Chapter 11 Monopoly Chapter Outline Defining Monopoly Five

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Chapter 11 Monopoly

Chapter 11 Monopoly

Chapter Outline • • Defining Monopoly Five Sources Of Monopoly The Profit-maximizing Monopolist A

Chapter Outline • • Defining Monopoly Five Sources Of Monopoly The Profit-maximizing Monopolist A Monopolist Has No Supply Curve Adjustments In The Long Run Price Discrimination The Efficiency Loss From Monopoly Public Policy Toward Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 2

Defining Monopoly • Monopoly: a market structure in which a single seller of a

Defining Monopoly • Monopoly: a market structure in which a single seller of a product with no close substitutes serves the entire market. – A monopoly has significant control over the price it charges. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 3

Five Sources Of Monopoly 1. 2. 3. 4. 5. Exclusive Control over Important Inputs

Five Sources Of Monopoly 1. 2. 3. 4. 5. Exclusive Control over Important Inputs Economies of Scale Patents Network Economies Government Licenses or Franchises © 2015 Mc. Graw-Hill Education. All Rights Reserved. 4

Figure 11. 1: Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 5

Figure 11. 1: Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 5

The Profit-Maximizing Monopolist • The monopolist’s goal is to maximize economic profit. – In

The Profit-Maximizing Monopolist • The monopolist’s goal is to maximize economic profit. – In the short run this means to choose the level of output for which the difference between total revenue and short-run total cost is greatest. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 6

The Monopolist’s Total Revenue Curve • As price falls, total revenue for the monopolist

The Monopolist’s Total Revenue Curve • As price falls, total revenue for the monopolist does not rise linearly with output. – Instead, it reaches a maximum value at the quantity corresponding to the midpoint of the demand curve after which it again begins to fall. – Total revenue reaches its maximum value when the price elasticity of demand is unity. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 7

Figure 11. 2: The Total Revenue Curve for a Perfect Competitor © 2015 Mc.

Figure 11. 2: The Total Revenue Curve for a Perfect Competitor © 2015 Mc. Graw-Hill Education. All Rights Reserved. 8

Figure 11. 3 Demand, Total Revenue, and Elasticity © 2015 Mc. Graw-Hill Education. All

Figure 11. 3 Demand, Total Revenue, and Elasticity © 2015 Mc. Graw-Hill Education. All Rights Reserved. 9

Figure 11. 4: Total Cost, Revenue, and Profit Curves for a Monopolist © 2015

Figure 11. 4: Total Cost, Revenue, and Profit Curves for a Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 10

Marginal Revenue • Optimality condition for a monopolist: a monopolist maximizes profit by choosing

Marginal Revenue • Optimality condition for a monopolist: a monopolist maximizes profit by choosing the level of output where marginal revenue equals marginal cost. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 11

Figure 11. 5: Changes in Total Revenue Resulting from a Price Cut © 2015

Figure 11. 5: Changes in Total Revenue Resulting from a Price Cut © 2015 Mc. Graw-Hill Education. All Rights Reserved. 12

Figure 11. 6: Marginal Revenue and Position on the Demand Curve © 2015 Mc.

Figure 11. 6: Marginal Revenue and Position on the Demand Curve © 2015 Mc. Graw-Hill Education. All Rights Reserved. 13

Marginal Revenue And Elasticity • The less elastic demand is with respect to price,

Marginal Revenue And Elasticity • The less elastic demand is with respect to price, the more price will exceed marginal revenue. – For all elasticity values less than 1 in absolute value marginal revenue will be negative. – For all elasticity values larger than 1 in absolute value marginal revenue will be positive. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 14

Figure 11. 7: The Demand Curve and Corresponding Marginal Revenue Curve © 2015 Mc.

Figure 11. 7: The Demand Curve and Corresponding Marginal Revenue Curve © 2015 Mc. Graw-Hill Education. All Rights Reserved. 15

Figure 11. 8: A Specific Linear Demand Curve and the Corresponding Marginal Revenue Curve

Figure 11. 8: A Specific Linear Demand Curve and the Corresponding Marginal Revenue Curve © 2015 Mc. Graw-Hill Education. All Rights Reserved. 16

Figure 11. 9: The Profit-Maximizing Price and Quantity for a Monopolist © 2015 Mc.

Figure 11. 9: The Profit-Maximizing Price and Quantity for a Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 17

Figure 11. 10: The Profit-Maximizing Price and Quantity for Specific Cost and Demand Functions

Figure 11. 10: The Profit-Maximizing Price and Quantity for Specific Cost and Demand Functions © 2015 Mc. Graw-Hill Education. All Rights Reserved. 18

The Profit-Maximizing Monopolist • If a monopolist’s goal is to maximize profits, she will

The Profit-Maximizing Monopolist • If a monopolist’s goal is to maximize profits, she will never produce an output level on the inelastic portion of her demand curve. • The profit-maximizing level of output must lie on the elastic portion of the demand curve. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 19

Figure 11. 11: When Should a Monopolist Shutdown? • Shutdown condition for a monopolist:

Figure 11. 11: When Should a Monopolist Shutdown? • Shutdown condition for a monopolist: cease production whenever average revenue is less than average variable cost at every level of output. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 20

A Monopolist Has No Supply Curve • The monopolist is a price maker. –

A Monopolist Has No Supply Curve • The monopolist is a price maker. – When demand shifts rightward elasticity at a given price may either increase or decrease, and vice-versa. • So there can be no unique correspondence between the price a monopolist charges and the amount she chooses to produce. • Monopoly has a supply rule, which is to equate marginal revenue and marginal cost. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 21

Figure 11. 12: Long-Run Equilibrium for a Profit-Maximizing Monopolist © 2015 Mc. Graw-Hill Education.

Figure 11. 12: Long-Run Equilibrium for a Profit-Maximizing Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 22

Price Discrimination • Price discrimination: a practice where the monopolist charge different prices to

Price Discrimination • Price discrimination: a practice where the monopolist charge different prices to different buyers. • Third-degree price discrimination: charging different prices to buyers in completely separate markets. • First-degree price discrimination: is the term used to describe the largest possible extent of market segmentation. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 23

Figure 11. 13: The Profit-Maximizing Monopolist Who Sells in Two Markets © 2015 Mc.

Figure 11. 13: The Profit-Maximizing Monopolist Who Sells in Two Markets © 2015 Mc. Graw-Hill Education. All Rights Reserved. 24

Figure 11. 14: A Monopolist with a Perfectly Elastic Foreign Market © 2015 Mc.

Figure 11. 14: A Monopolist with a Perfectly Elastic Foreign Market © 2015 Mc. Graw-Hill Education. All Rights Reserved. 25

Figure 11. 15: Perfect Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved.

Figure 11. 15: Perfect Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved. 26

Figure 11. 16: The Perfectly Discriminating Monopolist © 2015 Mc. Graw-Hill Education. All Rights

Figure 11. 16: The Perfectly Discriminating Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 27

Figure 11. 17: Second-Degree Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved.

Figure 11. 17: Second-Degree Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved. 28

Second-Degree Price Discrimination • Second-degree price discrimination: price discrimination where the same rate structure

Second-Degree Price Discrimination • Second-degree price discrimination: price discrimination where the same rate structure is available to every consumer and the limited number of rate categories tends to limit the amount of consumer surplus that can be captured. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 29

Figure 11. 18: A Perfect Hurdle © 2015 Mc. Graw-Hill Education. All Rights Reserved.

Figure 11. 18: A Perfect Hurdle © 2015 Mc. Graw-Hill Education. All Rights Reserved. 30

The Efficiency Loss From Monopoly • Deadweight loss from monopoly: the loss of efficiency

The Efficiency Loss From Monopoly • Deadweight loss from monopoly: the loss of efficiency due to the presence of a Monopoly. – Is the result of failure to price discriminate perfectly. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 31

Figure 11. 19: The Welfare Loss from a Single-Price Monopoly © 2015 Mc. Graw-Hill

Figure 11. 19: The Welfare Loss from a Single-Price Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 32

Public Policy Toward Natural Monopoly • • • State Ownership And Management State Regulation

Public Policy Toward Natural Monopoly • • • State Ownership And Management State Regulation Of Private Monopolies Exclusive Contracting For Natural Monopoly Vigorous Enforcement Of Antitrust Laws A Laissez-faire Policy Toward Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 33

Figure 11. 20: A Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved.

Figure 11. 20: A Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 34

Figure 11. 21: Cross-Subsidization to Boost Total Output © 2015 Mc. Graw-Hill Education. All

Figure 11. 21: Cross-Subsidization to Boost Total Output © 2015 Mc. Graw-Hill Education. All Rights Reserved. 35

Figure 11. 22: The Efficiency Losses from Single-Price and Two-Price Monopoly © 2015 Mc.

Figure 11. 22: The Efficiency Losses from Single-Price and Two-Price Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 36

Figure 11. 23: Does Monopoly Suppress Innovation? © 2015 Mc. Graw-Hill Education. All Rights

Figure 11. 23: Does Monopoly Suppress Innovation? © 2015 Mc. Graw-Hill Education. All Rights Reserved. 37

Chapter 11 Monopoly Defining Monopoly Monopoly a marketChapter 11 Monopoly Defining Monopoly Monopoly a market
Monopoly Outline Pure monopoly Barriers to entry MonopolyMonopoly Outline Pure monopoly Barriers to entry Monopoly
Monopoly Outline Pure monopoly Barriers to entry MonopolyMonopoly Outline Pure monopoly Barriers to entry Monopoly
Monopoly Outline Pure monopoly Barriers to entry MonopolyMonopoly Outline Pure monopoly Barriers to entry Monopoly
CHAPTER 14 Monopoly Monopoly A monopoly monopolist meansCHAPTER 14 Monopoly Monopoly A monopoly monopolist means
6 MONOPOLY Contents monopoly characteristics causes of monopoly6 MONOPOLY Contents monopoly characteristics causes of monopoly
Monopoly 15 Monopoly A firm is a monopolyMonopoly 15 Monopoly A firm is a monopoly
Monopoly Monopoly Why u Natural monopoly increasing returnsMonopoly Monopoly Why u Natural monopoly increasing returns
Ch 13 Monopoly Causes of monopoly Monopoly pricingCh 13 Monopoly Causes of monopoly Monopoly pricing
Ch 12 Monopoly Causes of monopoly Monopoly pricingCh 12 Monopoly Causes of monopoly Monopoly pricing
Monopoly Characteristics of a Monopoly Pure Monopoly existsMonopoly Characteristics of a Monopoly Pure Monopoly exists
Monopoly Identify characteristics of a monopoly Monopoly NaturalMonopoly Identify characteristics of a monopoly Monopoly Natural
Chapter 11 Monopoly Defining Monopoly a market structureChapter 11 Monopoly Defining Monopoly a market structure
MONOPOLY Chapter 9 Section Main Menu Defining MonopolyMONOPOLY Chapter 9 Section Main Menu Defining Monopoly
8 Monopoly Outline Monopoly Defined The Monopolists Supply8 Monopoly Outline Monopoly Defined The Monopolists Supply
6 Monopoly Outline Monopoly Defined The Monopolists Supply6 Monopoly Outline Monopoly Defined The Monopolists Supply
Defining Zone Assignments Concept Defining Zone Assignments DefiningDefining Zone Assignments Concept Defining Zone Assignments Defining
Unit 6 DEFINING AND NON DEFINING DEFINING RELATIVEUnit 6 DEFINING AND NON DEFINING DEFINING RELATIVE
Defining Inventory Pairs Concept Defining Inventory Pairs DefiningDefining Inventory Pairs Concept Defining Inventory Pairs Defining
Defining Allocations Concept Defining Allocations Defining Allocations StepDefining Allocations Concept Defining Allocations Defining Allocations Step
Defining Putaway Options Concept Defining Putaway Options DefiningDefining Putaway Options Concept Defining Putaway Options Defining
Defining Storage Areas Concept Defining Storage Areas DefiningDefining Storage Areas Concept Defining Storage Areas Defining
Defining Multicurrency Options Concept Defining Multicurrency Options DefiningDefining Multicurrency Options Concept Defining Multicurrency Options Defining
Defining Container Types Concept Defining Container Types DefiningDefining Container Types Concept Defining Container Types Defining