Download 55100A MONOPOLY 1) MONOPOLY AS A SINGLE SELLER -

1
55100A MONOPOLY
1) MONOPOLY AS A SINGLE SELLER
--WITH IMPLICATIONS ABOUT PRICE, OUTPUT, AND
WELFARE
--ASSUMES BEHAVIOR NO DIFFERENT THAN COMPETITIVE
FIRM…I.E. PROFIT MAXIMIZATION
--THUS, FOR STARTERS, FIRM DEMAND CURVE IS SIMPLY
THE MARKET DEMAND
2) SOURCE OF MONOPOLY
--NATURAL (NATURE OR RESOURCE OR PRODUCTION
CONDITIONS)
--LEGAL
A LA FRANK
a) EXCLUSIVE CONTROL OVER IMPORTANT INPUTS
b) ECONOMIES OF SCALE
c) PATENTS
d) GOVERNMENT LICENSES OR FRANCHISES
2
PROFIT MAXIMIZING MONOPOLIST
3) REQUIRES DERIVING:
TOTAL REVENUE
MARGINAL REVENUE
TOTAL, AVERAGE, AND MARGINAL COST
ANALYSIS CAN BE DONE WITH TOTALS, AND WITH MARGINAL
AND AVERAGES
[for graphical discussion, we will assume that the demand curve is linear]
$
total cost
total revenue (with max where Ed = 1)
output
x1
profit max where MC = MR (same as competitive situation—i.e., where
slopes of the two curves are equal…at approximately x1
OR: $
mc
atc
mr
ar = demand curve
x1
output
3
4) NOTE RELATIONSHIP BETWEEN MARGINAL REVENUE AND
ELASTICITY (page 406 in Frank)
MR = P(1 – 1/n)
where n = absolute value of elasticity
I.E., THE GREATER THE ELASTICITY THE CLOSER PRICE IS TO
MR [which is the neo-classical economist’s reasonable way of equating
“mark-up” pricing with profit maximization----e.g., the mark up on milk and
other groceries is usually quite low—2%--- while the mark up on camera’s,
TVs, etc, tend to be much higher]
see p. 411 FOR MARK-UP RATIO
(WHERE MC = MR IN EQUILIBRIUM) = P – MC/ P = 1/n;
note that the difference between P and MC over P is the “mark-up.”
5) SHUT-DOWN CONDITION…..WHERE AVERAGE REVENUE IS
LESS THAN AVCosts AT ALL LEVELS OF OUTPUT
p. 412 SOMEWHAT CONFUSING….KEY IS THAT TO CONTRACT
FROM Qo, FIRMS DOES BETTER BECAUSE MC GREATER THAN
MR….ALSO DOES BETTER TO EXPAND AS WELL SINCE MR
GREATER THAN MC
6) ABSENCE OF SUPPLY CURVE….ESSENCE HERE IS THE FACT
THAT MARGINAL REVENUE CAN INTERSECT MARGINAL COST
WITH A NUMBER OF DIFFERENT DEMAND CURVES….SO, THE
FACT THE MR = MC DOES NOT YIELD A UNIQUE PRICE---[as is the
case with the competitive firm]
7) LONG-RUN EQUILIBRIUM….(SEE FIGURE 12-12)
RELEVANT FACTOR (SIMILAR TO COMPETITION) IS THAT LONG
RUN MC = SHORT RUN MC…..
4
PRICE DISCRIMINATION
8) THIRD DEGREE DISCRIMINATION FRANK’S ANALYSIS
(EXAMPLE 12.3) COMPLICATED….WITH FIRM OPERATING IN
TWO MARKETS, ….
ESSENCE IS THAT FIRM CAN CHARGE DIFFERENT PRICES
IN THE TWO DISTINCT MARKETS….
WHICH LEADS TO THE MORE GENERAL QUESTION OF
“DIFFERENT MARKETS”….I.E., THEY MAY NOT BE SEPARATED
GEOGRAPHICALLY, BUT DEMOGRAPHICALLY…DIFFERENT
STROKES FOR DIFFERENT FOLKS….
9) FIRST DEGREE DISCRIMINATION….THE “PERFECT”
DISCRIMINATOR
IS ABLE TO PICK OFF ALL OF THE CONSUMER SURPLUS, AND AS
A RESULT, PRODUCES MORE THAN THE NON-DISCRIMINATING
MONOPOLIST---assuming constant costs for ease of exposition
p
if, by charging each consumer the max price they will pay
monopolist can take all of the consumer surplus
atc
output
10) SECOND-DEGREE DISCRIMINATION QUANTITY DISCOUNTS
DIAGRAM DOESN’T REALLY SHOW DIFFERENT QUANTITIES ON
TOTAL MARKET DEMAND CURVE…..
$
ph
a
pl
by charging based on quantity purchase, monopolist
is able to get some, but not all of the consumer
surplus (a), by charging a high price (ph) and a
low price (pl) to the larger buyer…
atc
output
5
12) THE “HURDLE” MODEL ….IF YOU ARE WILLING TO TAKE THE
TROUBLE TO GET A LOWER PRICE (I.E., YOU HAVE TO “PAY”
SOMETHING FOR THE DISCOUNT….CAPTURES THE “RICH,” AND
THE “POOR”
*************************************************************
EFFICIENCY LOSSES FROM MONOPOLY
12) SIMPLE CONSUMER SURPLUS DISCUSSION…..
WHICH IN THE END, FRANK DISCOUNTS CONSIDERABLY IN
TERMS OF FAIRNESS (AND EVEN EFFICIENCY, TO THE EXTENT
THAT FIRM CAN DISCRIMINATE---THIS DISCUSSION ON PAGES
432ff)
$
AGAIN, ASSUME THAT ATC CONSTANT
(makes life much simpler, without loss of generality)
pm cc
csm
cslost
atc = mc
xm
xc
output
In the traditional discussion, the welfare loss from monopoly has been
considered to be the consumer surplus lost (cslost in the diagram), while the
monopolist just appropriates some of the remaining consumer surplus (csm),
while the consumer gets a smaller surplus (cc) above.
6
Empirical estimates of the welfare loss (often called the “dead weight loss”)
from monopoly under these assumptions suggests that monopoly distortion
has not been very serious…i.e., less than 1% of GDP.
However, with the development of the concept of “rent seeking,” the
“loss” from monopoly can be a good bit greater. Frank puts off this
discussion until the section on government, late in the text, pp. 642-43; in
the chapter on GOVERNMENT….)
The essential point of “rent seeking” is that the monopolist should be willing
to “spend” all of the consumer surplus appropriated (csm) above, is simply
trying to “buy” the privilege---say in providing the agent who grants the
license (usually a govt. official) with comfortable trips to the Bahamas, with
all of the appropriate “amenities.” Such expenditure, while making the
political hack happy and assuring the monopolist of her contract, does little
to enhance the public welfare.
Frank also TAKES A NEO-CLASSICAL VIEW OF BUREAUCRACY RE
X-EFFICIENCY…. PAGES 426-27)
13) SOLUTIONS TO MONOPOLY PROBLEM via
a) STATE OWNERSHIP
b) REGULATION
c) ANTI-TRUST ENFORCEMENT
d) EXCLUSIVE CONTRACTING
e) LAISSEZ-FAIRE
FRANK POINTS TO PROBLEMS WITH ALL OF THESE….
NORMAL BIASES RE SOLUTIONS A FUNCTION (OFTEN) OF
POLITICAL/IDEOLOGICAL BENT OF ANALYST
14) INTERESTING SITUATION RE FIGURE 12-20…DECREASING
COST INDUSTRY..WITH APPLICATIONS TO ARTS FIRMS AND
7
NON-PROFIT SECTOR IN GENERAL….that is, MARGINAL COST
pricing would never permit the firm to function; i.e., mc always below costs
15) MONOPOLY AND INNOVATION…
COMMENT ON EXAMPLE 12-4; FRANK ASSUMES AWAY FACT
OF FIXED COSTS…WHICH MATTER IN THE SENSE THAT
INNOVATION MAY WELL REQUIRE CAPITAL OUTLAY (I.E., NO
LONGER A FIXED COST FOR NEW PRODUCT
8