1、,Monopoly,Chapter 15,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to:Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,Monopoly,While a competitive firm is a p
2、rice taker, a monopoly firm is a price maker.,Monopoly,A firm is considered a monopoly if . . .it is the sole seller of its product.its product does not have close substitutes.,Why Monopolies Arise,The fundamental cause of monopoly is barriers to entry.,Why Monopolies Arise,Barriers to entry have th
3、ree sources:Ownership of a key resource.The government gives a single firm theexclusive right to produce some good.Costs of production make a single producer more efficient than a large number of producers.,Monopoly Resources,Although exclusive ownership of a key resource is a potential source of mo
4、nopoly, in practice monopolies rarely arise for this reason.,Government-Created Monopolies,Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.,Government-Created Monopolies,Patent and copyright laws are two important examples of ho
5、w government creates a monopoly to serve the public interest.,Natural Monopolies,An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.,Natural Monopolies,A natural monopoly arises when there are economies
6、 of scale over the relevant range of output.,Economies of Scale as a Cause of Monopoly.,Quantity of Output,Cost,0,Monopoly versus Competition,MonopolyIs the sole producerHas a downward-sloping demand curveIs a price makerReduces price to increase sales,Competition versus Monopoly,Competitive FirmIs
7、one of many producersHas a horizontal demand curveIs a price takerSells as much or as little at same price,Demand Curves for Competitive and Monopoly Firms.,A Monopolys Revenue,Total RevenueP x Q = TRAverage RevenueTR/Q = AR = PMarginal RevenueDTR/DQ = MR,A Monopolys Total, Average, and Marginal Rev
8、enue,Quantity,(Q),Price,(P),Total Revenue,(TR=PxQ),Average,Revenue,(AR=TR/Q),Marginal Revenue,(MR= ),0,$11.00,$0.00,1,$10.00,$10.00,$10.00,$10.00,2,$9.00,$18.00,$9.00,$8.00,3,$8.00,$24.00,$8.00,$6.00,4,$7.00,$28.00,$7.00,$4.00,5,$6.00,$30.00,$6.00,$2.00,6,$5.00,$30.00,$5.00,$0.00,7,$4.00,$28.00,$4.0
9、0,-$2.00,8,$3.00,$24.00,$3.00,-$4.00,A Monopolys Marginal Revenue,A monopolists marginal revenue is always less than the price of its good.The demand curve is downward sloping.When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.,A Mon
10、opolys Marginal Revenue,When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q).The output effectmore output is sold, so Q is higher.The price effectprice falls, so P is lower.,Demand and Marginal Revenue Curves for a Monopoly.,Quantity of Water,Price,$11,10,9,8,7,
11、6,5,4,3,2,1,0,-1,-2,-3,-4,1,2,3,4,5,6,7,8,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Profit Maximization of a Monopoly,A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.It then uses the demand curve to find the price tha
12、t will induce consumers to buy that quantity.,Profit-Maximization for a Monopoly.,Quantity,QMAX,0,Demand,Average total cost,Marginal revenue,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Comparing Monopoly and Competition,For a competitive firm, price equals marginal cost.P
13、 = MR = MCFor a monopoly firm, price exceeds marginal cost.P MR = MC,A Monopolys Profit,Profit equals total revenue minus total costs.Profit = TR - TCProfit = (TR/Q - TC/Q) x QProfit = (P - ATC) x Q,The Monopolists Profit.,Quantity,0,Demand,Marginal cost,Marginal revenue,Average total cost,Harcourt,
14、 Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Monopolists Profit,The monopolist will receive economic profits as long as price is greater than average total cost.,The Market for Drugs.,Costs and Revenue,Price during patent life,Price after patent expires,Monopoly quantity,Compet
15、itive quantity,0,Quantity,Demand,Marginal cost,Marginal revenue,The Welfare Cost of Monopoly,In contrast to a competitive firm, the monopoly charges a price above the marginal cost. From the standpoint of consumers, this high price makes monopoly undesirable. However, from the standpoint of the owne
16、rs of the firm, the high price makes monopoly very desirable.,Price,0,Quantity,Marginal cost,Demand(value to buyers),The Efficient Level of Output.,The Deadweight Loss,Because a monopoly sets its price above marginal cost, it places a wedge between the consumers willingness to pay and the producers
17、cost.This wedge causes the quantity sold to fall short of the social optimum.,The Inefficiency of Monopoly.,Quantity,0,Demand,Marginal cost,Price,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Inefficiency of Monopoly,The monopolist produces less than the socially effici
18、ent quantity of output.,The Deadweight Loss,The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax.The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit.,Public Policy Toward Monopo
19、lies,Government responds to the problem of monopoly in one of four ways.Making monopolized industries more competitive.Regulating the behavior of monopolies.Turning some private monopolies into public enterprises.Doing nothing at all.,Increasing Competition with Antitrust Laws,Antitrust laws are a c
20、ollection of statutes aimed at curbing monopoly power.Antitrust laws give government various ways to promote competition.They allow government to prevent mergers.They allow government to break up companies.They prevent companies from performing activities which make markets less competitive.,Two Imp
21、ortant Antitrust Laws,Sherman Antitrust Act (1890)Reduced the market power of the large and powerful “trusts” of that time period.Clayton Act (1914)Strengthened the governments powers and authorized private lawsuits.,Regulation,Government may regulate the prices that the monopoly charges.The allocat
22、ion of resources will be efficient if price is set to equal marginal cost.,Marginal-Cost Pricing for a Natural Monopoly.,Quantity,0,Price,Demand,Marginal cost,Average total cost,Regulation,In practice, regulators will allow monopolists to keep some of the benefits from lower costs in the form of hig
23、her profit, a practice that requires some departure from marginal-cost pricing.,Public Ownership,Rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly itself. (e.g. in the U.S., the government runs the Postal Service).,Doing Nothing,Government c
24、an do nothing at all if the market failure is deemed small compared to the imperfections of public policies.,Price Discrimination,Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are th
25、e same.,Price Discrimination,Price discrimination is not possible when a good is sold in a competitive market since there are many firms all selling at the market price. In order to price discriminate, the firm must have some market power.,Perfect Price Discrimination,Perfect price discrimination re
26、fers to the situation when the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.,Price Discrimination,Two important effects of price discrimination:It can increase the monopolists profits.It can reduce deadweight loss.,Welfare Without Pr
27、ice Discrimination.,Price,0,Quantity,Demand,Marginal cost,(a) Monopolist with Single Price,Welfare With Price Discrimination.,Price,0,Quantity,Demand,Marginal cost,(b) Monopolist with Perfect Price Discrimination,Examples of Price Discrimination,Movie ticketsAirline pricesDiscount couponsFinancial a
28、idQuantity discounts,The Prevalence of Monopoly,How prevalent are the problems of monopolies?Monopolies are common. Most firms have some control over their prices because of differentiated products.Firms with substantial monopoly power are rare. Few goods are truly unique.,Summary,A monopoly is a fi
29、rm that is the sole seller in its market.It faces a downward-sloping demand curve for its product.A monopolys marginal revenue is always below the price of its good.,Summary,Like a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are
30、 equal.Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.,Summary,A monopolists profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus.A monopoly causes deadweight losses similar to the deadweig
31、ht losses caused by taxes.,Summary,Policymakers can respond to the inefficiencies of monopoly behavior with antitrust laws, regulation of prices, or by turning the monopoly into a government-run enterprise. If the market failure is deemed small, policymakers may decide to do nothing at all.,Summary,
32、Monopolists can raise their profits by charging different prices to different buyers based on their willingness to pay. Price discrimination can raise economic welfare and lessen deadweight losses.,Economies of Scale as a Cause of Monopoly.,Demand Curves for Competitive and Monopoly Firms.,Demand an
33、d Marginal Revenue Curves for a Monopoly.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Profit-Maximization for a Monopoly.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Monopolists Profit.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Market for Drugs.,The Efficient Level of Output.,The Inefficiency of Monopoly.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Marginal-Cost Pricing for a Natural Monopoly.,Welfare Without Price Discrimination.,Welfare With Price Discrimination.,
