Chapter 11 Monopoly Defining Monopoly Monopoly a market

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Chapter 11 Monopoly

Chapter 11 Monopoly

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. 2

Monopoly is the polar opposite of perfect competition. Monopoly is a market structure in

Monopoly is the polar opposite of perfect competition. Monopoly is a market structure in which a single firm makes up the entire market. Monopolies exist because of barriers to entry into a market that prevent competition. Barriers to entry include legal barriers, sociological barriers, and natural barriers. Legal barriers, such as patents, prevent others from entering the market until the patent expires. (governmentally created barriers) Sociological barriers – not everyone has the brains to win a Nobel Prize nor the skill to slam-dunk a basketball. (actions on the part of firms that create barriers to entry) Natural barriers – where the firm has economies of scale to produce what others cannot duplicate.

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

© 2015 Mc. Graw-Hill Education. All Rights Reserved. 5

© 2015 Mc. Graw-Hill Education. All Rights Reserved. 5

Monopoly ● patent The exclusive right to sell a new good for some period

Monopoly ● patent The exclusive right to sell a new good for some period of time. ● network externalities The value of a product to a consumer increases with the number of other consumers who use it. ● natural monopoly A market in which the economies of scale in production are so large that only a single large firm can earn a profit.

Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 7

Natural Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 7

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. 8

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. 9

The Total Revenue Curve for a Perfect Competitor © 2015 Mc. Graw-Hill Education. All

The Total Revenue Curve for a Perfect Competitor © 2015 Mc. Graw-Hill Education. All Rights Reserved. 10

Demand, Total Revenue, and Elasticity for Monopoly © 2015 Mc. Graw-Hill Education. All Rights

Demand, Total Revenue, and Elasticity for Monopoly © 2015 Mc. Graw-Hill Education. All Rights Reserved. 11

© 2015 Mc. Graw-Hill Education. All Rights Reserved. 12

© 2015 Mc. Graw-Hill Education. All Rights Reserved. 12

THE MONOPOLIST’S OUTPUT DECISION Total Revenue and Marginal Revenue The Demand Curve and the

THE MONOPOLIST’S OUTPUT DECISION Total Revenue and Marginal Revenue The Demand Curve and the Marginal-Revenue Curve Marginal revenue equals the price for the first unit sold, but is less than the price for additional units sold. To sell an additional unit, the firm cuts the price and receives less revenue on the units that could have been sold at the higher price. The marginal revenue is positive for the first four units, and negative for larger quantities. P > MR ( = MC)

Total Cost, Revenue, and Profit Curves for a Monopolist © 2015 Mc. Graw-Hill Education.

Total Cost, Revenue, and Profit Curves for a Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 14

Optimality condition for a monopolist: a monopolist maximizes profit by choosing the level of

Optimality condition for a monopolist: a monopolist maximizes profit by choosing the level of output where marginal revenue equals marginal cost. MR = MC and P > AVC (profit max. Condition) © 2015 Mc. Graw-Hill Education. All Rights Reserved. 15

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. 16

The Demand Curve and Corresponding Marginal Revenue Curve © 2015 Mc. Graw-Hill Education. All

The Demand Curve and Corresponding Marginal Revenue Curve © 2015 Mc. Graw-Hill Education. All Rights Reserved. 17

A Specific Linear Demand Curve and the Corresponding Marginal Revenue Curve © 2015 Mc.

A Specific Linear Demand Curve and the Corresponding Marginal Revenue Curve © 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

The Monopolist’s Price and Output Graphically MC Price $36 30 24 18 12 6

The Monopolist’s Price and Output Graphically MC Price $36 30 24 18 12 6 0 6 12 Monopolist price D 1 2 3 4 5 6 7 8 9 10 MR

The Profit-Maximizing Price and Quantity for a Monopolist © 2015 Mc. Graw-Hill Education. All

The Profit-Maximizing Price and Quantity for a Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 21

A Monopolist Making a Profit MC Price PM CM ATC A Profit B MR

A Monopolist Making a Profit MC Price PM CM ATC A Profit B MR 0 QM D Quantity

A Monopolist Breaking Even MC Price ATC PM MR 0 QM D Quantity

A Monopolist Breaking Even MC Price ATC PM MR 0 QM D Quantity

A Monopolist Making a Loss MC Price CM PM B Loss A MR 0

A Monopolist Making a Loss MC Price CM PM B Loss A MR 0 ATC QM D Quantity

When Should a Monopolist Shutdown? • Shutdown condition for a monopolist: cease production whenever

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. 25

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. 26

Comparing Monopoly and Perfect Competition MC Price $36 30 24 18 12 6 0

Comparing Monopoly and Perfect Competition MC Price $36 30 24 18 12 6 0 6 12 Monopolist price Competitive price D 1 2 3 4 5 6 7 8 9 10 MR

The Welfare Loss from Monopoly The welfare loss of a monopolist is represented by

The Welfare Loss from Monopoly The welfare loss of a monopolist is represented by the triangles B and D. Price MC PM C PC D B A 0 QM MR QC D Quantity

PRICE DISCRIMINATION ● price discrimination The practice of selling a good at different prices

PRICE DISCRIMINATION ● price discrimination The practice of selling a good at different prices to different consumers. Although price discrimination is widespread, it is not always possible. A firm has an opportunity for price discrimination if three conditions are met: 1 Market power. 2 Different consumer groups. 3 Resale is not possible.

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. 30

The Price-Discriminating Monopolist • 1 st-degree: Each output unit is sold at a different

The Price-Discriminating Monopolist • 1 st-degree: Each output unit is sold at a different price. Prices may differ across buyers. • Thus, it will produce the same quantity as will a perfectly competitive firm. • For perfectly price-discriminating monopolist, P = AR = MR. • First degree (or perfect) price discrimination – seller can identify where each consumer lies on the demand curve and charges each consumer the highest price the consumer is willing to pay – allows the seller to extract the greatest amount of profits – requires a considerable amount of information

Perfect Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved. 32

Perfect Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved. 32

The Perfectly Discriminating Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 33

The Perfectly Discriminating Monopolist © 2015 Mc. Graw-Hill Education. All Rights Reserved. 33

First-degree Price Discrimination $/output unit PS So the sum of the gains to the

First-degree Price Discrimination $/output unit PS So the sum of the gains to the monopolist on all trades is the maximum possible total gains-to-trade. MC(y) p(y) y

Second degree price discrimination • • differential prices charged by blocks of services requires

Second degree price discrimination • • differential prices charged by blocks of services requires metering of services consumed by buyers Implication: - block or quantity discounts Different prices for different incremental units in each market • The price paid by a buyer can vary with the quantity demanded by the buyer. • But all customers face the same price schedule.

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. 36

Second-Degree Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved. 37

Second-Degree Price Discrimination © 2015 Mc. Graw-Hill Education. All Rights Reserved. 37

Third degree (or simple) price discrimination • customers are segregated into different markets and

Third degree (or simple) price discrimination • customers are segregated into different markets and charged different prices in each • segmentation can be based on any characteristic such as age, location, gender, income, etc. • Price paid by buyers in a given group is the same for all units purchased. • But price may differ across buyer groups. E. g. , senior citizen and student discounts vs. no discounts for middleaged persons. © 2015 Mc. Graw-Hill Education. All Rights Reserved. 38

Chapter 11 Monopoly Defining Monopoly a market structureChapter 11 Monopoly Defining Monopoly a market structure
Chapter 11 Monopoly Chapter Outline Defining Monopoly FiveChapter 11 Monopoly Chapter Outline Defining Monopoly Five
CHAPTER 14 Monopoly Monopoly A monopoly monopolist meansCHAPTER 14 Monopoly Monopoly A monopoly monopolist means
MONOPOLY Chapter 9 Section Main Menu Defining MonopolyMONOPOLY Chapter 9 Section Main Menu Defining Monopoly
Monopoly Outline Pure monopoly Barriers to entry MonopolyMonopoly Outline Pure monopoly Barriers to entry Monopoly
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
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
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 Monopoly market n n singleChapter 11 Monopoly Monopoly market n n single
MONOPOLY Chapter 16 WHAT IS A MONOPOLY MarketMONOPOLY Chapter 16 WHAT IS A MONOPOLY Market
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