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Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
Bec doms ppt on monopoly
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Bec doms ppt on monopoly

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Bec doms ppt on monopoly

Bec doms ppt on monopoly

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  • 1. Monopoly <ul><li>How? </li></ul><ul><li>Firm behavior </li></ul><ul><li>Monopoly vs. Competition </li></ul><ul><li>Price Discrimination </li></ul><ul><li>Policy </li></ul>
  • 2. What makes a monopoly? <ul><li>single supplier of good </li></ul><ul><ul><li>firm supply = market supply </li></ul></ul><ul><ul><li>firm demand = market demand </li></ul></ul>
  • 3. How does it happen? <ul><li>1. no close substitutes </li></ul><ul><li>otherwise, makers of substitutes are competition </li></ul><ul><li>example: electricity </li></ul>
  • 4. 2. barriers to entry <ul><li>hard (impossible) </li></ul><ul><li>for new competitors to enter market </li></ul><ul><li>barriers are </li></ul><ul><ul><li>natural </li></ul></ul><ul><ul><li>legal </li></ul></ul>
  • 5. natural monopoly <ul><li>high fixed costs </li></ul><ul><li>large economies of scale </li></ul><ul><li>one firm meets market demand, </li></ul><ul><li>with lowest cost </li></ul>
  • 6. examples <ul><li>distribution of </li></ul><ul><ul><li>water </li></ul></ul><ul><ul><li>electricity </li></ul></ul><ul><ul><li>natural gas </li></ul></ul>
  • 7. legal monopoly <ul><li>firm owns most of natural resource </li></ul><ul><li>firm has exclusive license, patent, copyright </li></ul>
  • 8. examples <ul><li>DeBeers & diamonds </li></ul><ul><li>Bayer & Cipro </li></ul><ul><li>Microsoft & Powerpoint </li></ul>
  • 9. monopolist & prices <ul><li>power to set prices </li></ul><ul><ul><li>price maker </li></ul></ul><ul><li>charge single price to everyone </li></ul><ul><li>set prices for different groups/units </li></ul><ul><ul><li>price discrimination </li></ul></ul>
  • 10. Monopoly behavior <ul><li>single price case </li></ul><ul><li>same rule: </li></ul><ul><ul><li>choose Q where MR = MC </li></ul></ul><ul><ul><li>BUT </li></ul></ul><ul><li>different outcome </li></ul>
  • 11. P & MR <ul><li>for monopoly, </li></ul><ul><ul><li>MR < P </li></ul></ul><ul><li>why? </li></ul><ul><ul><li>increase Q </li></ul></ul><ul><ul><li>-- additional revenue </li></ul></ul><ul><ul><li>-- but at lower P </li></ul></ul><ul><ul><li>(demand slopes down) </li></ul></ul>
  • 12. 5 6 MR = $1 from 5 to 6 P Q D $7 $6 TR = $7 x 5 = $35 TR = $6 x 6 = $36
  • 13. MR & D P, MR Q D MR
  • 14. profit maximizing <ul><li>choose Q where MR = MC </li></ul><ul><li>charge highest P possible </li></ul><ul><ul><li>using demand curve </li></ul></ul><ul><li>profit </li></ul><ul><li>= (P - ATC)(Q) </li></ul>
  • 15. P, MR Q D MR MC Q* P*
  • 16. P, MR Q D MR MC Q* P* ATC economic profit
  • 17. 13.3 Monopoly vs. Competition <ul><li>monopoly </li></ul><ul><ul><li>smaller output </li></ul></ul><ul><ul><li>higher price </li></ul></ul>
  • 18. Pm > Pc Qm < Qc P, MR Q D MR MC Qm Pm Pc Qc
  • 19. Is monopoly efficient? <ul><li>No </li></ul><ul><li>output too low </li></ul><ul><ul><li>Marginal benefit > MC </li></ul></ul><ul><ul><li>deadweight loss </li></ul></ul>
  • 20. competition P, MR Q D S=MC Pc Qc consumer surplus producer surplus
  • 21. monopoly P, MR Q D MR MC Qm Pm consumer surplus producer surplus deadweight loss
  • 22. Price Discrimination <ul><li>charge each buyer higher price possible </li></ul><ul><ul><li>convert consumer surplus to economic profit </li></ul></ul><ul><li>must </li></ul><ul><ul><li>identify & separate buyers </li></ul></ul><ul><ul><li>prevent reselling </li></ul></ul>
  • 23. How? <ul><li>charge different prices to groups of buyers </li></ul><ul><li>groups have different willingness to pay </li></ul>
  • 24. example: airlines <ul><li>separate business, tourist travelers </li></ul><ul><ul><li>businesses have less elastic demand, will pay more </li></ul></ul><ul><li>last minute, refundable tickets have higher price </li></ul>
  • 25. <ul><li>get consumer surplus from business travelers </li></ul><ul><li>still have low fairs for tourism </li></ul>
  • 26. Example: textbooks <ul><li>NYT 10/21/2003 </li></ul><ul><li>Textbooks in U.S. cost twice as much as European editions </li></ul><ul><li>Students ordering overseas </li></ul><ul><ul><li>Internet makes reselling easier, price discrimination tougher </li></ul></ul>
  • 27. other price discrimination <ul><li>charge differently for different units </li></ul><ul><li>example </li></ul><ul><ul><li>1 pizza, $10 </li></ul></ul><ul><ul><li>2 pizzas, $14 </li></ul></ul><ul><li>people value 1st pizza more </li></ul><ul><li>MC of 2nd pizza to same house small </li></ul>
  • 28. Monopoly & policy <ul><li>some monopolies are regulated </li></ul><ul><ul><li>Niagara Mohawk </li></ul></ul><ul><li>some are illegal </li></ul><ul><ul><li>AT&T (split in 1982) </li></ul></ul><ul><ul><li>Microsoft? </li></ul></ul><ul><li>some are created </li></ul><ul><ul><li>drug patents </li></ul></ul>
  • 29. why allow monopolies? <ul><li>inefficient </li></ul><ul><ul><li>deadweight loss </li></ul></ul><ul><li>but there are gains </li></ul><ul><ul><li>economies of scale </li></ul></ul><ul><ul><li>-- natural monopolies </li></ul></ul><ul><ul><li>-- utilities </li></ul></ul>
  • 30. <ul><li>innovation </li></ul><ul><ul><li>drug patents reward research </li></ul></ul><ul><ul><li>copyrights reward creativity </li></ul></ul>
  • 31. summary: monopoly <ul><li>unique good, barrier to entry </li></ul><ul><li>choose Q where MR = MC </li></ul><ul><ul><li>but MR < P </li></ul></ul><ul><li>Qm lower, Pm higher than competition </li></ul><ul><ul><li>inefficient </li></ul></ul><ul><li>may use price discrimination </li></ul>

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