Chapter 8. Monopoly How? Firm behavior Monopoly vs. Competition Price Discrimination Policy How?...
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Transcript of Chapter 8. Monopoly How? Firm behavior Monopoly vs. Competition Price Discrimination Policy How?...
Chapter 8. MonopolyChapter 8. MonopolyChapter 8. MonopolyChapter 8. Monopoly
• How?
• Firm behavior
• Monopoly vs. Competition
• Price Discrimination
• Policy
• How?
• Firm behavior
• Monopoly vs. Competition
• Price Discrimination
• Policy
What makes a monopoly?What makes a monopoly?What makes a monopoly?What makes a monopoly?
• single supplier of good firm supply = market supply firm demand = market demand
• single supplier of good firm supply = market supply firm demand = market demand
How does it happen?How does it happen?How does it happen?How does it happen?
1. no close substitutes
• otherwise, makers of substitutes are competition
• example: electricity
1. no close substitutes
• otherwise, makers of substitutes are competition
• example: electricity
2. barriers to entry2. barriers to entry2. barriers to entry2. barriers to entry
• hard (impossible)
for new competitors to enter market
• barriers are natural legal
• hard (impossible)
for new competitors to enter market
• barriers are natural legal
natural monopolynatural monopolynatural monopolynatural monopoly
• high fixed costs
• large economies of scale
• one firm meets market demand,
with lowest cost
• high fixed costs
• large economies of scale
• one firm meets market demand,
with lowest cost
examplesexamplesexamplesexamples
• distribution of water electricity natural gas
• distribution of water electricity natural gas
legal monopolylegal monopolylegal monopolylegal monopoly
• firm owns most of natural resource
• firm has exclusive license, patent, copyright
• firm owns most of natural resource
• firm has exclusive license, patent, copyright
examplesexamplesexamplesexamples
• DeBeers & diamonds
• Bayer & Cipro
• Microsoft & Powerpoint
• DeBeers & diamonds
• Bayer & Cipro
• Microsoft & Powerpoint
monopolist & pricesmonopolist & pricesmonopolist & pricesmonopolist & prices
• power to set prices price maker
• charge single price to everyone
• set prices for different groups/units price discrimination
• power to set prices price maker
• charge single price to everyone
• set prices for different groups/units price discrimination
Monopoly behaviorMonopoly behaviorMonopoly behaviorMonopoly behavior
• single price case
• same rule: choose Q where MR = MC
BUT
• different outcome
• single price case
• same rule: choose Q where MR = MC
BUT
• different outcome
P & MRP & MRP & MRP & MR• for monopoly,
MR < P
• why? increase Q
-- additional revenue-- but at lower P
(demand slopes down)
• for monopoly, MR < P
• why? increase Q
-- additional revenue-- but at lower P
(demand slopes down)
profit maximizingprofit maximizingprofit maximizingprofit maximizing
• choose Q where MR = MC
• charge highest P possible using demand curve
• profit
= (P - ATC)(Q)
• choose Q where MR = MC
• charge highest P possible using demand curve
• profit
= (P - ATC)(Q)
13.3 Monopoly vs. Competition13.3 Monopoly vs. Competition13.3 Monopoly vs. Competition13.3 Monopoly vs. Competition
• monopoly smaller output higher price
• monopoly smaller output higher price
Is monopoly efficient?Is monopoly efficient?Is monopoly efficient?Is monopoly efficient?
• No
• output too low Marginal benefit > MC deadweight loss
• No
• output too low Marginal benefit > MC deadweight loss
monopolymonopolymonopolymonopoly
P, MR
Q
DMR
MC
Qm
Pm
consumersurplus
producersurplus
deadweight loss
Price DiscriminationPrice DiscriminationPrice DiscriminationPrice Discrimination
• charge each buyer higher price possible convert consumer surplus to
economic profit
• must identify & separate buyers prevent reselling
• charge each buyer higher price possible convert consumer surplus to
economic profit
• must identify & separate buyers prevent reselling
How?How?How?How?
• charge different prices to groups of buyers
• groups have different willingness to pay
• charge different prices to groups of buyers
• groups have different willingness to pay
example: airlinesexample: airlinesexample: airlinesexample: airlines
• separate business, tourist travelers businesses have less elastic
demand, will pay more
• last minute, refundable tickets have higher price
• separate business, tourist travelers businesses have less elastic
demand, will pay more
• last minute, refundable tickets have higher price
• get consumer surplus from business travelers
• still have low fairs for tourism
• get consumer surplus from business travelers
• still have low fairs for tourism
Example: textbooks Example: textbooks Example: textbooks Example: textbooks
• NYT 10/21/2003
• Textbooks in U.S. cost twice as much as European editions
• Students ordering overseas Internet makes reselling easier,
price discrimination tougher
• NYT 10/21/2003
• Textbooks in U.S. cost twice as much as European editions
• Students ordering overseas Internet makes reselling easier,
price discrimination tougher
other price discriminationother price discriminationother price discriminationother price discrimination
• charge differently for different units
• example 1 pizza, $10 2 pizzas, $14
• people value 1st pizza more
• MC of 2nd pizza to same house small
• charge differently for different units
• example 1 pizza, $10 2 pizzas, $14
• people value 1st pizza more
• MC of 2nd pizza to same house small
Monopoly & policyMonopoly & policyMonopoly & policyMonopoly & policy
• some monopolies are regulated Niagara Mohawk
• some are illegal AT&T (split in 1982) Microsoft?
• some are created drug patents
• some monopolies are regulated Niagara Mohawk
• some are illegal AT&T (split in 1982) Microsoft?
• some are created drug patents
why allow monopolies?why allow monopolies?why allow monopolies?why allow monopolies?
• inefficient deadweight loss
• but there are gains economies of scale
-- natural monopolies
-- utilities
• inefficient deadweight loss
• but there are gains economies of scale
-- natural monopolies
-- utilities
• innovation drug patents reward research copyrights reward creativity
• innovation drug patents reward research copyrights reward creativity
summary: monopolysummary: monopolysummary: monopolysummary: monopoly
• unique good, barrier to entry
• choose Q where MR = MC but MR < P
• Qm lower, Pm higher than competition inefficient
• may use price discrimination
• unique good, barrier to entry
• choose Q where MR = MC but MR < P
• Qm lower, Pm higher than competition inefficient
• may use price discrimination