Monopoly by panniuniu

VIEWS: 8 PAGES: 11

									                        Monopoly
        … sole supplier of a
        product with no
        close substitutes.




COL Gutermuth - Industrial
      Organization             1
Characteristics
 Chooses p or q, but not both.
 Faces downward sloping demand.
 “A monopolist will never operate in
  the inelastic portion of the demand
  curve.”

   NOTE: There is NO supply curve for
    a monopolist !!!!
               COL Gutermuth - Industrial
                     Organization           2
P


    || = 




              Elastic Portion




                                = 1




                                                Inelastic Portion




                                                                    Demand

                                                                       || = 0

                                                                                 Q
                                 MR



                                 COL Gutermuth - Industrial
                                       Organization                                  3
Firm Behavior



     max  (q)  TR(q)  TC (q)
          TR(q) TC (q)
   foc :                     0
         q    q        q
              MR  MC



               COL Gutermuth - Industrial
                     Organization           4
Profit Maximization
 P




        Profits                MC          AC

 P*


                  DWL




                                                Demand


         Q*        MR                                    Q


                  COL Gutermuth - Industrial
                        Organization                         5
“Price Cost Margin”

              (p – MC)/p = -1/


•“Lerner Index” of Market Power (ability to
price above marginal cost)
Only depends on 




                 COL Gutermuth - Industrial
                       Organization           6
Two Examples
   Beer
        = -1.0204
       Lerner Index = .98
       p = 50MC


   Cocaine
        = -4.86
       Lerner Index = .20576
       p = 1.26MC
                     COL Gutermuth - Industrial
                           Organization           7
Creating and Maintaining a
Monopoly
   Special Knowledge:               allows production of a new or
    better product.

   Special Knowledge:               allows production of same
    product at a lower cost.
   Patents
   Other Gov’t Restrictions
   Strategic Behavior:
       Control essential input
       Foreclosure Effect


                             COL Gutermuth - Industrial
                                   Organization                      8
Some “Costs”
 DWL
  Similar to a tax
  “Rent” goes to the monopolist



 Rent-Seeking              Behavior
    “complete dissipation of rent”


                COL Gutermuth - Industrial
                      Organization           9
Some “Benefits”
R   &D
  New/Better Products
  Innovations

 Externalities
    Reduced pollution
 Production        of Certain Goods
    Expensive pharmaceuticals

                COL Gutermuth - Industrial
                      Organization           10
And finally………….
 Positive   Profits  Monopoly

   Monopoly  Positive Profits




               COL Gutermuth - Industrial
                     Organization           11

								
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