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					Chapter 15

Monopoly
              Objectives
1.) 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 is
    supplied under monopoly conditions
   It helps to understand more
    common market structures such
    as 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
Patentand 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.
       Economies of Scale as a
        Cause of Monopoly
Cost




                              Average
                             total cost


  0                  Quantity of Output
             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 Behavior
 Monopoly verses Competitive Firm
         Monopoly
 Sole   Producer
 DownwardSloping
 Demand Curve
 Price   Setter
 Reduces Price to
 Increase Sales
 MarginalRevenue
 curve below demand
      Monopoly Behavior
Competitive Firm verses Monopoly

                 Competitive Firm
                 One   of many
                 Horizontal   Demand
                           Curve
                 Price   Taker
                 Sellsa lot or a little
                  at same price
                 Marginal  Revenue
                  curve is horizontal
     Demand Curves for Competitive
     and Monopoly Firms...
        (a) A Competitive Firm’s           (b) A Monopolist’s
        Demand Curve                       Demand Curve
Price                              Price




                           Demand



                                                          Demand

 0                   Quantity of       0                Quantity of
                     Output                             Output
          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.
                                        $P    Q    $TR   $MR
Price                                   11    0      0    N/A
        10                              10    1     10     10
                                         9    2     18      8
        9                                8    3     24      6
                                         7    4     28      4
        8                                6    5     30      2
                                         5    6     30      0
        7                                4    7     28     -2
                                         3    8     24     -4
        6                                2    9     18     -6
                                         1   10     10     -8
        5                                0   11      0    -10

        4
        3                                         Demand
                             Marginal
        2                    Revenue

        1

             1   2   3   4   5   6      7    8     9     10 Quantity
Total, Average, and Marginal Revenue for a Competitive Firm


   Quality     Price    Total     Average     Marginal
                       Revenue    Revenue     Revenue
     Q          P      (TR=P*Q)   (AR=TR/Q) (MR= TR / Q)

     1gallon     $6       $6         $6          $6
     2            6       12          6           6
     3            6       18          6           6
     4            6       24          6           6
     5            6       30          6           6
     6            6       36          6           6
     7            6       42          6           6
     8            6       48          6           6
$          elastic
           portion


                                 inelastic
                                 portion
    Marginal
    Revenue                                       Demand

                                                     Quantity

$
                                                  Total
       along the elastic
                            along the inelastic   Revenue
       portion of the
                            portion of the
       demand curve,
                            demand curve,
       lower prices and
                            lower prices and
       greater quantities
                            greater quantities
       result in rising
                            result in declining
       total revenue
                            total revenue
                                                            Quantity
 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




                   D
                        Quantity
              MR
Monopoly’s Profit Maximization
Price              MC = Supply




                   D
                          Quantity
              MR
Monopoly’s Profit Maximization
Price              MC = Supply




              MR=MC

                   D
                          Quantity
              MR
 Profit Maximization of a Monopoly
  competitive markets, price equals
In
 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                 MC = Supply




                      D
                             Quantity
                 MR
Monopoly’s Profit Maximization Price
Price                 MC = Supply

                      Price consistent
  PM                     with profit
                        maximizing
                          quantity


                      D
                              Quantity
         QM      MR
 Profit Maximization of a Monopoly

  competitive markets, price equals
In
 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                   MC = Supply
        Monopoly
          Price
  PM
                   Monopoly
                    Quantity


                        D
                               Quantity
        QM         MR
Monopoly’s Profit Maximization
Price              MC = Supply


  PM                    Monopoly
                       Average Cost
                          Curve



                   D
                             Quantity
        QM    MR
Monopoly’s Profit Maximization
Price              MC = Supply


  PM
                       Monopoly
                        Profit!


                   D
                          Quantity
        QM    MR
  Comparing Monopoly and Competition
Fora competitive firm, price equals
 marginal cost.
            P = MR = MC
Fora 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                   MC = Supply
        Monopoly
          Price
  PM
                   Monopoly
                    Quantity


                        D
                               Quantity
        QM         MR
  Monopoly’s Profit Maximization
Price                MC = Supply


  PM                 Efficient
                     Quantity!



                     D
                            Quantity
        QM      MR
  Monopoly’s Profit Maximization
Price                MC = Supply


  PM




                     D
                            Quantity
        QM      MR
  Monopoly’s Profit Maximization
Price                MC = Supply


  PM
                     Monopoly
                  Deadweight Loss


                     D
                            Quantity
        QM      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 life

Price after                                      Marginal
    patent                                       cost
   expires                  Marginal
                            revenue           Demand

         0       Monopoly       Competitive      Quantity
                 quantity        quantity
   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
 Marginal-Cost Pricing for a
    Natural Monopoly
   Price




                        Average total cost
            Loss
Regulated
                          Marginal cost
    price


                      Demand


        0                      Quantity
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)
        Welfare With and Without Price Discrimination

          (a) Monopolist with Single Price                (b) Monopolist with Perfect Price
                                                                  Discrimination
Price                                           Price
                   Consumer Surplus



                              Deadweight Loss


          Profit                                            Profit
                                      Marginal cost                                 Marginal cost



                         Marginal         Demand                                         Demand
                         Revenue


   0               Quantity              Quantity     0                                  Quantity
                    sold
 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.
      with substantial monopoly
 Firms
 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
Howprevalent 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
     a competitive firm, a monopoly
 Like
 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.

				
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posted:10/9/2012
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