Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does...

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Transcript of Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does...

Page 1: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Monopoly

Page 2: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Learning Objectives:

• What is a Monopoly?

• What are the sources of Monopoly power?

• How does a Monopoly choose how much to produce and what price to charge?

• What effect does a Monopoly have on economic efficiency?

• How does a government react to a Monopoly?

Page 3: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Definition of Monopoly

• A market for a product or service with only one firm producing and selling that particular product or service

• Examples of Monopoly: • Public utilities (may be local monopolies) • BCCI• Indian Railways (till 2009)

• Example: Entering the Aspartame Market

Page 4: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Source of Monopoly Power: Barriers to Entry

• Key input for production under the control of one firm

• Network externalities in the supply of the product • As more people use the product, its usefulness rises

• Economies of scale giving rise to Natural Monopoly• One firm can supply the entire market at lower average total cost

than many firms together

• Government imposed entry barrier • Patent & Copyright • Public Franchise

Page 5: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Monopolist’s Demand Curve and Marginal Revenue Curve

Monopolist’s demand curve is downward sloping

When a (non price discriminating) Monopolist lowers the price of the product in order to sell more of it:

More of the product gets sold, giving extra revenue

Total revenue from all the previous units decreases due to lower price being charged for each unit

Page 6: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

How does a Monopoly choose Price and Output?

• A Monopolist maximizes profit

• Profit maximization rule:• Marginal Revenue (MR) = Marginal Cost (MC)

Profit = Total Revenue – Total Cost

Maximizing profit with respect to output:

Page 7: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

A Monopolist Maximizing ProfitProfit Maximizing Price and Output:

P* & Q*

Monopolist’s Profit: □P*Act

Page 8: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

A Rule of Thumb for Monopoly Pricing

Or,

• Markup over marginal cost as a percentage of price for a Monopolist should be equal to the negative of the inverse of the elasticity of demand for the monopolist’s product

• If demand for the product is very elastic, the Monopolist will get a lower markup

Page 9: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Calculating a Monopolist’s Profit Maximizing Price and Output Price (P) Quantity

(Q)Total

Revenue (P*Q)

Marginal Revenue

Total Cost (C)

Marginal Cost

20 0 0 - 41 -

19 1 19 19 45 4

18 2 36 17 50 5

17 3 51 15 56 6

16 4 64 13 63 7

15 5 75 11 71 8

14 6 84 9 80 9

13 7 91 7 90 10

12 8 96 5 101 11

Page 10: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Social Costs of Monopoly Power• Fall in Consumer

Surplus

• Rise in Producer Surplus

• Creation of Deadweight Loss, and thus leading to a fall in Economic Efficiency

• Example: In Prisons, Sky-High Phone Rates and Money Transfer Fees

Page 11: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Measuring Monopoly Power

• Lerner’s Degree of Monopoly Power

• For a Perfectly Competitive firm,

Page 12: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Multi-plant Monopoly

• Profit maximization:

,

where are output from plants 1 and 2 respectively.

Page 13: Monopoly. Learning Objectives: What is a Monopoly? What are the sources of Monopoly power? How does a Monopoly choose how much to produce and what price.

Government Policy towards Monopoly

• Antitrust Laws

• Merger Evaluations

• Price Regulations

• Example: Dollar Tree Crowned Victor In Battle For Family Dollar

• Example: The Death of Google Reader Paves The Way For Real RSS Businesses


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Chapter 8: Pure Monopoly. Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin What is a Pure Monopoly? A pure monopoly.

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Monopoly © 2003 South-Western/Thomson Learning. What Is a Monopoly? A monopoly firm is the only seller of a good or service with no close substitutes.

Monopoly © 2003 South-Western/Thomson Learning. What Is a Monopoly? A monopoly firm is the only seller of a good or service with no close substitutes.