Download Market Structures

Market
Structures
Mods 61-63:
Monopolies
• Intro to Monopolies
• Monopoly is exact opposite of perfect competition
• Monopoly – one supplier of a good
• Demand curve for the firm = demand curve for the market
Market Structure:
Monopoly
Market Structure:
Monopoly
• Increasing production by a monopolist
• PC – firm has control over output but is a price-taker
• Monopolists must deal with changing prices and their
output level which EFFECT market price
• Two Effects:
• Quantity Effect – one more unit is sold, increasing TR by the
price at which the unit is sold
• Price Effect – in order to sell one more unit, the monopolist
must cut market price on all units
• Decreases TR
Market Structure:
Monopoly
• Monopoly’s
MR is
ALWAYS
below Demand
• B/C of the
price effect
• Determining Price
• First, figure out profit maximizing output (MR = MC), then focus
on demand curve
Market Structure: Monopoly
• Then add in cost
curves – can now find
price, TC, TR, and
profit
Price Consumers Pay
Optimal Point
Total Cost
Market Structure:
Monopoly
• Monopoly and Public Policy
• Monopolies are considered incredibly inefficient
• Losses to consumers due to monopolistic behavior is greater
than the gains to the monopolist
• Consumer surplus is lost, deadweight loss is
introduced…but profit gained for the monopolist
• Still losses outweight profit
Market Structure:
Monopoly
• Monopolies detract from welfare of society as a whole –
why gov’t prevent/break-up monopolies
Market Structure:
Monopoly
• Natural Monopolies:
• What makes a monopoly natural?
• Monopoly in which increasing returns to scale ensure a bigger
firm will have lower ATC
• AKA – fixed costs are so high (railways, electrical grid, etc.)
that barriers of entry are very high
• Single producer is then most efficient (but still not necessarily
equitable)
Market Structure:
Monopoly
• Natural Monopoly Solutions
• Public ownership – Post Office
• Not a good solution, often becomes a political bargaining chip
• Usually very inefficient
• Regulation
• Price regulations (usually forces the monopoly to make zero profit)
• Price must cover ATC otherwise there is no incentive to produce
Market Structure:
Monopoly
Price Regulation
• Monopolies and Price Discrimination
• Price Discrimination
• Sell the same good at different prices
• Can allow a monopolist to maximize profits
• Ex: Airline tickets
• Student travelers vs. business travelers
Market Structure:
Monopoly
Market Structure:
Monopoly
• There is a different price elasticity for each group
• Students are more susceptible to price changes
• Perfect Price Discrimination
• Each consumer is charged at exactly their willingness to pay
• NO consumer surplus because it becomes profit for the
monopoly
Market Structure:
Monopoly
• In theory, the greater number of prices charged, the closer the
monopoly is to perfect price discrimination
• Almost never possible in real world
• Cell phone plans
• Common real would techniques to attempt PPD:
• Advance Purchase Restrictions
• Cheaper goods are bought earlier
• Volume discounts
• Large quantity = lower price
• Two-Part Tariff System
• Sam’s Club
Market Structure:
Monopoly
Market Structure:
Monopoly