Download Unit IV: Imperfect Competition

Don’t Write On Desks
1
Monopoly- more than just a game
• 1)What is a monopoly
• 2) How do monopolies
affect the marketplace?
• 3) How do monopolies
affect you, the consumer?
• 4) What are examples of
Monopolies that you know
of?
• One company has entire market
share
• No other options for consumers
• Create the supply
• Control the product
• Higher Prices
• Less Quantity
• Creates inefficiency
• US Postal Service, Parking
Meter, Tap Water, ExxonMobile, Com Ed, GE, CTA
3
Monopoly- more than just a game
• Monopolies are a source
of inefficiency in the
marketplace
• Monopolies can be argued
to be a source of inequity
• Monopolies cause higher
prices for consumers
• Examples-Diamonds, Cell
Phones
4
Demand for Class
• How many of you would
pay?
• In perfect competition
what is demand for the
firm?
• But I was a monopolist,
what is the demand for
me?
• Demand for a monopolist
is the industry market
demand
5
Comparing the Demand Curves of a Perfectly
Competitive Firm and a Monopolist
7
Imperfect
Competition
8
Characteristics of
Monopolies
9
Take five minutes to come up with
answers to these questions- have
someone record for your table
• 1) What are the characteristic of a monopoly?
• 2) What are examples of monopolies that you know of?
• 3) How can a company become a monopoly?
• 4) How do monopolies affect you? Society? Are they
good? Bad?
10
5 Characteristics of a Monopoly
1. Single Seller
•
One Firm controls the vast
majority of a market
•
The Firm IS the Industry
• This doesn’t happen
often, a true monopoly is
rare
• 2. Unique good with no
close substitutes
11
5 Characteristics of a Monopoly
• 3. “Price Maker”
• The firm can manipulate
the price by changing
the quantity it produces
(ie. shifting the supply
curve to the left).
• Ex: DeBeers Diamonds
12
5 Characteristics of a Monopoly
4. High Barriers to Entry
• New firms CANNOT
•enter market
• No immediate competitors
• Firm can make profit
in the long-run
13
5 Characteristics of a Monopoly
AT&T Commercial
5. Some “Nonprice” Competition
• Despite having no close competitors,
monopolies still advertise their products
in an effort to increase demand.
14
Examples of
Monopolies
15
Four Origins of Monopolies
1. Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, Chicago
Bulls, Cable TV,
-Location or control of resources limits competition and
leads to one supplier.
16
Four Origins of Monopolies
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army,
Pharmaceutical drugs, rubix cubes…
-Government allows monopoly for public benefits
(water company) or to stimulate innovation
(patents).
-The government issues patents to protect inventors
and forbids others from using their invention.
(They last 20 years)
17
Four Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Frisbee, Itunes, Band-Aide…
-Patents and widespread availability of certain products
lead to only one major firm controlling a market.
18
Four Origins of Monopolies
4. Mass Production and Low Costs are Barriers to Entry
Ex: Electric Companies
• If there were three competing electric companies
they would have higher costs.
• Having only one electric company keeps prices low
-Economies of scale make it impractical to have
smaller firms.
Natural Monopoly- It is NATURAL for only one firm to
produce because they can produce at the lowest cost.
19
Drawing
Monopolies
21
Good news…
1.Only one graph because the
firm IS the industry.
2.The cost curves are the same
3.The MR= MC rule still applies
4.Shut down rule still applies
22
The Main Difference
• Monopolies (and all Imperfectly
competitive firms) have downward
sloping demand curve.
• Which means, to sell more a firm must
lower its price.
• This changes MR…
THE MARGINAL REVENUE
DOESN’T EQUAL THE PRICE!
23
Why is MR less than
Demand?
P
Qd
$11
0
TR MR
0
-
24
Why is MR less than
Demand?
$10
P
Qd
$11
$10
0
1
TR MR
0
10
10
25
Why is MR less than
Demand?
$10
$9
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
18
10
8
$9
26
Why is MR less than
Demand?
$10
$9
$9
$8
$8
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
18
24
10
8
6
$8
27
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
18
24
28
10
8
6
4
$7
28
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
P
Qd
$11
$10
$9
$8
$7
$6
0
1
2
3
4
5
TR MR
0
10
18
24
28
30
10
8
6
4
2
$6
29
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
P
Qd
$11
$10
$9
$8
$7
$6
$5
0
1
2
3
4
5
6
TR MR
0
10
18
24
28
30
30
10
8
6
4
2
0
$5
30
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
31
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
32
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
MR
$8 IS LESS THAN
$7 $7 PRICE
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
33
Calculating
Marginal Revenue
34
To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
$6
0
$5
1
$4
2
$3
3
$2
4
$1
5
Total
Revenue
Marginal
Revenue
Does the Marginal Revenue equal the price?
35
To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
Total
Revenue
$6
0
0
$5
1
5
$4
2
8
$3
3
9
$2
4
8
$1
5
5
Marginal
Revenue
Does the Marginal Revenue equal the price?
36
To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
Total
Revenue
Marginal
Revenue
$6
0
0
-
$5
$4
MR
1 DOESN’T
5
2
8
EQUAL PRICE
5
3
$3
3
9
1
$2
4
8
-1
$1
5
5
-3
Draw Demand and Marginal Revenue Curves
37
Plot the Demand, Marginal Revenue, and
Total Revenue Curves
P
$15
10
5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
TR
$64
40
20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
38
Demand and Marginal Revenue Curves
What happens to TR when MR hits zero?
P
$15
10
5
D
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
TR
$64
40
20
MR
Total Revenue is
at it’s peak when
MR hits zero
TR
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
39
Elastic vs. Inelastic
Range of Demand Curve
40
Elastic and Inelastic Range
P
Total Revenue Test
If price falls and TR
increases then
demand is elastic.
Elastic
Inelastic
$15
10
5
D
Total Revenue Test
If price falls and TR
$64
TR falls then
demand is inelastic. 40
Total Revenue is
maximized when
Marginal Revenue
is Zero
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
MR
20
TR
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Q
41
A monopoly will only produce
in the elastic range
42
Maximizing Profit
1)How much should
a monopolist
produce?
2) What does a
monopolist charge?
43
What output should this monopoly produce?
MR = MC
How much is the TR, TC and Profit or Loss?
P
$9
8
7 Profit =$5
6
MC
ATC
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
44
Conclusion: A monopolists produces where
MR=MC, buts charges the price consumer are
willing to pay identified by the demand curve.
P
$9
8
7
6
MC
ATC
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
45
What if cost are higher?
How much is the TR, TC, and Profit or Loss?
MC
P
ATC
$10
9
8
AVC
7
6
5
D
4
TR= $90
TC= $100
Loss=$10
MR
3
6 7 8 9 10
Q
46
Identify and
TR=
Calculate:
TC=
Profit/Loss=
Profit/Loss per Unit=
P
$70
$56
$14
$2
MC
ATC
$10
9
8
7
6
D
MR
5
4
1 2 3 4 5 6 7 8
9 10
Q
49
Are Monopolies
Efficient?
50
Monopolies vs. Perfect Competition
S = MC
P
CS
In perfect competition,
CS and PS are
maximized.
Ppc
PS
D
Qpc
Q
51
Monopolies vs. Perfect Competition
S = MC
P
At MR=MC,
A monopolist will
produce less and
charge a higher price
Pm
Ppc
D
MR
Qm
Qpc
Q
52
Monopolies vs. Perfect Competition
Where is CS
and PS for a
monopoly?
P
S = MC
CS
Total surplus falls.
Now there is
DEADWEIGHT
LOSS
Pm
PS
Monopolies underproduce and over
D
charge, decreasing CS and
increasing
PS.
MR
Qm
Q
53
Are Monopolies Productively Efficient?
Does Price = Min ATC?
P
$9
8
7
6
No. They are not
producing at the lowest
cost (min ATC)
MC
ATC
5
4
3
2
D
MR
1 2 3 4 5 6 7 8 9 10 Q
54
Are Monopolies Allocatively Efficiency?
Does Price = MC?
P
$9
8
7
6
No. Price is greater.
The monopoly is under
producing.
MC
ATC
5
4
3
D
Monopolies are NOT efficient!
2
MR
1 2 3 4 5 6 7 8 9 10 Q
55
Monopolies are inefficient because
they…
1. Charge a higher price
2. Don’t produce enough
• Not allocatively efficiency
3. Produce at higher costs
• Not productively efficiency
4. Have little incentive to innovate
Why?
Because there is little external pressure to
be efficient
56
Regulating
Monopolies
57
What should be regulated?
•
•
•
•
•
1) Local Cable
2) Local Electric
3) Local Trash Service
4) Diamonds
5) The nearest theme
park
• 6) Phone Service
• Consider which are
natural monopolies?
• Would regulation give
incentive to the firm to
innovate?
• Would regulation
protect consumers?
58
Why Regulate?
Why would the government regulate
an monopoly?
1. To keep prices low
2. To make monopolies efficient
How do they regulate?
•Use Price controls: Price Ceilings
•Why don’t taxes work?
•Taxes limit supply and that’s the problem
59
Where should the government
place the price ceiling?
1.Socially Optimal Price
P = MC (Allocative Efficiency)
OR
2. Fair-Return Price (Break–Even)
P = ATC (Normal Profit)
60
Regulating Monopolies
Where does the firm produce if it is
unregulated?
P
MC
Pm
ATC
D
MR
Qm
Q
61
Regulating Monopolies
PriceOptimal
Ceiling at
Socially Optimal
Socially
= Allocative
Efficiency
P
MC
Pm
Pso
ATC
D
MR
Qm
Qso
Q
62
Regulating Monopolies
Price Ceiling
Returnprofit
Fair Return
meansat
noFair
economic
P
MC
Pm
Pso
Pfr
ATC
D
MR
Qm
Qso Qfr
Q
63
Regulating Monopolies
Unregulated
P
Socially
Optimal MC
Fair
Return
Pm
Pso
Pfr
ATC
D
MR
Qm
Qso Qfr
Q
64
Natural Monopoly
One firm can produce the socially optimal quantity
at the lowest cost due to economies scale.
P
It is better to have only
one firm because ATC is
falling at socially
optimal quantity
MC
ATC
MR
D
Qsocially optimal Q
65
Regulating a Natural Monopoly
What happens if the government sets a price ceiling
to get the socially optimal quantity?
P
The firm would make a
loss and would require a
subsidy
MC
Pso
ATC
MR
D
Qsocially optimal Q
66
Price
Discrimination
67
Price Discrimination
Definition:
Practice of selling the same products
to different buyers at different prices
Examples:
•Airline Tickets (vacation vs. business,
purchasing in advance vs. the day before)
•Movie Theaters (child vs. adult)
•All Coupons (spenders vs. savers)
68
PRICE DISCRIMINATION
•Price discrimination seeks to charge each
consumer what they are willing to pay in an
effort to increase profits.
•Those with inelastic demand are charged
more than those with elastic
69
PRICE DISCRIMINATION
Requires the following conditions:
1. Must have some form of monopoly power
2. Must be able to segregate the market
3. Consumers must NOT be able to resell
product (Cannot always be controlled i.e.
scalping
70
P
Qd
$11
0
TR MR
0
-
71
Results of Price
Discrimination
$10
P
Qd
$11
$10
0
1
TR MR
0
10
10
72
Results of Price
Discrimination
$10
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
19
10
9
$10 $9
73
Results of Price
Discrimination
$10
$10 $9
$10 $9
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
19
27
10
9
8
$8
74
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
19
27
34
10
9
8
7
$7
75
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
$7
$10 $9
$8
$7
$6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
76
P
Qd
$10 $9
$11 0
$10 1
$9
2
$8
3
WHEN PRICE
$7
4
$8
DISCIMINATING
$6
5
$8 $7 MR = D$5 6
$4
7
$8 $7 $6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
$10
$10 $9
$10 $9
$10 $9
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
77
Regular Monopoly vs.
Price Discriminating Monopoly
P
MC
Pm
ATC
D
MR
Qm
Q
78
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
P
MC
ATC
D
MR
Q
79
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Qnm
Q
80
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Price Discrimination results in several
prices, more profit, no CS, and a higher
socially optimal
quantity
Q
Q
nm
81
• Why charge a higher rate for popcorn?
• Which is better for the movie theater?
– Ticket $15, Popcorn $5
– Ticket- $11, Popcorn $9
– Both equal $20 total
• Is this price discrimination, or just a close
pricing scheme?
82
• What knowledge does a monopolist require to Price
Discrimination?
•
•
•
•
•
•
How would you Price Discriminate?
1) High School Sporting Events
2) Student Fundraisers (Art Sale, Bake Sale, Pizza Sale)
3) School Parking Lot (Premium Spaces, Remote Spaces)
4) Online Gaming/Television subscriptions
5) Iphone/Android Games with in-app purchases- Candy
Crush/ Jetpack Joy Ride/ Angry Birds
• 6) Think of your own good or service where price
discrimination is beneficial.
83