Monopoly. A firm that is the sole seller of a product No close substitutes Many barriers to entry...
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Transcript of Monopoly. A firm that is the sole seller of a product No close substitutes Many barriers to entry...
Monopoly
Monopoly• A firm that is the sole seller of a product• No close substitutes• Many barriers to entry• Sources of market power:–Firm owns a key resource–Government gives a firm exclusive selling rights
(patents)–The costs of production make a single producer
more efficient than a larger number of producers
Natural Monopoly
• Market that run most efficiently when one large firm provides all of the output
• Firm’s costs continuously decrease with increased output when providing for entire market.
• What resources do you need for public water?
How do Monopolies Maximize Profits?
Let’s pretend that I wrote an economics book that explains the concepts of economics SO well that you
are GUARANTTEED to score a 5 on the A.P. Microeconomics exam. Also, it only takes one hour to read!!! Lastly, lets assume I was able to obtain a
patent for this amazing book.
Figure 3 Demand and Marginal-Revenue Curves for a Monopoly
Quantity of Vespernomics Textbooks
Price
$1110
9876543210
–1–2–3–4
1 2 3 4 5 6 7 8
First, lets review: What would my firm’s demand look like if the book sold in a competitive market?
In reality, do you think the demand for my book would really look like that?
P Qd TR MR
11 0
10 1
9 2
8 3
7 4
6 5
5 6
4 7
3 8
In reality, do you think the demand for my book would really look like that?
P Qd TR MR
11 0 0 -
10 1 10 10
9 2 18 8
8 3 24 6
7 4 28 4
6 5 30 2
5 6 30 0
4 7 28 -2
3 8 24 -4
Graph demand and MR for my books
Quantity of Vespernomics
Price
$1110
9876543210
–1–2–3–4
Demand(averagerevenue)
Marginalrevenue
1 2 3 4 5 6 7 8
If a monopoly wants to sell more, it must lower price.
Price falls for ALL units sold.
This is because monopolies are STILL impacted by the law of demand.
The dilemma for monopolies
• As a monopoly produces more, the price and revenue of their goods will fall
• WHY?????
So let’s go back to the main question, how do I maximize my profits!?!?
Remember profit maximization is where MR = MC
Quantity of Vespernomics
Price
$1110
9876543210
–1–2–3–4
Demand(averagerevenue)
Marginalrevenue
1 2 3 4 5 6 7 8
MC
- My profit maximization quantity is 5, where my MR = MC
- But, at that quantity, the five people who will buy the book are willing to spend $6
So, the firm would sell the good for $6
Inefficiency of Monopolies
FIRMS
BUYERS
The Deadweight Loss
• A monopoly sets a price above its MC–Price is higher than the market price–Quantity is lower than the market
quantity–This causes markets to be inefficient• Deadweight loss
Figure 8 The Inefficiency of Monopoly
Quantity0
PriceDeadweight
loss
DemandMarginalrevenue
Marginal cost
Efficientquantity
Monopolyprice
Monopolyquantity
Review: Monopoly Key Concepts • Monopoly's are able to charge a higher
price because they have high market power
• MR is below demand• The price that a monopoly sets is equal
to the demand at the profit maximizing production level (MR=MC)
• P > MC• Monopolies cause inefficient markets– Produce less and a higher price
Price Discrimination
Price Discrimination
• Selling the same good at different prices to different customers
Price Discrimination
• Selling the same good at different prices to different customers
• This can be done only if a firm:– Has market power– Can separate consumers into groups– Can prevent resale between consumers
Lets say I want to start selling the critically acclaimed book: Vespernomics
Let’s also assume that it costs me $5 to produce one book of Vespernomics
Now assume that there are two types of people who want to buy Vespernomics
• Type 1: These are the die hard readers. There are currently two type 1 people and are willing to spend $50 for the book
• Type 2: These are the, “I just want to make Mr. Vesper happy so I can pass” readers. There are currently five type 2 people and are willing to spend $10 for the book
I can sell the book for $50 and make a profit of $90. But, there would be 5 students who don’t have the book.
I can sell the book for $10 and make a profit of $25. Obviously, a much
smaller profit.
Now assume I can price discriminate
• Type 1: The die hard readers
• I can sell them the books for $50 and make a profit of $90
• Type 2: The “just want to pass” readers
• I can sell them the book for $10 and make a profit of $25
So, as a firm, I make the most profit possible of $115 AND everyone who wanted the book will be able to obtain it.
THE BIG IDEA
Contrary to popular belief, price discrimination actually makes a market
more efficient! More consumers are able to purchase the product and there
is less surplus lost (deadweight loss). The monopoly firm will just share most
of the surplus.
Final Question
If a firm can PERFECTLY price discriminate, who would obtain all of
the surplus?
Natural Monopolies
All of you used a good/service today produced by a natural monopoly…
Natural Monopoly
• A monopoly that exists because it would be most efficient for the market
• A natural monopoly provides a good/service to the entire market at a smaller cost than two or more firms– Natural monopoly is always in economies of scale– The firm’s ATC is still decreasing when it earns
normal profit (where ATC = D)
Natural Monopoly
Regulating Natural Monopolies
• The government sets the price and quantity• The regulated price is where the natural
monopoly earns normal profit– When price = ATC
Regulating Natural Monopolies
MC