization
Price
Quantity
PM
QM
Efficient Quantity!
MC = Supply
D
MR
Monopoly’s Profit Maximization
Price
Quantity
PM
QM
MC = Supply
D
MR
Monopoly’s Profit Maximization
Price
Quantity
PM
QM
Monopoly Deadweight Loss
MC = Supply
D
MR
Monopolistic Deadweight Loss: Example
Cable TV market. Assume:– Competitive Market Price = $15
– Monopolist Market Price = $25
– Marginal Cost = $5
Deadweight loss to society is $10:– Consumer does not value cable TV at
more than its cost. Hence the consumer will not subscribe to cable TV.0
The Market for Drugs...
Costs and Revenue
Price during patent
lifePrice after
patent expires
Monopoly quantity
Competitive quantity
0 Quantity
Demand
Marginal cost
Marginal revenue
Public Policy Toward Monopoly: Government may intervene by. . .
Creating a competitive market
Implement/Enforce Anti-Trust Laws
Regulating the behavior of monopolies
Price control and regulation
Public Ownership
Government runs the monopoly itself
Doing Nothing
Loss
Marginal-Cost Pricing for aNatural Monopoly
Price
Quantity0
Marginal cost
Average total cost
Demand
Regulatedprice
Quick Quiz!
Describe the ways policymakers can respond to the inefficiencies caused by monopolies.
List a potential problem with each of these policy responses.
Price Discrimination: Monopoly Tool
The practice of selling the same good to different customers at different prices.
– Not possible in a competitive market.
Two Important Effects:
– Can increase the monopolist’s profits
– Can reduce deadweight loss
A Parable About Pricing (Figure 15-10)
Profit Profit
Welfare With and Without Price Discrimination
Price
Quantity Quantity
Price
Marginal cost
DemandDemand
Marginal cost
Deadweight Loss
Consumer Surplus
MarginalRevenue
Quantitysold
0 0
(a) Monopolist with Single Price (b) Monopolist with Perfect PriceDiscrimination
Examples: Price Discrimination
Movie Tickets, i.e., children, adult, senior Citizens
Airline Tickets, i.e., first class, coach, stay over, one-way verses round-trip
Discount Coupons
Financial Aid
Two-Part Tariff, i.e., amusement park entrance fee, and then a fee for each ride
The Prevalence of Monopoly
How prevalent are the problems of monopolies?
Monopolies are common. Most firms have some control over their
prices because of differentiated products. Firms with substantial monopoly power
are rare. Few goods are truly unique.
Quick Quiz! Give two examples
of price discrimination.
How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus?
The Prevalence of Monopoly How prevalent are the problems of
monopolies?– Monopolies are common. Most firms
have some control over the prices because of differentiated products. Ben & Jerry’s Ice Cream vs Breyer’s
– Firms with substantial monopoly power are rare. Few goods are truly unique.
Summary
A monopoly is a firm that is the sole seller in its market.
It faces a downward-sloping demand curve for its product.
A monopoly’s marginal revenue is always below the price of its good.
Summary
Like a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal.
Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.
Summary
A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus.
A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.
Summary
Policymakers can respond to the inefficiencies of monopoly behavior with antitrust laws, regulation of prices, or by turning the monopoly into a government-run enterprise.
If the market failure is deemed small, policymakers may decide to do nothing at all.
Summary
Monopolists can raise their profits by charging different prices to different buyers based on their willingness to pay.
Price discrimination can raise economic welfare and lessen deadweight losses.