Download Monopoly Announcements What is a Monopoly? Monopoly and

Announcements
Monopoly
2
…
Lecture 18 outline: Read Chapter 11 and the
assigned reading.
†
…
…
Announcements
What is a monopoly?
H a monopolist
How
li t d
determines
t
i
itits profit-maximizing
fit
i i i output
t t
and price
…
The difference between monopoly and perfect competition and
the consequences for society’s welfare.
Homework #8 is posted. It is due a week from today.
We will return the midterms in section this week.
A provisional curve for midterm #2. Be clear – this
g than it would if I were not
has less meaning
dropping the low midterm!
†
†
Problems posed by monopoly.
What is price discrimination and why is it prevalent when
producers have market power?
†
†
†
†
†
What is a Monopoly?
3
90-100: A
80-89: A/B
72-79: B
62-71: B/C
48-61: C
33-47: D
0-32: F
Monopoly and Perfect Competition
4
…
Monopoly is a market structure where a single seller
of a product with no close substitutes serves the entire
market.
†
Examples of monopolistic behavior might include Microsoft;
Walmart (who gets accused of “predatory
predatory pricing
pricing”);
);
American airlines (trying to fix prices with Braniff).
„
†
There are famous (and not so famous) cartels for Diamonds,
Ostriches, Oil, and Ivy League schools (fixing financial aid offers).
P
Monopolist
S=MC
Perfectly
competitive firm
S=MC
P
D=MR
Under perfect competition each firm is small relative to the
size of the market.
„
D
The monopolist, in contrast, is the market, and hence faces
downward sloping demand.
Q
Q
1
There Must Be Barriers to Entry for
Monopolies to Exist
5
…
…
One Example: Economies of Scale Will
Create a Natural Monopoly
Monopolists will charge higher prices and produce
less output than would occur in a perfectly competitive
industry. This generates short- and long-run profit.
There must be barriers to entry for there to be longrun economic profit.
profit These include:
include
Control of natural resources or inputs.
Economies of scale.
† Technological superiority
† Legal restrictions, (i.e. patents and copyrights).
† Actions by firms (trade organizations, advertising, threats or
coercion.
†
†
6
7
P=10-Q
Q
Note:
MR<P
What is the Monopolist’s Marginal
Revenue Curve?
P
10
9
8
7
6
5
4
3
2
1
Q
0
1
2
3
4
5
6
7
8
9
TR
0
9
16
2
21
24
25
24
21
16
9
MR
Why is Marginal Revenue Less Than
Price?
8
…
9
7
5
3
1
-1
-3
-5
-7
In order to sell one more unit, the monopolist must
lower the prices on all units that are sold (assuming
they do not price discriminate).
In fact, for a linear demand curve, the marginal revenue
curve will be a line with the same y
y-intercept
intercept with twice the
slope.
† Earlier in the class we saw that total revenue is maximized
when the elasticity of demand is 1, which is the midpoint of
the demand curve.
†
„
Marginal revenue is zero at the point at which total revenue is
maximized.
2
A Monopolist’s Demand, Total Revenue,
and Marginal Revenue Curves
10
The Monopolist’s Pricing and Output
Decision (MR=MC)
1000
Qm=8, PM=600, profit=3200
P
QC=16, PC=200, profit=0
600
MC=ATC
200
8
9
Monopoly versus Perfect Competition
11
12
…
…
…
P=MC at the perfectly competitive firm’s profitmaximizing quantity of output (and, of course, P=MR).
P>MR=MC at the monopolist’s profit-maximizing
quantity of output.
C
Compared
to a competitive industry, the monopolist
10
MR
D
20
16
Q
The Monopolist’s Production and Price
Decision, Again…
MC
P, MR, MC
ATC
PM
Produces a smaller quantity QM<QC
Charges a higher price PM>PC
† Earns economic profits
†
†
D
QM
MR
Q
3
A Regulated and an Unregulated
Natural Monopoly
Monopoly Results in Inefficiency
13
14
Total surplus with perfect
competition
Consumer
surplus
l
PC
Total surplus with monopoly
Consumer surplus
PM
D
MR
Consumer surplus
Profit
PM
Deadweight
loss
MC
MC
QC
Consumer surplus
Monopoly profit
MR
D
QM
ATC PR
MC
D
QM
ATC
MR
D
QR
Do regulators have adequate information, and will quality suffer?
What Makes Price Discrimination
Possible?
Price Discrimination: Two versus Three
Different Prices
16
…
The ability to price discriminate requires at least
three conditions.
The would-be price discriminator must have market
(monopoly) power.
† There must be no resale market.
† There must be the ability to segment (or keep track of)
buyers.
†
…
Ways that companies price discriminate
Advance purchase restrictions
Volume discounts
† Two-part tariffs (like the Sam’s Club)
† “Early-bird” specials, outlet malls away from cities
†
†
By increasing the number of different prices charged,
the monopolist captures more of the consumer surplus
15
and makes a larger profit.
4
Are Monopolies Evil?
17
…
It depends.
If monopolies arise because of price fixing, predatory
pricing, cartels, or other forms of anticompetitive behavior,
we shouldn’t be happy with them.
† If they
y exist because of patents,
p
, we need to ask what would
be there in the absence of the monopoly. If the alternative
is that there wouldn’t be a market, we probably don’t mind
tolerating the inefficiency of the monopoly.
† In the natural monopoly case, there is no alternative, so the
question of “good or evil” isn’t relevant.
†
5