Bec doms ppt on monopoly

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Bec doms ppt on monopoly

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Bec doms ppt on monopoly

  1. 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. 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. 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. 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. 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. 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. 7. legal monopoly <ul><li>firm owns most of natural resource </li></ul><ul><li>firm has exclusive license, patent, copyright </li></ul>
  8. 8. examples <ul><li>DeBeers & diamonds </li></ul><ul><li>Bayer & Cipro </li></ul><ul><li>Microsoft & Powerpoint </li></ul>
  9. 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. 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. 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. 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. 13. MR & D P, MR Q D MR
  14. 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. 15. P, MR Q D MR MC Q* P*
  16. 16. P, MR Q D MR MC Q* P* ATC economic profit
  17. 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. 18. Pm > Pc Qm < Qc P, MR Q D MR MC Qm Pm Pc Qc
  19. 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. 20. competition P, MR Q D S=MC Pc Qc consumer surplus producer surplus
  21. 21. monopoly P, MR Q D MR MC Qm Pm consumer surplus producer surplus deadweight loss
  22. 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. 23. How? <ul><li>charge different prices to groups of buyers </li></ul><ul><li>groups have different willingness to pay </li></ul>
  24. 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. 25. <ul><li>get consumer surplus from business travelers </li></ul><ul><li>still have low fairs for tourism </li></ul>
  26. 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. 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. 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. 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. 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. 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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