Date post: | 16-Apr-2017 |
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Business |
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15:10
Monopoly
How? Firm behavior Monopoly vs. Competition Price Discrimination Policy
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What makes a monopoly?
single supplier of good firm supply = market supply firm demand = market demand
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How does it happen?
1. no close substitutes otherwise, makers of substitutes are
competition example: electricity
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2. barriers to entry
hard (impossible)for new competitors to enter market
barriers are natural legal
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natural monopoly
high fixed costs large economies of scale one firm meets market demand,
with lowest cost
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examples
distribution of water electricity natural gas
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legal monopoly
firm owns most of natural resource firm has exclusive license, patent, copyright
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examples
DeBeers & diamonds Bayer & Cipro Microsoft & Powerpoint
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monopolist & prices
power to set prices price maker
charge single price to everyone set prices for different groups/units
price discrimination
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Monopoly behavior
single price case same rule:
choose Q where MR = MCBUT
different outcome
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P & MR for monopoly,
MR < P why?
increase Q-- additional revenue-- but at lower P
(demand slopes down)
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P
Q
D
$7
$6
5 6
TR = $7 x 5 = $35
TR = $6 x 6 = $36 MR = $1from 5 to 6
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MR & DP, MR
Q
DMR
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profit maximizing
choose Q where MR = MC charge highest P possible
using demand curve profit
= (P - ATC)(Q)
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P, MR
Q
DMR
MC
Q*
P*
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P, MR
Q
DMR
MC
Q*
P* ATC
economic profit
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13.3 Monopoly vs. Competition
monopoly smaller output higher price
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P, MR
Q
DMR
MC
Qm
PmPc
Qc
Pm > PcQm < Qc
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Is monopoly efficient?
No output too low
Marginal benefit > MC deadweight loss
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P, MR
Q
D
S=MC
competition
Pc
Qc
consumersurplus
producersurplus
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monopolyP, MR
Q
DMR
MC
Qm
Pm
consumersurplus
producersurplus
deadweight loss
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Price Discrimination
charge each buyer higher price possible convert consumer surplus to economic profit
must identify & separate buyers prevent reselling
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How?
charge different prices to groups of buyers groups have different willingness to pay
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example: airlines
separate business, tourist travelers businesses have less elastic demand, will pay
more last minute, refundable tickets have higher
price
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get consumer surplus from business travelers still have low fairs for tourism
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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
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other 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
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Monopoly & policy some monopolies are regulated
Niagara Mohawk some are illegal
AT&T (split in 1982) Microsoft?
some are created drug patents
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why allow monopolies?
inefficient deadweight loss
but there are gains economies of scale
-- natural monopolies-- utilities
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innovation drug patents reward research copyrights reward creativity
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summary: 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