7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
1/50
that has no close substitutes and faces many
.
he firm and the industr are identical.
The demand curve faced by the firm is the
downward-sloping industry demand curve.
A monopo y acts as a price-ma er
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
2/50
-
demand curve sets a constraint on the
The monopolist can either set the price
demand curve
r e erm ne e quan y o e so anthen find the price at which this quantitycan e so
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
3/50
That is, it can set a price above marginal cost
depends on the definition of the market
product has no close substitutes
If we define the market too broadl a
monopolist may appear to have rivals
If we define it too narrowl we ma identif afirm as a monopoly when it is not
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
4/50
Where Do Mono olies Come From?1 Government blocks the entry of more than
one rm n o a mar e . y2 One firm has control of a ke resource
necessary to produce a good.
firm has a natural monopoly.
4 Being first to produce a new product (iPod)
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
5/50
Where Do Mono olies Come From?Entry Blocked by Government Action
The government blocks entry in two main ways:
1 By granting apatentor copyrightto anindividual or firm, giving it the exclusive rightto produce a product.
2 By granting a firm apublic franchise, making
service.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
6/50
Where Do Monopolies Come From?
Entry Blocked by Government Action
Patent The exclusive right to a product for some.
Copyright A government-granted exclusive rightto pro uce an se a creat on.
Public Franchises
Public franchise A designation by the
of a good or service.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
7/50
Where Do Mono olies Come From?Control of a Key Resource
Another way for a firm to become a monopoly isby controlling a key resource.
ALCOA example
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
8/50
Forever?
Monopoly
sentimental value of diamonds as
a way to maintain its position inthe diamond market.
.logue.htm
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
9/50
a profit because AClies below thedemand curve at
some quantities wo firms cannot
make positive profits
es a ove half orall quantities
17-9
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
10/50
-
curve facing the monopolist be P = P(Q),.
The total cost function is C = C(Q). e monopo st tr es to max m ze
= TR C,
where TR = P(Q).Q and TC = C(Q).
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
11/50
-
d/dQ = dTR/dQ dC/dQ = 0,
.e., = .
=> MR = MC.The second order condition is
2 2
=
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
12/50
$
ro axmza onC
400Rt'
300
c
150
200
Profits
t
100
50c
Quantity0 5 10 15 20
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
13/50
P = a bQ,
w at s t e equat on
TR = PQ = aQ bQ2
Then
= = AR = TR/Q = a bQ for Q > 0.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
14/50
Average and Marginal Revenue$ per 7
un o
output 6
4
5
Average Revenue (Demand)
3
1MarginalRevenue
Output0 1 2 3 4 5 6 7
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
15/50
.
But TR = PXQ.
ence
MR = P + Q(dP/dQ) = P(1 1/e)
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
16/50
Maximizing Profit When Marginal Revenue
E uals Mar inal Cost
$ per
P1
MC
un o
output
AC
P*
Lostprofit
=
2
Lostprofit
MR
Q1 QuantityQ* Q2
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
17/50
-,
for e < 1, MR will be negative
So long as MC > 0, profit-maximization,
i.e. e > 1.
The monopolist will operate on the elasticportion of the demand curve.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
18/50
The Monopolists Output Decision
An Example
C(Q) = 50 + Q2
P(Q) = 40 Q
,
= => = =
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
19/50
ro ax m za on$/Q
MC40
AC
30
ro
AR
20
15
MR
10
Quantity
0 5 10 15 20
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
20/50
Curve
- The elasticity of demand affects amonopo st s pr ce re at ve to ts marg nacost
- Check the price-marginal cost margin: MC
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
21/50
Then MR = MC implies
= p p = e
For a competitive firm, p = MC=> L = 0
,and the greater the monopolists ability to
.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
22/50
,
benefit to being a monopolist,
perfectly competitive market
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
23/50
monopolist?- ,
that there will be no effect on either,
monopolist will now be maximizing T.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
24/50
imposed.
P = a Q, C = cQ, a > c. hen Q* = (a c)/2 and P* = (a + c)/2.
Next let the tax be im osed on uantit
at the rate t, a > (c+t).
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
25/50
becomes C = (c+t)Q.=
price P** = (a+c+t)/2.
ence, - = t , w c s ows t atprice has increased by only half the
amoun o e ax per un .
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
26/50
However it is not enerall true that the rice
increases by less than the tax. Suppose that the demand curve is a constant-
. MR = P(1 1/e).
E uatin this to MC = c and solvin we et P =c/(1 1/e).
After the tax is imposed, price is P = (c+t)/(1 .
P P = t/(1 1/e). Since e > 1 1 1 e is a fraction and therefore
the increase in price exceeds t.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
27/50
MONOPOLY
e E ect o a Tax
Suppose a specific tax oftdollars per unit is levied, so that the
sells. If MC was the firms original marginal cost, its optimalproduction decision is now given by
Effect of Excise Tax on Monopolist
With a tax tper unit, the firmseffective marginal cost isincreased by the amount ttoMC + t.
In this example, the increase inprice Pis larger than the tax t.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
28/50
Res onse to Chan es in Cost How do monopolies and perfectly competitive markets
Consider the case of a marginal cost increase by agiven amount at every level of output xamp e: a spec c ax, , on rms
Thepass-through rateis the increase in price that
occurs in response to a small increase in marginal cost,measure per o ar o increase in margina cost
In a competitive market, the pass-through rate is neverreater than one
The monopolists pass-through rate depends on theshape of the demand curve -
curve
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
29/50
.
in two respects.,
equilibrium is when price is driven down to
curve productive efficiency is attained.
onopo s s no orce o pro uce a elowest point of the average cost.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
30/50
.
where the potential gains from trade
realized allocative efficiency
The monopoly charges a price that is
g er an marg na cos an ere s adeadweight loss under monopoly.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
31/50
Does Monopoly Reduce Economic Efficiency?
Comparing Monopoly and Perfect Competition
What Happens If a Perfectly Competit ive
Industry Becomes a Monopoly?
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
32/50
and lower quantities,
consumers and producers in the
We can compare producer and consumer
surp us w en n a compe ve mar e anin a monopolistic market
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
33/50
Does Monopoly Reduce Economic Efficiency?
Measuring the Efficiency Losses from Monopoly
The Ineffic iency of Monopoly
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
34/50
Firms can make investments in an effort tobecome a monopolist Example: cable TV firms lobbying government
If firms compete to become a monopolist, they
will spend up to the full monopoly profit (Richardosner If they spend on socially wasteful things (e.g.,
olf outin s for local officials the loss from
monopoly may be larger than deadweight lossand include all monopoly profit
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
35/50
devoted to securing a monopoly position
always be so bad
xpen tures rms ma e to ga nmonopoly positions can be socially
va ua e e.g., spen ng n esearch for patentable drugs)
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
36/50
and a lower output than a comparable,
restrict monopoly power in various ways.
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
37/50
- anges t e eman curve ac ng t e rm
- The profit-maximizing output formonopoly becomes the same as theperfectly competitive output
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
38/50
If price is lowered to PC outputincreases to its maximum QC and
MR
ere s no ea we g oss. $/Q
MCPm
AC
P2 = PC
If left alone, a monopolistproduces Qm and charges Pm.
Qm QuantityQc
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
39/50
e oc a os s o onopo y ower
Natural Monopoly
an industry at a cost lower than what it would
be if there were several firms. C(Q) < C(q1) + C(q2) + C(q3) + .. +
C(qn), where Q = q1+q2+ ..+qn
e average cos curve s ownwarsloping, then there is natural monopoly
,
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
40/50
Su ose that the total cost function is C = 50 +
10Q. If output per day is 25, one firm can produce thisamount at an average cost o s. an totacost of Rs.300.
,produces 12 units while the other produces 13units, the total cost of production is 170 + 180 =
Rs.350 which is greater than the cost ofproduction of a single firm.
Regulating the Price
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
41/50
Regulating the Priceof a Natural Mono ol
$/Q
Natural monopolies occur
economies of scale
Quantity
Regulating the Price
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
42/50
Regulating the Priceof a Natural Mono ol
$/Q
Unregulated, the monopolis twould produce Qm and
char e P .
If the price were regulate to be PC,the firm would lose money
and go out of business.
Setting the price at Pryields the largest possib le
output;excess profi t is zero.
Pm
MC
ACPr
AR
MR
C
QuantityQr QCQm
i d
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
43/50
First-Best vs. Second-Best
rce eguaton Under regulation, ideally prices will be set at the competitive
pr ce
Price at which demand and supply curves intersect A re ate sur lus will be maximized First-best solutionto problem of price regulation
Two problems with achieving this lead to second-best
re ulation Regulator may not know the firms marginal costs First-best solution would cause the monopolist to lose money
Best the regulator can do is set a price that makes
aggregate surplus as large as possible, allow the firm to
Set P = AC17-43
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
44/50
regulation:'
and demand functions because they change
with evolvin market conditions Regulated monopolists make many decisions
other than about rice re ulation ma lead
to inefficiencies wrt these decisions
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
45/50
the maximization of aggregate surplus-
objectives, e.g. provision of services to
oor consumers- Regulators may be appointed/elected
they can try to improve chances of repeat
appointment or reelection- Regulators may be captured by the
regulated firm
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
46/50
- There is no need for elaborate regulatory
- Managers have no incentive to overstate
But there is no focus on profits which
- the politicians and bureaucrats have their
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
47/50
-
- Adds to cost- ut s ts eman curve
Letp = price
=
q = q(a, p), q/a > 0, q/p < 0.
q = o er cos s
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
48/50
Dorfman-Steiner model
Consider a profit-maximizing monopolist:
= pq a, p q a, p a
To maximize profit:
p = q + pq/p (C/q)(q/p) = 0 (1)
a = pq/a (C/q)(q/a) 1 = 0 (2)From (1),
+ =
[p C/q]/p = -(q/p)/(q/p) = 1/ep (3)
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
49/50
Dorfman-Steiner model
,
(p C/ q)(q/ a) = 1 p q = q a
(p C/q) = (a/q)/(a/q)(q/a)(p C/q) = (a/q)/(1/ea) (4)
,
[(a/q)/ea][1/p] = 1/epa pq = ea ep
7/29/2019 Monopoly SlidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slidesMonopoly slides
50/50
-= a p
| |
as a proportion of sales elasticities
revenue
Ifep is large, then less will be spent onadvertising the product
Top Related