Download Natural Monopoly

Unit 3b- Imperfect Competition
• Monopolies
• Monopolistic Competition
• Oligopolies
Monopoly
• MR twice slope of D
• D=AR
• MR = 0 @ TR maximizing Q
Using MR to
determine the
price elasticity
of demand
Answer Key
Answer Key
Important!
• Average x Q = Total & Total /Q = Average
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Total = Marginal
• Variable Cost + Fixed Cost = Total Cost
• Revenue – Cost = Profit
Answer Key
• Max. Profit @ Q
where MR = MC
Monopolies
• Pure Monopolies (rare and likely not “pure”)
– Public Utilities
– Cable TV (in some locations)
– Sports Teams?
• Near Monopolies
– Intel (81%)
– Wham-O (90%)
– De Beers (55%)
Barriers To Entry
• Economies of Scale
– “Natural Monopoly”
• Demand intersects LRATC where LRATC is still
declining
• LRATC continues to decrease at high levels of
output
Constructing the LRATC
LONG RUN ONLY!
The terms Economies/Diseconomies of Scale do NOT
apply to the short run ATC
Minimum Efficient Scale (MES)
Minimum Efficient Scale (MES)
• Minimum output at which lowest LRATC is
achieved
Minimum Efficient Scale (MES)
• If there is a natural monopoly, one firm can
produce enough to satisfy market demand
before achieving MES
Minimum Efficient Scale (MES)
• In perfect competition, is MES at a low Q?
• This allows MANY small firms to produce
at competitive output levels
Minimum Efficient Scale (MES)
• In a natural monopoly, is MES at a very
high Q?
• One firm achieves a lower cost of
production than multiple firms would and
MES is not reached.
Natural Monopoly- LRATC is
downward sloping at intersection with D
Barriers To Entry
• Legal
– Patents/Copyrights
– Licenses
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FCC
Taxis
Liquor Licenses
Marijuana Dispensary
Barriers To Entry
• Ownership/Control of Resources
– Natural Resources
• Inco (90% of known nickel)
• Geographic
– Diner in a small desert town
• Consumer Loyalty
• Capital Costs
Barriers to Entry
• Pricing
– Predatory
– Economies of Scale
• Advertising and Other Practices
– Influence consumer tastes
– Creates perception of quality
Competitive v. Monopolist
Price and Output
Competitive Consumer/Producer Surplus
Monopolist Consumer/Producer Surplus/DWL
Is a Monopoly Productively Efficient?
Is a Monopoly Allocatively Efficient?
Conclusions About Monopolist’s P and Q
Welcome to Market Failure
Natural Monopoly Regulatory Options
What happens if the monopoly is
broken?
Natural Monopoly- LRATC is
downward sloping at intersection with D
Natural Monopoly Regulatory Options
Natural Monopoly Regulatory Options
Natural Monopoly Regulatory Options
1. Unregulated:
Price on D above MR = MC
2. Fair Return: P = ATC
3. Social Optimal (Allocatively Efficient)
P = MC
Monopoly
• Monopolists do not face a supply curve
• It is the Price Maker
Minimum Efficient Scale (MES)
• In a natural monopoly, is MES at a low or
high Q?
Natural Monopoly- LRATC is
downward sloping at intersection with D
Welcome to Market Failure
Natural Monopoly Regulatory Options
Natural Monopoly Regulatory Options
What happens if the monopoly is
broken?
Natural Monopoly Regulatory Options
Natural Monopoly Regulatory Options
1. Unregulated:
Price on D above MR = MC
2. Fair Return: P = ATC
3. Social Optimal (Allocatively Efficient)
P = MC
PER UNIT V. LUMP SUM
*Applies to Tax or Subsidy
• PER UNIT
– SHIFTS MC
– Changes profit-max. Q and P
– Variable cost
• LUMP SUM
– SHIFTS only FC/ATC, THEREFORE, NOT Q
– Fixed cost
– P and Q same; Profit/Loss Changes
Natural Monopoly Regulatory Options
Price Discrimination Conditions
1. Market Power
2. Market Segregation
3. No Resale
Price Discrimination Types
1. 1st Degree (Perfect)
-Each consumer charged maximum
willing price
-Consumer surplus = 0
2. 2nd Degree
-Different Quantities, Different Prices
-Reduces, but doesn’t eliminate
consumer surplus
3. 3rd Degree
- Different groups/times
Deadweight Loss
• Under allocation
– Output less than socially optimal
– Area of underproduction where MB > MC
– Unregulated monopoly
Deadweight Loss
• Over allocation
– Output greater than socially optimal
– Area of overproduction where MC > MB
Monopolistic Competition
Which go together?
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Allocatively Efficient
Productively Efficient
Profit-Max.
Fair Return
Socially Optimal
Min. ATC
MR = MC
P = ATC
P = MC
Product Differentiation
• Physical Differences
• Perceived Differences
• Support Services
Monopoly v. Monopolistic Competition
• Why is it called monopolistic competition?
• How will the demand curve differ?
• Long Run? (remember- no barriers)
Excess Capacity
• Q Gap between profit max. and min. ATC
Distinguishing Between
Monopolistic Competition and
Oligopolistic Structures
• 4 Firm Concentration
• HHI
• The Real Test
4 Firm Concentration Ratio
• Sum of 4 largest firms’ market share
• > 40% = Oligopoly
• < 40% = Monopolistic Competition
Herfindahl-Hirschman Index
• Sum of squared market shares of all firms
• s12 + s22 + …
• Range of 0 - 10,000
Herfindahl-Hirschman Index
• Sum of squared market shares of all firms
• (% Share of Firm 1)2 + (% Share of Firm
2)2 …
• Range of 0 - 10,000
Natural Oligopoly
Dollars
LRATCTypical Firm
H
$200
F
E
80
DMarket
0
25,000
100,000
Units per Month
61
Oligopoly- Kinked Demand
Horizontal Merger
• Two companies in same industry
– Red Flag: HHI increase of 100 or more
Vertical Merger
• Two companies in complimentary industries
Potential Competition Merger
FTC
Denied
Antitrust Laws
• Sherman Antitrust Act (1890)
– Banned predatory and unfair business practices
• Clayton Antitrust Act (1914)
– Specified unfair practices
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Interlocking Directories
Price Discrimination
Exclusive Dealings and Tying
Horizontal Mergers that Destroy Competition
• Federal Trade Commission (FTC)
– Approves mergers and enforces trade regulations
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Homework List
Legibly Applied to Our
Simulation
Players, Strategies, Payoffs
Dominate Strategy
Nash Equilibrium
Explicit Collusion
Tacit Collusion
Tit for Tat
Cheating
Cartel
Game Theory
• Players, Strategies, and Payoffs
• Dominate Strategy
– A player has a single best strategy regardless
of opponent’s strategy decision
• Nash Equilibrium
– No player can benefit from a unilateral move
• Dominate Strategy Equilibrium
– Nash Equilibrium AND both players are
playing a dominate strategy
Circle Method
• Dominate Strategy
– Player on Left
• Two circles in same row
– Player on Top
• Two circles in same column
• Nash Equilibrium
– Two circles in same box
• Dominate Strategy Equilibrium
– Two Circles in same box and both players have
dominate strategy
FRQs
• #1- Monopoly Graph
• #2- Payoff Matrix