Monopoly

2,244 views

Published on

concept of monopoly with examples

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
2,244
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
89
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Monopoly

  1. 1. Chapter 10 Pure MonopolyMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Chapter Objectives• Characteristics of pure monopoly• Profit-maximizing output and price• Economic effects of monopoly• Charging different prices in different markets 10-2
  3. 3. Characteristics of Monopoly1. Single seller
  4. 4. No close substitutes – unique product
  5. 5. “Price maker”
  6. 6. Blocked entry
  7. 7. Reasons behind blocked EntryEconomicalTechnologicalLegal
  8. 8. 1.Economical barrier for blocked entry in Pure MonopolyExample
  9. 9. 2. Technological barrier for blocked entry in Pure MonopolyExample
  10. 10. 3.Legal barrier for blocked entry in Pure Monopoly Up to late 1990s
  11. 11. Non price competition
  12. 12. Non price competition• Two types of product a Monopolist have. Either “ Standardized or Differentiated ”Products
  13. 13. Standardized• As natural gas
  14. 14. Differentiated
  15. 15. Examples of Monopoly1. Pure Monopoly Regulated or natural monopolies Electricity
  16. 16. Examples of MonopolyNear monopolieshave about 80 % share of Market as Intel De Beers
  17. 17. Examples of Monopoly• Geographic monopolies –Professional sport teams• Dual objectives of study For understanding two other market models Oligopoly and Monopolistic Competition. Because these two markets combine in different degrees and characteristics of pure competition and pure Monopoly.
  18. 18. Barriers to Entry• Economies of scale• Legal barriers to entry –Patents –Licenses• Ownership or control of essential resources• Pricing and other strategic barriers to entry
  19. 19. Monopoly Demand
  20. 20. “ After discussing the sources, inorder to understand fully pureMonopoly we have to analyze thePrice and output decision of PureMonopoly”
  21. 21. Monopoly Demand• Assumptions: 1. Monopoly status is secure 2. No government regulation 3. Single-price monopolist• Face down-sloping demand –Entire market demand
  22. 22. Downward sloping demand has Three Implications
  23. 23. Price and Marginal Revenue 1. Marginal revenue is less than price• A monopolist is selling 3 units at $142 $142 132• To sell 4, price must 122 Loss = $30 be lowered to $132 112 D• All customers 102 Gain = $132 must pay the same 92 price 82• TR increases $132 minus $30 (3x$10) 0 1 2 3 4 5 6 10-26
  24. 24. Price and Marginal Revenue Marginal revenue is less than price• A monopolist is selling 3 units at $142• To sell 4, price must $142 be lowered to $132 132• All customers 122 must pay the same 112 Loss = $30 D price 102• TR increases $132 Gain = $132 minus $30 (3x$10) 92• $102 becomes a 82 point on the MR curve MR• Try other prices to determine other 0 1 2 3 4 5 6 MR points The Constructed Marginal Revenue Curve Must Always Be Less Than the Price
  25. 25. Down-Sloping Demand• Marginal revenue < price –To increase sales, must lower price• Firm is a price maker –Choose P,Q combination• Operate in the elastic region –Marginal revenue > 0 –Total-revenue test (recall)
  26. 26. Difference between pure competition and monopoly• For a competitive firm: P = MR = MC.• For a monopoly firm: P > MR = MC
  27. 27. Profit Maximization• Output-price determination –Marginal revenue marginal cost rule –Same cost definitions• No supply curve 10-32
  28. 28. Monopoly Revenue and Costs Revenue Data Cost Data (2) (3) (1) Price Total (4) (5) (6) (7) (8)Quantity (Average Revenue Marginal Average Total Cost Marginal Profit (+)Of Output Revenue) (1) X (2) Revenue Total Cost (1) X (5) Cost or Loss (-) 0 $172 $0 ] $100 ] $90 $-100 $162 1 162 162 ] $190.00 190 ] 80 -28 142 2 152 304 ] 135.00 270 ] 70 +34 122 3 142 426 ] 113.33 340 ] 60 +86 102 4 132 528 ] 100.00 400 ] 70 +128 82 5 122 610 ] 94.00 470 ] 80 +140 62 6 112 672 ] 91.67 550 ] 90 +122 42 7 102 714 ] 91.43 640 ] 110 +74 22 8 92 736 ] 93.75 750 ] 130 -14 2 9 82 738 ] 97.78 880 ] 150 -142 -18 10 72 720 103.00 1030 -310 Can you See Profit Maximization? 10-34
  29. 29. Monopoly Revenue and Costs Demand and Marginal-Revenue Curves Elastic Inelastic $200 150 Price 100 50 MR D 0 2 4 6 8 10 12 14 16 18 Total-Revenue Curve $750 Total Revenue 500 250 TR 0 2 4 6 8 10 12 14 16 18 10-35
  30. 30. Profit Maximization $200Price, Costs, and Revenue 175 MC 150 Pm=$122 125 Economic Profit ATC 100 75 A=$94 D 50 MR=MC 25 MR 0 1 2 3 4 5 6 7 8 9 10 Quantity
  31. 31. Misconceptions• Not the highest price• Total, not unit, profit• Possibility of losses 10-37
  32. 32. Loss MinimizationPrice, Costs, and Revenue MC ATC A Loss Pm AVC V D MR=MC MR 0 Qm Quantity 10-38
  33. 33. Economic Effects Purely Pure Competitive Monopoly Market S=MC MC Pm b P=MC=Pc Minimum Pc c ATC a D D MR Qc Qm Qc Pure competition is efficient Monopoly is inefficient 10-39
  34. 34. Economic Effects• Pure competition is efficient –Productive efficiency –Allocative efficiency –CS+PS maximized• Monopoly is inefficient –Charge P>MC –Deadweight loss• Income transfer 10-40
  35. 35. Cost Complications• Economies of scale –Simultaneous consumption –Network effects• X-inefficiency –Lowest ATC not achieved• Rent seeking behavior• Technological advance –More likely with monopoly? 10-41
  36. 36. Price Discrimination• Three forms – Charge each customer max willingness to pay – Charge one price for first unit and a lower price for subsequent units – Charge different customers different prices 10-42
  37. 37. Price Discrimination• Conditions – Monopoly power – Market segregation – No resale• Examples – Airfares – Electric utilities – Theaters & golf courses 10-43
  38. 38. Regulated Monopoly• Natural monopolies• Rate regulation• Socially optimum price P = MC• Fair return price P = ATC 10-44
  39. 39. Regulated MonopolyDilemma of Regulation Monopoly Price Price and Costs (Dollars) Pm Fair-Return Price Socially f Optimal Pf a Price ATC Pr r MC MR D b 0 Qm Qf Qr Quantity 10-45
  40. 40. De Beers Diamonds• 66 years of monopoly pricing –Independent producers went along• Mid-2000 abandoned monopoly –New discoveries –Independent producers withdrew –Political considerations• New strategy –“The diamond supplier of choice” 10-46
  41. 41. Key Terms• pure monopoly• barriers to entry• simultaneous consumption• network effects• X-inefficiency• rent-seeking behavior• price discrimination• socially optimal price• fair-return price 10-47
  42. 42. Next Chapter Preview…MonopolisticCompetitionand Oligopoly 10-48

×