Download Monopoly - A Single Seller

Microeconomics - Dr. D. Foster
Monopoly - A Single Seller
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D
Q
MR
Monopoly Characteristics
A single seller with no “close” substitutes . . .
-- means that the market demand is the firm’s demand.
Barriers to entry . . .
-- means that they can earn LR econ. profit.
–
–
–
–
legal restrictions
patents
control of resources
economies of scale
Monopoly - Finding Profit Max.
Find where MR=MC . . .
MR = Gain - Loss
P
If P1=$10, P2=$9.95,
Q1=100, Q2=101,
what is MR?
loss
P1
P2
gain
Gain = $9.95
Loss = $5.00
MR = $4.95 < Price
D
Q
Q1 Q2
Monopoly - Finding Profit Max.
Find where MR=MC . . .
Set output at
MR=MC.
P
MC
Find the price to
charge from the
Demand.
P*
D
Q
Q*
MR
Will the firm earn
an economic
profit?
How can we tell?
Monopoly - Finding Profit Max.
Economic profit = TR - TC . . .
P
TR = P•Q
MC
ATC
P*
TC = ATC•Q
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Q
Q*
MR
Can a monopoly firm
earn “negative”
economic profit and
stay in business in the
short run?
Monopoly
Can a firm can earn negative profit in the SR?
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ATC
MC
AVC
P*
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Q
Q*
MR
Yes! As long as
P > AVC, the
firm will sustain
losses in the
short run.
Can a monopoly
earn just a zero
economic profit?
Monopoly - Earning zero profit
Zero Economic profit if TR = TC
P
MC ATC
P*
D
Q
Q*
MR
P = ATC
Under what
circumstances
might we expect
this to happen?
When owners of a
monopoly sell it to a
new owner they should
attempt to extract this
econ. profit.
Monopoly Example I
P
1. What is the profit
maximizing level of
output?
ATC
MC
$100
2. What price will the
monopolist charge?
3. What is the amount of
economic profit?
4. What is the amount of
accounting profit?
$90
$75
$70
$50
$45
$30
D
Q
500
1000
1200
1300
1800
MR
Monopoly and Inefficiency
Allocative efficiency occurs when P=MC.
Monopolies are
allocatively
inefficient, as they
price above the MC.
P
MC
ATC
P*
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Q
Q*
MR
They produce too
little. Our loss is call
the “social loss” (or,
deadweight cost) and
measured as shown.
Monopoly and Inefficiency
Productive efficiency occurs when at min ATC.
-- Monopolies are likely to be inefficient.
“Social waste of resources” - up to the value of
the firm’s economic profit if spent in “rent
seeking” activities.
“X-inefficiency” - arises from a cost structure that
is higher than would be true for perfectly
competitive firms.
Monopoly Example II
P
1. What output level is
allocatively efficient?
ATC
MC
2. What is the social loss?
3. What output level is
productively efficient?
$100
$90
$75
$70
$50
$45
$30
D
Q
500
1000
1200
1300
1800
MR
Regulating Monopoly
Using price controls can promote efficiency!
P
By instituting a price
ceiling, the “demand”
is altered, insofar as
the firm’s actions are
concerned.
MC
ATC
P*
Pc
D
Q
Q*
MR
Regulating Monopoly
Using price controls can promote efficiency!
P
MC
ATC
P*
Pc
Q*Q’
MR
The monopolist can be
induced to produce
more (Q’) at a lower
price!!
The firm is still
inefficient, but we could
D
set prices to achieve
either allocative or
Q
productive efficiency.
Monopoly Example III
P
1. What would be the effect
on output, price, economic
profit and social cost if the
government establishes a
price ceiling of . . .
a. $45?
b. $50?
ATC
MC
$100
$90
$75
$70
$50
$45
$30
c. $70?
d. $75?
D
e. $90?
f. $100?
Q
500
1000
1200
1300
1800
MR
Monopoly Fundamentals
A single seller with no “close” substitutes.
Barriers to entry.
Sets output at MR=MC.
Prices output based on demand.
Will be allocatively inefficient as P>MC.
Will likely be productively inefficient.
Also suffers from “social waste” and “X-inefficiency.”
Price controls can promote efficient outcomes.
Regulating Monopoly
Do regulations work?
– Inflating the cost structure (X-inefficiency).
– The “capture” hypothesis.
– Antitrust legislation may promote inefficiency.
– Regulating a natural monopoly . . .
Natural Monopoly
Experiences economies of scale:
--Profit max. rule is
still the same.
--Price off of demand.
--May earn positive
economic profit in LR.
P
Pm
ATC
MC
D
Q
P*?
Qm
Q*?
MR
How do you regulate?
At P=MC, firm has
negative econ. profit.
Natural Monopoly
P
--We can set the price
equal to the MC.
Pm
… and give the
monopoly a subsidy
equal to its losses!
P*?
Qm
Q*?
MR
ATC
MC
D
Q
--Or, we can set the
price equal to the ATC.
… and the firm can
earn zero econ profits,
but is alloc. inefficient.
Monopoly - Price Discrimination
When different people/customers
are charged different prices
when costs are equal.
When different people/customers
are charged the same price
when costs are different.
Monopoly - Price Discrimination
1st degree price discrimination (perfect p.d.)
– when a firm can charge each individual the max.
they are willing to pay.
2nd degree price discrimination (method #1)
– when a firm uses volume discounts to vary the price.
3rd degree price discrimination (method #2)
– when a firm segments the market by elasticity.
– more elastic = lower price; less elastic = higher price
Monopoly - Price Discrimination
If the firm is
collecting different
prices from each
customer, to sell
one more unit, it
need only lower
the price for that
unit, not for all.
Perfect price discrimination
Price
Pmax
MC
Pmin
D=MR
Q
Q*
This only works if:
--you prevent resale.
--you can easily
separate customers.
Monopoly - Segmented markets
Day/night billing . . . phone/electric
Matinee/evening . . . theater
Senior menu . . . restaurant
Ladies night . . . bar
Student price . . . restaurant/other
Coupons & club cards . . . grocery
Is it easy to separate customers?
Can resale be prevented?
Microeconomics - Dr. D. Foster
Monopoly - A Single Seller
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D
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MR