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Download Monopoly - Helena Glebocki Keefe
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Principles of Microeconomics Chapter 15 Monopoly Fundamental Causes of Monopoly Barriers to Entry cause Monopoly Power • Resource Restrictions: Monopoly has sole ownership of a key resource in production • Gov’t created Monopolies Monopoly is granted exclusive rights to produce or sell a good • Natural Monopolies One firm can provide the good at a lower cost than two or more firms Pricing and Production Decisions • A monopoly firm has complete price control because they are the sole provider of the good Considered a Price Maker • Monopoly firm – still faces a downward sloping demand curve • To sell more = must lower the price Price: determined by firm Quantity: determined by demand Monopoly Production Decisions Consider the market for diamonds where DeBeers has a monopoly. It is deciding how much to sell and at what price. Price Quantity TR TC MR MC Profit Change Profit 2000 0 0 25,000 - - -25,000 - 1800 100 180,000 100,000 1800 750 80,000 105,000 1600 200 320,000 190,000 1400 900 130,000 50,000 1400 300 420,000 290,000 1000 1000 130,000 0 1200 400 480,000 400,000 600 1100 80,000 -50,000 1000 500 500,000 525,000 200 1250 -25,000 -105,000 • Where will it gain positive revenue? • What price should it set and where should it produce to maximize profits? • What will be the size of its profits at this point? Monopoly Production Decisions Consider the market for diamonds where DeBeers has a monopoly. It is deciding how much to sell and at what price. Price Quantity TR TC MR MC Profit Change Profit 2000 0 0 25,000 - - -25,000 - 1800 100 180,000 100,000 1800 750 80,000 105,000 1600 200 320,000 190,000 1400 900 130,000 50,000 1400 300 420,000 290,000 1000 1000 130,000 0 1200 400 480,000 400,000 600 1100 80,000 -50,000 1000 500 500,000 525,000 200 1250 -25,000 -105,000 • Where will it gain positive revenue? • What price should it set and where should it produce to maximize profits? • What will be the size of its profits at this point? Monopoly Production Decisions Monopoly can set the price anywhere below $2000 and gain positive revenue Optimal point of production? Need to consider profit maximization MR = MC If MR > MC: Increase profits by increasing Qs If MR < MC: Increase profits by decreasing Qs Monopoly Production Decisions Price Quantity TR MR TC MC Profit Change Profit 2000 0 0 - 25,000 - -25,000 - 1800 100 180,000 1800 100,000 750 80,000 105,000 1600 200 320,000 1400 190,000 900 130,000 50,000 1400 300 420,000 1000 290,000 1000 130,000 0 1200 400 480,000 600 400,000 1100 80,000 -50,000 1000 500 500,000 200 525,000 1250 -25,000 -105,000 Optimal Point of Production: MR = MC P = 1400; Q = 300 Profits for a Monopoly Profits = TR – TC = (P x Q) – (ATC x Q) = Q (P – ATC) Profits = 300 (1400 – 966) ATC = 290,000 / 300 = 966 Welfare Costs of a Monopoly • Since monopolies set prices and quantities at MR = MC and MR ≠ P – the monopoly outcome is socially inefficient. • Total surplus would be maximized at P = D = MC • D = MC Socially Efficient Outcome • MR = MC Profit Max Outcome Difference between Monopoly Outcome and Socially Efficient Outcome Deadweight loss Application 1 Based on market research, Company A finds out the following information on demand and production costs of its new good: Demand: P = 1000 – 10Q Marginal Revenue: MR = 1,000 – 20 Q Marginal Cost: MC = 100 + 10 Q • What is the price and quantity that maximize profits? • What is the price and quantity that maximize social welfare? • Draw the diagram and calculate the deadweight loss. Price Discrimination Because a monopoly can set the price based on consumer demand – It can set different prices for different buyers – If different markets do not interact: Each consumer can be charged a different price based on max price willing to pay – Example: Pharmaceuticals • US market pays a higher price for pharmaceuticals than Europe (65% cheaper) • People in US do not fly to Europe to buy their medicine • Two markets are separate – Price Discrimination: Allows monopoly to gain even greater profits Price Discrimination Because a monopoly can set the price based on consumer demand – It can set different prices for different buyers – If different markets do not interact: Each consumer can be charged a different price based on max price willing to pay – Example: Pharmaceuticals • US market pays a higher price for pharmaceuticals than Europe (65% cheaper) • People in US do not fly to Europe to buy their medicine • Two markets are separate – Price Discrimination: Allows monopoly to gain even greater profits Price Discrimination Because a monopoly can set the price based on consumer demand – It can set different prices for different buyers – If different markets do not interact: Each consumer can be charged a different price based on max price willing to pay – Example: Pharmaceuticals • US market pays a higher price for pharmaceuticals than Europe (65% cheaper) • People in US do not fly to Europe to buy their medicine • Two markets are separate – Price Discrimination: Allows monopoly to gain even greater profits Ways to Regulate Monopoly Power • Increase competition with Antitrust Laws • Regulate natural monopolies to bring price as close to socially efficient point as possible • Public Ownership Government takes over • Do nothing: Cost to regulation > Benefit of regulating Real-World Monopolies • https://www.youtube.com/watch?v=h7H_8UkmFU Key Takeaways • Monopolies are the least competitive market structure but they still depend on demand to set prices and profit maximizing quantities • There are social costs to monopoly power, including deadweight loss • There are many harmless and harmful examples of monopoly power in the world today.
