Monopoly © 2003 South-Western/Thomson Learning. What Is a Monopoly? A monopoly firm is the only...
-
Upload
cassandra-barker -
Category
Documents
-
view
224 -
download
0
description
Transcript of Monopoly © 2003 South-Western/Thomson Learning. What Is a Monopoly? A monopoly firm is the only...
MonopolyMonopoly
© 2003 South-Western/Thomson © 2003 South-Western/Thomson LearningLearning
What Is a Monopoly?What Is a Monopoly?A A monopoly firmmonopoly firm is the is the only seller of a good or only seller of a good or service with service with no close no close
substitutessubstitutes. . The market in which the The market in which the
monopoly firm operates is monopoly firm operates is called a called a monopoly monopoly
marketmarket. .
Sources of Sources of MonopolyMonopoly
•Economies of ScaleEconomies of Scale•Control of Scarce InputsControl of Scarce Inputs•Government-Enforced Government-Enforced
Barriers Barriers
Economies of ScaleEconomies of ScaleNatural MonopolyNatural Monopoly
A market in which, due to A market in which, due to economies of scale, one economies of scale, one
firm can operate at lower firm can operate at lower average cost than can two average cost than can two
or more firmsor more firms
Government-Enforced Government-Enforced BarriersBarriers
Protection of intellectual property(IP):Protection of intellectual property(IP):•Government allows creators of IP to enjoy Government allows creators of IP to enjoy a monopoly and earn economic profit, a monopoly and earn economic profit, but but onlyonly for a limited timefor a limited time•Once the time is up, other sellers are Once the time is up, other sellers are allowed to enter the market, and allowed to enter the market, and competition is expected to bring down competition is expected to bring down pricesprices
Government-Enforced Government-Enforced BarriersBarriersPatentPatent
A temporary grant of A temporary grant of monopoly rights over a monopoly rights over a
new product or new product or scientific discovery.scientific discovery.
Government-Enforced Government-Enforced BarriersBarriers
CopyrightCopyright A grant of exclusive A grant of exclusive
rights to sell a rights to sell a literary, musical, or literary, musical, or
artistic workartistic work
Government-Enforced Government-Enforced BarriersBarriers
Government Government FranchiseFranchise
A government-granted A government-granted right to be the sole right to be the sole seller of a product or seller of a product or serviceservice–U. S. Postal ServiceU. S. Postal Service–Local utilities, etc.Local utilities, etc.
Monopoly Goals and Monopoly Goals and ConstraintsConstraints
•Monopoly Price or Monopoly Price or Output Decision Output Decision •Profit and LossProfit and Loss
Monopoly Goals and Monopoly Goals and ConstraintsConstraints
For any level of output a firm For any level of output a firm might produce, total cost is might produce, total cost is determined by determined by
(1) its technology of production, and (1) its technology of production, and (2) the prices it must pay for its (2) the prices it must pay for its
inputs. inputs. For any level of output it might For any level of output it might
produce, the maximum price it produce, the maximum price it can charge is determined by can charge is determined by the market demand curve for the market demand curve for its productits product
Monopoly Goals and Monopoly Goals and ConstraintsConstraints
5,000
Numberof Subscribers
Monthly Price per
SubscriberB
A
18
MR6,00015,000 20,000
21,00030,000
20
30
38
4850
$60
Demand
FG
C
Monopoly Price or Monopoly Price or Output Decision Output Decision
When When anyany firm - including a firm - including a monopoly - faces a downward-monopoly - faces a downward-
sloping demand curve, sloping demand curve, marginal revenue is less than marginal revenue is less than
the price of output. the price of output. Therefore, the marginal Therefore, the marginal
revenue curve will lie below revenue curve will lie below the demand curve.the demand curve.
Monopoly Price or Monopoly Price or Output DecisionOutput Decision
A monopoly will never A monopoly will never produce a level of output produce a level of output
at which its marginal at which its marginal revenue is negative.revenue is negative.
Monopoly Price or Output Monopoly Price or Output DecisionDecision
Number of Subscribers
Monthly Price per
Subscriber
E
MR10,000
40
MC
D
$60
30,000
Profit and LossProfit and Loss
A monopoly earns a profit A monopoly earns a profit whenever P>ATCwhenever P>ATCand suffers a loss and suffers a loss whenever P<ATCwhenever P<ATC
Monopoly Profit and Monopoly Profit and LossLoss
Number of Subscribers
Dollars
E
MR10,000
$40
MC
32
Total Profit
ATC
D
(a)
E
Total Loss AVC
ATC
Number of Subscribers
Dollars
MR10,000
40
MC
D
(b)
$50
Equilibrium in Equilibrium in Monopoly MarketsMonopoly Markets•Short-Run EquilibriumShort-Run Equilibrium•Long-Run EquilibriumLong-Run Equilibrium•Comparing Monopoly to Comparing Monopoly to
Perfect CompetitionPerfect Competition•Why Monopolies Often Earn Why Monopolies Often Earn
Zero Economic ProfitZero Economic Profit
Short-Run EquilibriumShort-Run Equilibrium
Any firm - including a Any firm - including a monopoly - should shut monopoly - should shut down if P<AVC at the down if P<AVC at the
output level where MR = output level where MR = MC.MC.
Long-Run EquilibriumLong-Run Equilibrium•A privately owned monopoly A privately owned monopoly suffering an economic loss in suffering an economic loss in the long run will exit the the long run will exit the industry, just as would any industry, just as would any other business firm. other business firm. •In the long run, therefore, In the long run, therefore, we should not find privately we should not find privately owned monopolies suffering owned monopolies suffering economic losses.economic losses.
Comparing Monopoly Comparing Monopoly to Perfect to Perfect
CompetitionCompetitionA monopoly market can be A monopoly market can be
expected to have a higher price expected to have a higher price and lower output than an and lower output than an
otherwise similar perfectly otherwise similar perfectly competitive market.competitive market.
Comparing Monopoly to Comparing Monopoly to Perfect CompetitionPerfect Competition
100,000 Quantityof Output
PriceperUnit
E$10
D
(a) Competitive Market
S
1,000 Quantityof Output
DollarsperUnit
ATC
MC
d
(b) Competitive Firm
$10
DollarsperUnit
E
F
D
(c) Monopoly
Quantityof Output
MR
S = MC
10
$15
100,00060,000
Two Opposing EffectsTwo Opposing Effects1) For any given technology of 1) For any given technology of production, production, monopolization leads to monopolization leads to higher prices and lower outputhigher prices and lower output..2) 2) ChangesChanges in the technology of in the technology of production made possible under production made possible under monopoly monopoly may lead to lower prices and may lead to lower prices and higher output.higher output.
Monopolies Often Monopolies Often Earn Zero Economic Earn Zero Economic
ProfitProfit
1.1. Government regulationGovernment regulation2.2. Rent-seeking activityRent-seeking activity
Monopolies Often Monopolies Often Earn Zero Economic Earn Zero Economic
ProfitProfitRent-Seeking ActivityRent-Seeking Activity
Any costly action a firm Any costly action a firm undertakes to establish undertakes to establish
or maintain its monopoly or maintain its monopoly statusstatus
What Happens When What Happens When Things Change?Things Change?
•A monopolist will react to A monopolist will react to an an increaseincrease in demand by in demand by producing more output, producing more output, charging a higher price, and charging a higher price, and earning a larger profit. earning a larger profit. •It will react to a It will react to a decreasedecrease in in demand by reducing output, demand by reducing output, lowering price, and suffering lowering price, and suffering a reduction in profit.a reduction in profit.
What Happens When What Happens When Things Change?Things Change?
Numberof Subscribers
MonthlyPrice per
Subscriber
(a) (b)
A
MR1
10,000
$40
MC
D1
30,000Number
of Subscribers
MonthlyPrice per
Subscriber
MR1
MR210,000
11,000
40
MC
D1 D2
$47A
B
Price Price DiscriminationDiscrimination
•Requirements for Price Requirements for Price DiscriminationDiscrimination•Effects of Price Effects of Price Discrimination Discrimination
Price DiscriminationPrice Discrimination
Single-Price MonopolySingle-Price Monopoly A monopoly firm that is A monopoly firm that is limited to charging the limited to charging the same price for each unit same price for each unit
of output sold.of output sold.
Price DiscriminationPrice Discrimination
Price DiscriminationPrice Discrimination Charging different prices Charging different prices to different customers for to different customers for
reasons other than reasons other than differences in cost.differences in cost.
Price DiscriminationPrice DiscriminationRequirements for Price Requirements for Price DiscriminationDiscrimination•There must be a downward-There must be a downward-sloping demand curve for the sloping demand curve for the firm’s outputfirm’s output•The firm must be able to The firm must be able to identify consumers willing to identify consumers willing to pay morepay more•The firm must be able to The firm must be able to prevent low-price customers prevent low-price customers from reselling to high-price from reselling to high-price customerscustomers
Effects of Price Effects of Price DiscriminationDiscrimination
Price discrimination Price discrimination that that harms harms consumers:consumers:
when prices are above the when prices are above the price consumers would pay price consumers would pay under a single price policy. under a single price policy. The additional profit for the The additional profit for the firm is equal to the monetary firm is equal to the monetary
loss of consumersloss of consumers
Effects of Price Effects of Price DiscriminationDiscrimination
Price discrimination Price discrimination that that benefitsbenefits consumers:consumers:
when the price for some when the price for some consumers is below what they consumers is below what they would pay under a single-price would pay under a single-price policy. This benefits both the policy. This benefits both the
consumer and the firm.consumer and the firm.
Effects of Price Effects of Price DiscriminationDiscrimination
30 Number of Round-tripTickets
Dollarsper
Ticket
80
$120 ATC
MR
MC
(a)
Number of Round-tripTickets
30
Dollarsper
Ticket
120
MR
MC
(b)
10
$160
Additional profitfrom pricediscrimination
Number of Round-tripTickets
(c)
30
Dollarsper
Ticket
$120
MR
MC
40
100
D
Additional profitfrom pricediscrimination
G
H
F
D
E
D
Perfect Price Perfect Price DiscriminationDiscrimination
Perfect Price Perfect Price DiscriminationDiscrimination
Charging each customer Charging each customer the most he or she would the most he or she would be willing to pay for each be willing to pay for each
unit purchasedunit purchased
Perfect Price Perfect Price DiscriminationDiscrimination
Number of Dolls per Day
Dollars per Doll
E
20
$30
25
10
30 60
JBMC = ATC
H
DMR
MR curve before price discrimination