Monopoly

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  • Monopoly

    1. 1. Monopoly
    2. 2. OutlineI. Introduction A. Definition B. Barriers to EntryII. Monopoly in the Short-Run A. Demand B. Profit Maximization in the Short-Run
    3. 3. Outline (Cont.)III. Monopoly in the Long-Run A. Losses in the Short-Run B. Break-Even or Profits in the Short-RunIV. Advantages and Disadvantages of Monopoly A. Benefits B. Disadvantages
    4. 4. Introduction• Perfect Competition was one type of market structure. It had to satisfy many assumptions - some of which are not all that realistic. Now we will look at another market structure which is nearly he opposite of perfect competition• Monopoly - a single firm that produces all the output in a particular market with no close substitutes and high barriers to entry.
    5. 5. Barriers to Entry• Barriers to Entry are what keeps monopoly from becoming like a perfectly competitive market• Barriers to entry are things that prevent firms from entering the market. Such as...• Control of Raw Materials • Example: The DeBeer’s family owns most of the diamond mines in the world• Economies of Scale
    6. 6. Barriers to Entry (Cont.)• Patents and Copyrights – Patents - an exclusive right, granted by the government, to market a product or process for 17 years. – Copyrights - an exclusive right, granted by the government, to publish, copy or sell a piece of music, art or literature.• Other Legal Restrictions – Example: U.S. Mail, Cable Monopolies, etc.
    7. 7. Monopoly in the Short-Run• What makes monopoly different from perfect competition is the firm’s demand curve.• Since the firm is the market, the firm’s demand curve is the market demand curve• Hence, it’s downward sloping
    8. 8. Monopoly in the Short Run• A profit-maximizing monopolist, then not only chooses how much to produce, but also chooses what price to charge.• What prevents a monopolist from charging an amazingly high price? – there may not be much demand at that price• So a monopolist wants to get the highest price that maximizes their profit
    9. 9. Monopoly and Total Revenue• Profits = Total Revenue - Total Cost• But Total Revenue is different for a monopolist than in perf. comp.• In perf. comp. the moreyou sell, the more the total revenue, but now if you sell more you have to lower your price.• Remember when we discussed elasticity, we looked at how total revenue changes as you move down a demand curve
    10. 10. Monopoly and Total Revenue$ Elastic Elasticity = 1 Inelastic Demand Q$ Total Revenue Q
    11. 11. Monopoly Profit• So does a monopolist want to produce at the quantity where elasticity equals 1 and total revenue is at a maximum? – Not necessarily. Remember we need to consider total cost, as well• The monopolist wants to maximize the difference between total revenue and total cost
    12. 12. Total Revenue and Total Cost TC$ TR Q* Q
    13. 13. Monopoly Profit Maximization• Like perfect competition, this is the quantity where the slopes of the TC and TR curves are the same• And also like perfect competition, this is the quantity where MR=MC.• But the MR curve looks different, since the demand curve is downward sloping
    14. 14. D and MRQd P ($)0 101 82 63 44 25 0
    15. 15. D and MRQd P ($) TR ($)0 10 01 8 82 6 123 4 124 2 85 0 0
    16. 16. D and MRQd P ($) TR ($) MR ($)0 10 0 ---1 8 8 82 6 12 43 4 12 04 2 8 -45 0 0 -8
    17. 17. D and MR P$10 8 6 4 2 D 0 1 2 3 4 5 Q
    18. 18. D and MR P$10 8 6 4 2 MR D 0 1 2 3 4 5 Q
    19. 19. Profit Maximizing P$10 MC 8 6 4 2 MR D 0 1 2 3 4 5 Q
    20. 20. Profit Maximizing P$10 MC 8 6 4 2 MR D 0 1 2 3 4 5 Q
    21. 21. Profit Maximizing• So the monopolist chooses the quantity where MC=MR (a quantity of 2, in this example)• If they chose less, MR>MC so they could get more money from selling one more than it would cost to make one more.• But they also get to choose the price• They choose the highest price they can charge in order to sell Q*
    22. 22. Profit Maximizing P$10 MC 8 6 4 2 MR D 0 1 2 3 4 5 Q
    23. 23. Profit Maximizing• The price is found by looking to the demand curve and finding the price people are will to pay in order to buy the quantity the firm wants to produce• In the case of this example, this is a price of about $6.50• How do we show the profit in this case?
    24. 24. Profit Maximizing P$10 MC 8 ATC AVC 6 4 2 MR D 0 1 2 3 4 5 Q
    25. 25. Profit Maximizing P$10 MC 8 ATC p* AVC 6 atc* 4 2 MR D 0 1 2 3 4 5 Q
    26. 26. Profit Maximizing P$10 MC 8 ATC p* AVC 6 atc* Profit 4 2 MR D 0 1 2 3 4 5 Q
    27. 27. Shut Down Rules• A monopolist faces the same short run shut down rules as a perfectly competitive firm for all of the same reasons• As long as P>AVC, the firm is paying off some fixed cost and should stay open in the short run• If P<AVC, the firm should shut down. Just because the firm is a monopolist, does not guarantee a profit.
    28. 28. A Monopolist Who Should Shut Down P ATC$10 MC AVC atc* 8 p* 6 4 2 MR D 0 1 2 3 4 5 Q
    29. 29. Profit Maximizing• Q* - where MR = MC (profit maximization)• P* - highest P consumers are willing and able to pay for Q* • Demand curve at Q*• In the Short-Run a Monopolist may • Make Profits • Break Even • Operate at a Loss
    30. 30. Profit Maximizing• Note that a Monopolist always Operates on Elastic Portion of Demand Curve • Profit Maximizing - MR = MC • MC > 0 always • MR > 0 when demand is elastic
    31. 31. Monopoly in the Long-Run• If Losses in Short-Run • Firm exits the Industry • Industry Disappears• If Profits or Break-Even in the Short-Run • Profit may or may not persist in the long run
    32. 32. Benefits of Monopoly• Natural Monopoly - a monopolist whose ATC decreases over the relevant range of output.• Economies of Scale - monopolist can produce at lower costs.
    33. 33. Why Monopoly Profits May Persist• Since there are barriers to entry, firms don’t enter the industry and drive down prices
    34. 34. Why Monopoly Profits May Not Persist• When Selling The Firm – If the firm is sold for the value of future profits, the new owner of the monopoly will make zero profits or certainly less profit• Auctioning of the Monopoly Rights (Rent Seeking) – Ex. - If the govt. auctioned off the right to be the monopolist, they price for this right would eventually equal the expected profit
    35. 35. Benefits of Monopoly• While Costs are lower, price can still be relatively "high" since P > MC in monopoly.• Sometimes, Gov. regulates natural monopolies to lower price. • Ex: Utilities• A Natural Monopoly is an industry where is can be cheaper to let one firm provide the good (because of econ. of scale, etc)
    36. 36. Natural MonopolyP ATC MR D Q
    37. 37. Natural MonopolyP MC ATC MR D Q
    38. 38. Benefits of Monopoly• Technological Innovations • Incentive for monopoly profits gives firm an incentive to innovate.
    39. 39. Costs of Monopoly• To begin to understand the costs of monopoly, we need to introduce another concept – Producer Surplus• Producer Surplus - the revenue received by the firm above the marginal cost
    40. 40. Producer SurplusP MC p Q Q
    41. 41. Producer SurplusP MC p The Shaded Area is the Producer Surplus Q Q
    42. 42. Comparison of Monopoly and Perfect Competition• We can compare Monopoly and Perfect Competition by looking at the total amount of social surplus (consumer surplus plus producer surplus) generated by both and then comparing them.
    43. 43. Monopoly vs Perfect Comp. P MC MRPMonopP perf comp D 0 Q Monop Q perf comp Q
    44. 44. Monopoly vs Perfect Comp. P MC MR Total SurplusPMonop for PerfectP perf comp Competition D 0 Q Monop Q perf comp Q
    45. 45. Monopoly vs Perfect Comp. P MC MRPMonop Total SurplusP perf comp for Monopoly D 0 Q Monop Q perf comp Q
    46. 46. Dead Weight Loss• If we take the difference between the total social surplus under perfect competition and subtract the total surplus under monopoly we find the dead weight loss• This is the loss in surplus to consumers and producers from having a monopoly
    47. 47. Monopoly vs Perfect Comp. P MC MR The area of this trianglePMonop is the dead weight lossP perf comp D 0 Q Monop Q perf comp Q
    48. 48. Disadvantages of Monopoly• Inefficient Allocation of Resources • Allocatively Inefficient (P > MC) • Productively Inefficient (P not = min ATC)
    49. 49. Price Discriminating Monopolist• A price discriminating monopolist is a monopolist who can charge different prices to different customers for the same good or service.• In order to be a price discriminator you need – at least 2 types of consumers with different elasticities of demand – to be able to distinguish between the types
    50. 50. Examples of Price Discriminating Behavior• Coupons• Airline Tickets• Dry Cleaning and Haircuts (?) (…think gender)The idea is that the monopolist charges a higher price to the consumer with more inelastic demand
    51. 51. Perfect Price Discrimination• A Perfectly Price Discriminating Monopolist is a monopolist who charges everyone exactly what they are willing to pay• In other words, they work their way down the demand curve, lowering the price only to those who aren’t willing to pay the high price, until P=MC• Example - Auctions
    52. 52. Perfect Price DiscriminationNote that in this case there is no dead weight loss AND the firm is allocatively efficient

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