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Chapter9 monopoly
- 1. Chapter 9 Monopoly
- 2. The Monopoly MarketStructure What is a monopoly exactly? A monopoly is a market structure characterized by: A single seller A unique product Impossible entry into the market Under a monopoly, the consumer has only one choice. Thus, they can either buy from the producer or not consume There are no close substitutes.
- 3. A Single Seller One single firm IS the industry. Local monopolies are more commonly observed in the real-world than national monopolies. Examples
- 5. Unique Products Why do Monopolists have unique products? Absence of close substitutes
- 6. Impossible Entry Barriers to Entry are high It is different or impossible for a new firm to enter an industry due to: Ownership of Vital Resources Legal Barriers Economies of Scale
- 7. Ownership of VitalResources A seller can create its own barrier to entry if it owns a significant portion of a key resource required for the production of the good or service. In practice, monopolies rarely arise for this reason. The market for most resources is national or even international, and ownership of most resources is dispersed among a large number of people and nations. Example
- 8. Legal Barriers Legal barriers to entry are the source of most present- day monopolies. Entry into the market or competition within the market are restricted by the granting of a public franchise, government license, patent, or copyright. Examples:
- 9. Economies of Scale Monopolies can emerge in time naturally because of the relationship between average cost and the scale of the operation. This is called “natural monopolies” Def: A natural monopoly is an industry in which the LRAC of production declines throughout the entire market. Natural monopoly provides an economic argument for regulated public utilities.
- 10. Economies of Scale When this happens a single firm can supply the entire market demand at a lower cost than two or more smaller firms. Markets characterized by economies of scale often become competitive over time because of technological advances or because of natural growth in the size of the market.
- 11. SOURCES OF MONOPOLY Economies of Scale The cost to distribute 4 million kilowatt hours of electric power is 5 cents a kilowatt-hour with one seller in the market, or . . . 10 cents a kilowatt-hour with two sellers, or . . . 15 cents a kilowatt-hour with four sellers. Because of economies of scale, one seller can meet the market demand at a lower average cost than two or more sellers.
- 12. Price and OutputDecisions for a Monopolist The demand curve for a monopolist differs from the competitive firm because the monopolist is a price maker not taker. Def: A price maker is a firm that faces a downward sloping demand curve.
- 13. More Demand andsome Marginal Revenue Demand and Marginal Revenue They are both negatively-sloped Demand Market demand is negatively-sloped. The monopolist faces a tradeoff between price and quantity sold. To obtain a higher price, the monopolist must lower quantity. Or, if it wants to sell a larger quantity, it must lower price.
- 14. MONOPOLY EQUILIBRIUM Demand and Marginal Revenue Marginal revenue is less than price The marginal revenue curve is negatively-sloped but lies below the demand curve at each quantity: MR<P at all Q.
- 15. MONOPOLY EQUILIBRIUM Example: Demandand Marginal Revenue Calculate the marginal revenue generated along the demand curve.
- 16. MONOPOLY EQUILIBRIUM Example: Demandand Marginal Revenue If the price is $16, quantity demanded is 2 haircuts per hour.
- 17. MONOPOLY EQUILIBRIUM Example: Demandand Marginal Revenue If the price is $14, quantity demanded is 3 haircuts per hour.
- 18. MONOPOLY EQUILIBRIUM Example: Demandand Marginal Revenue Total revenue from two haircuts per hour decreases by $4.
- 19. MONOPOLY EQUILIBRIUM Example: Demandand Marginal Revenue Total revenue from the additional haircut is $14.
- 20. MONOPOLY EQUILIBRIUM Example: Demandand Marginal Revenue Marginal revenue from the additional haircut is $10.
- 21. MONOPOLY EQUILIBRIUM Example: Demandand Marginal Revenue The marginal revenue curve is negatively-sloped and lies below the demand curve. Marginal revenue is less than price at each quantity.
- 22. MONOPOLY EQUILIBRIUM Profit Maximizationby a Monopolist The diagram shows the monopolist’s • average total cost (ATC), • marginal cost (MC), • demand (D), • and marginal revenue (MR). The monopolist maximizes profits or minimizes losses by producing the quantity at which marginal revenue equals marginal cost.
- 23. MONOPOLY EQUILIBRIUM Profit Maximizationby a Monopolist The equilibrium quantity is 3 haircuts per hour where MR=MC, and the equilibrium price is $14, shown by the demand at the quantity 3. The ATC of 3 haircuts is $10. Because P>ATC at the equilibrium quantity, the monopolist earns a profit of $4 per haircut or $12 per hour. 23 Monopoly
- 24. MONOPOLY EQUILIBRIUM Profit Maximizationby a Monopolist: Numerical Example The data in the table below verify that 3 haircuts per hour maximizes the monopolist’s profit.
- 25. MONOPOLY EQUILIBRIUM Short-Run and Long-Run Equilibrium When a monopolist incurs short-run losses However, if a monopolist incurs economic losses in the short- run, it exits the market in the long-run. The long-run equilibrium quantity is zero.
- 26. MONOPOLY EQUILIBRIUM Short-Run and Long-Run Equilibrium When a monopolist earns short-run profits
- 27. Price Discrimination The monopolist may charge different prices to consumers to maximize profits. Def: Price discrimination occurs when a seller charges different prices for the same product that are not justified by cost differences. Selling a good or service at a number of different prices where the price differences do not reflect differences in cost but instead reflect differences in consumers’ price elasticities of demand. However, specific conditions must be met before the seller can act in this way.
- 28. Conditions for PriceDiscrimination The seller must be a price maker and therefore face a downward-sloping demand curve The seller must be able to segment the market distinguishing between consumers willing to pay different prices It must be impossible or too costly for customers to engage in arbitrage
- 29. How can aproducer price discriminate Discriminating among groups of consumers Different prices for consumers with different elasticities. The market is segmented based on some easily distinguished characteristic of consumers—age, for example. Discriminating among units of a good The seller charges the same prices to all consumers but offers each consumer a lower price for a larger number of units bought—volume discounts, for example.
- 30. Price Discrimination withTwo Groups of Consumers (a) (b) per unit Dollars Dollars per unit $3.00 LRAC, MC $1.50 LRAC, MC 1.00 1.00 MR D MR’ D’ 0 400 Quantity per period 0 500 Quantity per period A monopolist facing two groups of consumers with different demand elasticities may be able to practice price discrimination to increase profit or reduce loss. With marginal cost the same in both markets, the firm charges a higher price to the group in panel (a), which has a less elastic demand than group in panel (b).
- 31. Is Price DiscriminationUnfair There is nothing evil or illegal about economic price discrimination. It simply means charging different prices for the same good or service unrelated to differences in cost. Price discrimination is common in all markets other than perfectly competitive markets.
- 32. Is Price DiscriminationUnfair What are its effects: Increase seller’s profit, at least in the short run Enhance economic efficiency Conserve on scarce resources. Many buyers benefit because they are now paying a lower price Example: Movie Theatres- senior citizen and college students discounts
- 33. How does itincrease the sellers profits Increases seller’s profits By observing different elasticities for the consumers the following can happen Reduce the price for buyers with elastic demand will increase TR Increase the price for buyers with inelastic demand will increase TR When the total quantity is not changing, then costs are not changing, but revenues are profits are HIGHER
- 34. What about efficiency Enhances economic efficiency We know that under a monopoly the output is under- produced. But price discrimination can fix this underproduction of the good A price-discriminating monopolist is able to sell a larger quantity than a single-price monopolist by reducing price only on the additional units sold, not on all units sold. Because the problem with monopoly is underproduction, increasing quantity enhances efficiency. The sum of producer and consumer surplus is higher in a monopoly market with price discrimination than in a market with a single-price monopolist.
- 35. MONOPOLY AND COMPETITION CompetitiveEquilibrium The market demand curve is D. The market supply curve is S. The competitive market equilibrium is where quantity demanded equals quantity supplied. The competitive equilibrium quantity is QC and the equilibrium price is PC.
- 36. MONOPOLY AND COMPETITION MonopolyEquilibrium The competitive market supply curve, S, is the monopolist’s marginal cost curve, MC. The monopolist’s marginal revenue curve is MR. The monopolist’s equilibrium quantity is QM where marginal revenue equals marginal cost. The equilibrium price is PM , shown by the demand at QM.
- 37. MONOPOLY AND COMPETITION Competitive and Monopolistic Equilibrium Monopoly quantity is lower and price is higher Amonopolist supplies a smaller quantity than a competitive market would supply at a higher price. The higher price allows a monopolist to earn positive long-run economic profits.
- 38. MONOPOLY AND COMPETITION Economic Consequences of Monopoly The absence of competition results in • Inefficiency and deadweight loss • Redistribution of wealth
- 39. MONOPOLY AND COMPETITION Efficiencyof Competitive Equilibrium The competitive equilibrium price, PC, brings consumers’ marginal benefit into equality with producers’ marginal cost. Therefore, the competitive equilibrium quantity, QC, is efficient. The sum of consumer surplus and producer surplus is maximized.
- 40. MONOPOLY AND COMPETITION Inefficiencyof Monopoly Marginal benefit in the monopoly equilibrium (equals to the monopoly equilibrium price, PM) exceeds marginal cost. Therefore, the monopoly equilibrium quantity, QM, is inefficient because of underproduction. Monopoly results in a deadweight loss.
- 41. MONOPOLY AND COMPETITION Economic Consequences of Monopoly Redistribution of wealth
- 42. MONOPOLY AND COMPETITION MonopolyRedistributes Wealth The deadweight loss of monopoly arises from a net loss in both consumer and producer surplus compared with the competitive equilibrium. In addition to the net loss in the total surplus, monopoly also redistributes some of the remaining surplus from consumers to the monopolist.
Editor's Notes
- #31 Chapter 9 Monopoly