Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 8 Monopoly, Oligopoly, and Monopolistic Competition McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Market Imperfections Ch 10 Externalities and Property Rights Ch 8 Imperfect Competition Ch 9 Games and Strategic Behavior LO 8 - All 8-2 Learning Objectives 1. Distinguish among three types of imperfectly competitive industries 2. Define imperfect competition and describe how it differs from perfect competition 3. Understand why economies of scale are the most enduring source of monopoly power 4. Understand the concepts of marginal cost and marginal revenue Find the output level and price that maximizes a monopolist's profits 5. Explain why the profit-maximizing output level for a monopolist is too small from society's perspective 6. Discuss why firms offer discounts to buyers who are willing to jump a hurdle LO 8 - All 8-3 Imperfect Competition Imperfectly competitive firms have some control of price Long-run economic profits possible Reduce economic surplus Three types 1. Monopoly has only one seller, no close substitutes 2. Monopolistic competition has many firms with differentiated products These products are all close substitutes 3. Oligopoly is a small number of firms producing close substitutes LO 8 - 2 8-4 Monopolistic Competition Number of Firms Price Entry and Exit Product Economic Profits Decisions LO 8 - 1 Monopolistic Competition Perfect Competition Many firms Many firms Limited flexibility Free Price taker Free Differentiated Standardized Zero in long run Zero in long run P, Q, product differentiation Q only 8-5 Oligopoly Oligopoly Number of Firms Price Entry and Exit Product Few firms, each large Some flexibility Large size firm Differentiated or standardized Perfect Competition Many firms Price taker Free Standardized Economic Profits Possible Zero in long run Decisions P, Q, differentiation, advertising Q only LO 8 - 1 8-6 The Essential Difference Market power is the firm's ability to raise its price without losing all its sales Any firm facing a downward sloping demand curve Firm picks P and Q on the demand curve Market power comes from factors that limit competition Perfectly Competitive Firm Price Price Imperfectly Competitive Firm D D Quantity LO 8 - 2 Quantity 8-7 Five Sources of Market Power 1. 2. 3. 4. 5. Exclusive control over inputs Patents and copyrights Government licenses or franchises Economies of scale (natural monopolies) Network economies LO 8 - 3 8-8 Market Power: Economies of Scale Returns to scale refers to the percentage change in output from a given percentage change in ALL inputs Long-run idea Constant returns to scale: doubling all inputs doubles output Increasing returns to scale: output increases by a greater percentage than the increase in inputs Average costs decrease as output increases Natural monopoly: a monopoly that results from economies of scale LO 8 - 3 8-9 Market Power: Network Economies Network economies occur when the value of the product increases as the number of users increases VHS format for video tapes, Blu-ray for DVDs Telephones Windows operating system eBay Facebook and MySpace LO 8 - 3 8 - 10 Economies of Scale and Start-Up Costs New products can have a large fixed development cost If marginal cost is constant, Marginal cost = Average variable cost Total cost is fixed cost (F) plus variable cost TC = F + (M) (Q) Total cost increases as output increases Average total cost is ATC = F / Q + M Average total cost decreases as output increases LO 8 - 3 8 - 11 TC = F + M Q F Average cost ($/unit) Total cost ($/year) Economies of Scale ATC = F/Q + M M Quantity LO 8 - 3 Quantity 8 - 12 Video Game – Different Volumes Nintendo Playstation Annual Production (000s) 1,000 1,200 Fixed Cost ($000s) $200 $200 Variable Cost ($000s) $800 $960 Total Cost ($000s) $1,000 $1,160 ATC per game $1.00 $0.97 LO 8 - 3 8 - 13 Video Game – Lower Marginal Costs Nintendo Playstation Annual Production (000s) 1,000 1,200 Fixed Cost ($000s) $200 $200 Variable Cost ($000s) $200 $240 Total Cost ($000s) $400 $440 ATC per game $0.40 $0.37 LO 8 - 3 8 - 14 Video Games – Higher Fixed Cost Nintendo Playstation Annual Production (000s) 1,000 1,200 Fixed Cost ($000s) $10,000 $10,000 $200 $240 Total Cost ($000s) $10,200 $10,240 ATC per game $10.20 $8.53 Variable Cost ($000s) LO 8 - 3 8 - 15 Video Games – Different Production Levels Nintendo Playstation Annual Production (000s) 500 1,700 Fixed Cost ($000s) $10,000 $10,000 $100 $340 Total Cost ($000s) $10,100 $10,240 ATC per game $20.20 $6.08 Variable Cost ($000s) LO 8 - 3 8 - 16 Intel's Advantage Development cost of a new chip Marginal cost of making a chip Dominating the market $2 billion Pennies Priceless Intel supplies more than 80% of the processors for PCs LO 8 - 3 8 - 17 Monopolist Pure monopoly: the only seller of a unique product which has no close substitutes Like all other firms, a monopolist Maximizes profits Applies the Cost-Benefit Principle Increase output if marginal benefit > marginal cost Decrease output is marginal benefit < marginal cost Marginal benefit for a monopolist is different than for a perfectly competitor LO 8 - 4 8 - 18 Profit Maximization for the Monopolist Price ($/unit) For the monopolist, selling one more unit Decreases market price Reduces marginal revenue by more than the price Lower price applied to all units 6 5 D 2 3 Quantity (units/week) LO 8 - 4 8 - 19 Price & marginal revenue ($/unit) Monopolist's Marginal Revenue LO 8 - 4 8 3 D 1 2 -1 3 4 8 5 MR Quantity (units/week) Price Quantity Total Revenue $6 2 $12 Marginal Revenue $5 3 $15 3 $4 4 $16 1 $3 5 $15 -1 8 - 20 Monopoly Demand and Marginal Revenue In general, the monopolist's marginal revenue curve Has the same intercept as demand Has twice the slope of demand Lies below demand Price a a/2 D MR Q0 Q0/2 Quantity LO 8 - 4 8 - 21 Deciding Quantity LO 8 - 4 6 Price ($/unit of output) A monopolist knows his demand and marginal revenue curves Marginal cost is also known If he operates at P = $3 and Q = 12, MC > MR Decrease output If the firm operates at Q = 8, then MC = MR = 2 The demand curve sets the price, P = $8 At any output below 8, MC < MR MC 4 3 D 2 MR 12 8 Quantity (units/week) 8 - 22 Monopoly Losses and Profits Economic profit = $400,000/day Price ($/minute) 0.12 ATC 0.10 MC 0.05 MR 0.10 0.08 ATC MC 0.05 D 20 24 Minutes (millions/day) LO 8 - 4 Price ($/minute) Economic loss = $400,000/day MR D 20 24 Minutes (millions/day) 8 - 23 The Invisible Hand Fails Price ($/unit of output) 6 The monopolist's optimal amount occurs where MC = MR, Q = 8 units and P = $4 4 Deadweight loss from monopoly = $4 The socially optimal amount occurs where MC = MB, Q = 12 units and P = $3 3 2 Marginal Cost MR D 8 12 24 Quantity (units/week) LO 8 - 5 8 - 24 Monopoly and Perfect Competition LO 8 - 5 Monopoly Perfect Competition MC = MR MC = MR P >MR P > MC P = MR P = MC Deadweight Loss No Deadweight Loss 8 - 25 Managing Monopoly Monopolies exist for economic reasons Patents, copyrights, and innovation Economies of scale Network economies Anti-trust laws attempt to limit deadweight loss Limiting monopolies has costs Patents encourage innovation Economies of scale minimize ATC Network economies increase benefits LO 8 - 5 8 - 26 Price Discrimination Price discrimination means charging different buyers different prices for essentially the same good or service Separate the groups No side trades among buyers Many forms of price discrimination Hurdle method: discounts for identifiable groups (e. g., students, AARP) Perfect discrimination: negotiate separate deals with each customer LO 8 - 6 8 - 27 Carla the Editor What is the social optimum? What's Carla's revenue? Opportunity cost of Carla's time is $29 Reservation Total Student Price Revenue A B C D E F G LO 8 - 6 $40 38 36 34 32 30 28 $40 $76 $108 $136 $160 $180 $196 8 - 28 Carla the Editor What if Carla What's Carla's maximizes her profit? revenue? Opportunity cost of Carla's time is $29 Student A B C D E F G LO 8 - 6 Reservation Price Total Revenue $40 38 36 34 32 30 28 $40 $76 $108 $136 $160 $180 $196 MR $40 $36 $32 $28 $24 $20 $16 8 - 29 What's Carla's What if Carla is Carla the Editor perfect discriminator? revenue? Opportunity cost of Carla's time is $29 Reservation Total Student Price Revenue A B C D E F G LO 8 - 6 $40 38 36 34 32 30 28 $40 $78 $114 $148 $180 $210 $238 8 - 30 Carla Offers a Rebate If reservation price < $36, mail in rebate Reservation Price Total Revenue A $40 $40 B 38 76 C 36 108 Student Discounted Price Submarket LO 8 - 6 D $34 $34 E 32 64 F 30 90 MR $40 36 32 $34 30 26 8 - 31 Carla's Choices Program Social Optimum Single Price Perfect Discriminator Hurdle Papers Edited 6 3 6 5 = (3 + 2) Price $30 $36 Reservation $36, $4 rebate Total Revenue $180 $108 $210 $172 Carla's Time $174 $87 $174 $145 Economic Profit $6 $21 $36 $27 Total Surplus $26 $27 $36 $35 LO 8 - 6 8 - 32 Hurdle Method of Price Discrimination The hurdle method of price discrimination is the practice of offering a discount to all buyers who overcome some obstacle. Temporary Sales Hard cover and paperback books Multiple car models from one manufacturer Commercial air carriers Movie producers and phased releases Scratch and Dent appliance sales LO 8 - 6 8 - 33 Imperfect Competition Imperfect Competition Monopolistic Competition and Oligopoly Sources of Market Power Monopoly LO 8 - All 8 - 34 Chapter 8 Appendix The Algebra of Monopoly Maximization McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved From Demand to Marginal Revenue Given a demand curve such as P = 15 – 2 Q We can write the marginal revenue curve as MR = 15 – 4 Q Suppose marginal cost is a line with zero intercept and a slope of 1 MC = Q The remaining step is to set marginal revenue equal to marginal cost LO 8 - 4 8 - 36 MR = MC Let Q* be the profit maximizing level of output MC = MR Q* = 15 – 4 Q* 5 Q* = 15 Q* = 3 To find P, substitute Q = 3 into the demand equation P = 15 – 4 Q* P = 15 – 4 (3) P=3 LO 8 - 4 8 - 37