Post on 31-Dec-2015
transcript
10
MonopolyThe price of monopoly is upon every occasion the
highest which can be got.ADAM SMITH
● Monopoly Defined
● The Monopolist’s Supply Decision
● Can Anything Good Be Said About Monopoly?
● Price Discrimination Under Monopoly
● Monopoly Defined
● The Monopolist’s Supply Decision
● Can Anything Good Be Said About Monopoly?
● Price Discrimination Under Monopoly
ContentsContents
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Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Monopoly DefinedMonopoly Defined
● Only one firm in the industry
● No close substitute for the product
● Little chance of successful entry by a competitor
● Only one firm in the industry
● No close substitute for the product
● Little chance of successful entry by a competitor
● Barriers to entry♦ Legal restrictions
♦ Patents
♦ Control of a scarce resource or input
♦ Deliberately erected entry barriers
♦ Large sunk costs
● Barriers to entry♦ Legal restrictions
♦ Patents
♦ Control of a scarce resource or input
♦ Deliberately erected entry barriers
♦ Large sunk costs
Sources of MonopolySources of Monopoly
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● Cost advantages♦ Technical superiority
♦ Economies of scale
● Cost advantages♦ Technical superiority
♦ Economies of scale
Sources of MonopolySources of Monopoly
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● Declining long-run average costs
● When a large firm can produce and sell more cheaply than a small firm
● Declining long-run average costs
● When a large firm can produce and sell more cheaply than a small firm
Natural MonopolyNatural Monopoly
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FIGURE 10-1 Natural MonopolyFIGURE 10-1 Natural Monopoly
AC
Ave
rag
e C
ost
Quantity Supplied
2.5 2 1
2.00
2.50
$3.00
C
B
A
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Monopolist’s Supply DecisionThe Monopolist’s Supply Decision
● Price maker (or price searcher)
● Faces a negatively sloped demand curve
● Standard supply-demand analysis does not apply.
● Price maker (or price searcher)
● Faces a negatively sloped demand curve
● Standard supply-demand analysis does not apply.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Monopolist’s Supply DecisionThe Monopolist’s Supply Decision
● Joint decision about price and output
● Marginal revenue < selling price
● Joint decision about price and output
● Marginal revenue < selling price
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Monopolist’s Supply DecisionThe Monopolist’s Supply Decision
● Monopolist sets output where MC = MR
● Market demand price for this output
● P > MR
● Monopolist makes profits (or losses) to the extent that price is greater (less) than average cost.
● Monopolist sets output where MC = MR
● Market demand price for this output
● P > MR
● Monopolist makes profits (or losses) to the extent that price is greater (less) than average cost.
FIGURE 10-2 Profit-Maximizing Equilibrium for a Monopolist
FIGURE 10-2 Profit-Maximizing Equilibrium for a Monopolist
MC
MC
0
4
$9
AC
AC
Quantity
Pri
ce
pe
r U
nit
7
150
C D (AR)
D
P
MR
M
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
TABLE 10-1 A Monopolist’s Price-Output Decision
TABLE 10-1 A Monopolist’s Price-Output Decision
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
The Monopolist’s Supply DecisionThe Monopolist’s Supply Decision
● Compared to perfect competition, a monopoly:♦ May enjoy a long-run profit
♦ Restricts its output to raise its selling price (both in the long and short runs)
♦ Leads to inefficient resource allocation (MC < MU)
● Compared to perfect competition, a monopoly:♦ May enjoy a long-run profit
♦ Restricts its output to raise its selling price (both in the long and short runs)
♦ Leads to inefficient resource allocation (MC < MU)
FIGURE 10-3 Compare Monopoly to Competitive Industry
FIGURE 10-3 Compare Monopoly to Competitive Industry
300
$9
AC
AC
Quantity
Pri
ce
pe
r U
nit
7
150
D (AR)
D
MC
MC
MR
B
P
M
C
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Can Anything Good Be Said About Monopoly?Can Anything Good Be Said About Monopoly?
● Under some circumstances a monopoly may:♦ Raise demand for its product (thus negating the
inefficient reduction in output noted above)
♦ Reduce marginal and average cost (produce more efficiently)
♦ Stimulate innovation
● Under some circumstances a monopoly may:♦ Raise demand for its product (thus negating the
inefficient reduction in output noted above)
♦ Reduce marginal and average cost (produce more efficiently)
♦ Stimulate innovation
● Natural monopoly = average costs fall as output rises
● Costs of production would be higher if a natural monopoly were broken up into many smaller firms.
● Natural monopoly = average costs fall as output rises
● Costs of production would be higher if a natural monopoly were broken up into many smaller firms.
Natural Monopoly: Where Single-Firm Production Is CheapestNatural Monopoly: Where Single-Firm Production Is Cheapest
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● Natural monopolies may allow lower average cost than a market with numerous competing firms. (Natural monopoly must be regulated in order for consumers to receive lower prices, however.)
● Monopolist may have incentive to produce more innovation than firms in more competitive markets.
● Natural monopolies may allow lower average cost than a market with numerous competing firms. (Natural monopoly must be regulated in order for consumers to receive lower prices, however.)
● Monopolist may have incentive to produce more innovation than firms in more competitive markets.
Natural Monopoly: Where Single-Firm Production Is CheapestNatural Monopoly: Where Single-Firm Production Is Cheapest
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Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Price Discrimination Under MonopolyPrice Discrimination Under Monopoly
● Price discrimination = charge different prices to different groups of customers (or charge the same price in markets where costs vary)
● Allows a monopolist to maximize profits
● Price discrimination = charge different prices to different groups of customers (or charge the same price in markets where costs vary)
● Allows a monopolist to maximize profits
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Price Discrimination Under MonopolyPrice Discrimination Under Monopoly
● Monopolist sets marginal revenue (not price) equal in each market
● Assumes equal cost conditions in each markets
● Monopolist sets marginal revenue (not price) equal in each market
● Assumes equal cost conditions in each markets
FIGURE 10-4 Prices/Quantities under Price Discrimination
FIGURE 10-4 Prices/Quantities under Price Discrimination
Db
Db MRa Qa MRb Qb
Pb
W
(b)
Customer Group B Customer Group A
Quantity
0
H H
Pri
ce
(a)
Quantity
Da
Da
0
J
Pa
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● No, although sometimes justice appears to demand different prices in different markets.
● In some cases, price discrimination may be necessary for a firm to survive.
● In some cases, where there are significant economies of scale, price discrimination may actually lead to lower prices.
● No, although sometimes justice appears to demand different prices in different markets.
● In some cases, price discrimination may be necessary for a firm to survive.
● In some cases, where there are significant economies of scale, price discrimination may actually lead to lower prices.
Is Price Discrimination Always Undesirable?Is Price Discrimination Always Undesirable?
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