Monopoly Chapter 12

advertisement

Monopoly Chapter 12

© 2003 McGraw-Hill Ryerson Limited.

12 - 2

Introduction

Monopoly

is a market structure in which a single firm makes up the entire supply side of the market.

 Monopoly is the polar opposite of perfect competition.

© 2003 McGraw-Hill Ryerson Limited.

12 - 3

Introduction

 Monopolies exist because of barriers to entry into a market that prevent entry by new firms.

 Barriers to entry include legal barriers such as a patent, and natural barriers such as the size of the market that can support only one firm.

© 2003 McGraw-Hill Ryerson Limited.

12 - 4

The Key Difference Between a Monopolist and a Perfect Competitor

 A competitive firm is too small to affect the price.

 It does not have to take into account the effect of its output decision on the price it receives.

© 2003 McGraw-Hill Ryerson Limited.

12 - 5

The Key Difference Between a Monopolist and a Perfect Competitor

 A competitive firm's marginal revenue is the market price.

 A monopolistic firm’s marginal revenue is not equal to its price – it takes into account that in order to sell more it has to decrease the price of its product.

© 2003 McGraw-Hill Ryerson Limited.

12 - 6

The Key Difference Between a Monopolist and a Perfect Competitor

 Monopolist as the only supplier faces the entire market demand curve.

 Therefore, monopoly demand is downward sloping, and to increase output the firm must decrease its price.

© 2003 McGraw-Hill Ryerson Limited.

12 - 7

A Model of Monopoly

 How much should a monopoly produce to maximize its profit?

 The monopolist employs a two-step profit maximizing process; it chooses quantity and price.

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output

12 - 8  As in perfect competition, profit for the monopolist is maximized at a point where

MC = MR

.

 What is different for a monopolist – marginal revenue does not equal price; marginal revenue is below price.

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output

12 - 9  If a monopolist deviates from the output level at which marginal cost equals marginal revenue, profits will fall.

© 2003 McGraw-Hill Ryerson Limited.

12 - 10

Profit Maximization for a Monopolist, Table 12-1, p 257 Output Price

0 36 1 2 3 4 5 33 30 27 24 21 6 7 8 9 18 15 12 9

TR

0 33 60 81 96 105 108 105 96 81

MR

— 33 27 21 15 9 3 –3 –9 102 142 196 –15 278

TC

47 48 50 54 62 78

MC

ATC Profit

–47 1 2 4 48.00 –15 25.00 10 18.00 27 8 15.50 34 16 15.60 27 24 17.00 6 40 20.29 –37 56 24.75 –102 80 30.89 –197

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output Graphically

12 - 11  The marginal revenue curve tells us the additional revenue the firm will get from an additional unit of output.

 The marginal cost curve is a graph of the change in firm’s total cost as it changes output.

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output Graphically

12 - 12  To determine the profit-maximizing price and quantity:  one first finds output (where and then

MC = MR

),  extends a vertical line for that output, up to the demand curve to find the price.

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output Graphically

12 - 13  If

MR > MC

, the monopolist gains profit by increasing output.

 If

MR < MC

, the monopolist gains profit by decreasing output.

 If

MC = MR

, the monopolist is maximizing profit.

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output Graphically

12 - 14  The

MR = MC

condition determines the quantity a monopolist produces.

 That quantity determines the price the monopolist will charge.

© 2003 McGraw-Hill Ryerson Limited.

12 - 15

Comparing Monopoly and Perfect Competition

 Profit-maximizing output for the monopolist, like profit maximizing output for the competitor in a perfectly competitive market is where

MC = MR

.

© 2003 McGraw-Hill Ryerson Limited.

12 - 16

Comparing Monopoly and Perfect Competition

 Because the monopolist’s marginal revenue is below its price, its equilibrium output is less than, and price is higher than that of a perfectly competitive market.

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output Graphically, Fig.12-1, p 259

12 - 17 Price $36 30 20.50

24 18 12 6 0 6 12 1 2

MC

Monopolist price and output Perfectly competitive price and output 3 4 5 5.17

6 7 8

MR

9 10

D

© 2003 McGraw-Hill Ryerson Limited.

Finding the monopolist’s price and output

12 - 18  Draw the firm's marginal revenue curve.

 Determine the output the monopolist will produce by the intersection of the

MC

and

MR

curves.

© 2003 McGraw-Hill Ryerson Limited.

12 - 19

Finding the monopolist’s price and output

 Determine the price the monopolist will charge for that output by finding where the quantity line intersects the demand curve.

© 2003 McGraw-Hill Ryerson Limited.

Finding the monopolist’s price and output, Fig. 12-2a and b, p 260

Price

MC

12 - 20 D MR Quantity

© 2003 McGraw-Hill Ryerson Limited.

Finding the monopolist’s price and output, Fig. 12-2 c and d, p 260

12 - 21 Price

MC

P M Q M D MR Quantity

© 2003 McGraw-Hill Ryerson Limited.

12 - 22

Finding the Monopolist’s Profit

 Determine the average cost at the profit-maximizing level of output.

 Determine the monopolist's profit (loss) by subtracting average total cost from average revenue (

P

) at that level of output and multiply by the chosen output.

© 2003 McGraw-Hill Ryerson Limited.

Monopoly

 A monopolist can make a profit, it can break even, or it can incur a loss.

12 - 23

© 2003 McGraw-Hill Ryerson Limited.

12 - 24

A Monopolist Making a Profit, Fig. 12-3, p 261

MC

Price

ATC P M C M

Profit

A B

0

Q M MR D

Quantity

© 2003 McGraw-Hill Ryerson Limited.

12 - 25

A Monopolist Breaking Even, Fig. 12-4a, p 262

MC

Price

ATC P M

0

Q M MR D

Quantity

© 2003 McGraw-Hill Ryerson Limited.

12 - 26

A Monopolist Making a Loss Fig. 12-4b, p 262

MC

Price

C M P M

Loss

B A ATC

0

Q M MR D

Quantity

© 2003 McGraw-Hill Ryerson Limited.

12 - 27

The Welfare Loss from Monopoly

 A single price monopoly creates welfare losses.

 Welfare losses can be illustrated by the area of consumer and producer surplus that is lost due to smaller output produced, compared to output produced in perfect competition.

© 2003 McGraw-Hill Ryerson Limited.

12 - 28

The Welfare Loss from Monopoly

 Compare the normal monopolist's equilibrium to the equilibrium of a perfect competitor.

 Equilibrium in both market structures is determined by the

MC = MR

condition.

© 2003 McGraw-Hill Ryerson Limited.

The Welfare Loss from Monopoly

 But the monopolist's MR is below its price, thus its equilibrium output is different from a competitive market.

 The welfare loss of a monopolist is represented by the triangles

B

and

D

.

12 - 29

© 2003 McGraw-Hill Ryerson Limited.

12 - 30

The Welfare Loss from Monopoly, Fig. 12-5, p 262

Price

MC P M C P C

0

D B Q M A MR Q C D

Quantity

© 2003 McGraw-Hill Ryerson Limited.

12 - 31

The Welfare Loss from Monopoly

 Welfare loss is often called the deadweight loss or welfare loss triangle.

 It is the geometric representation of the welfare cost in terms of misallocated resources that are caused by monopoly.

© 2003 McGraw-Hill Ryerson Limited.

The Price-Discriminating Monopolist

Price discrimination

is the ability to charge different prices to different customers.

12 - 32

© 2003 McGraw-Hill Ryerson Limited.

The Price-Discriminating Monopolist

 In order to price discriminate, a monopolist must be able to:  Identify groups of customers who have different elasticities of demand;  Separate them in some way; and  Limit their ability to resell its product between groups.

12 - 33

© 2003 McGraw-Hill Ryerson Limited.

The Price-Discriminating Monopolist

 A price-discriminating monopolist can charge customers with more inelastic demands a higher price.

 It can charge customers with more elastic demands a lower price.

12 - 34

© 2003 McGraw-Hill Ryerson Limited.

12 - 35

The Price-Discriminating Monopolist

 A

perfect

price discriminating monopoly can extract the most consumers are willing to pay for each unit of the product it sells.

 All consumer surplus is transferred to the monopolist.

© 2003 McGraw-Hill Ryerson Limited.

12 - 36

The Price-Discriminating Monopolist

 A perfect price discriminating monopoly will stop expanding its output when MR = MC, which corresponds to the perfectly competitive output.

 The deadweight loss is therefore eliminated under perfect price discrimination.

© 2003 McGraw-Hill Ryerson Limited.

12 - 37

Perfect Price Discrimination, Fig. 12-6, p 265

Price 10 9 8 7 6 5 4 3 2 1 MC 1 2 3 4 5 6 7 8 9 10 11 MR D=MR Quantity (number of consumers)

© 2003 McGraw-Hill Ryerson Limited.

12 - 38

Barriers to Entry and Monopoly

 What prevents other firms from entering the monopolist’s market in response to profits the monopolist earns?

 Monopolies exist because of

barriers to entry

.

© 2003 McGraw-Hill Ryerson Limited.

12 - 39

Barriers to Entry and Monopoly

 In the absence of barriers to entry, the monopoly would face competition from other firms, which would erode its monopoly position .

© 2003 McGraw-Hill Ryerson Limited.

Barriers to Entry and Monopoly

 Some important barriers to entry are:  Economies of scale,  Set-up costs,  Legislation.

12 - 40

© 2003 McGraw-Hill Ryerson Limited.

12 - 41

Barriers to Entry and Monopoly

 Economies of scale:  When production is characterized by increasing returns to scale, the larger the firm becomes, the lower its per unit costs become.

© 2003 McGraw-Hill Ryerson Limited.

12 - 42

Barriers to Entry and Monopoly

 Economies of scale:  If significant economies of scale are possible, it is inefficient to have two producers because if each produced half of the output, neither could take advantage of economies of scale.

© 2003 McGraw-Hill Ryerson Limited.

12 - 43

Barriers to Entry and Monopoly

 Economies of scale:  A

natural monopoly

is an industry in which one firm can produce at a lower cost than can two or more firms.

© 2003 McGraw-Hill Ryerson Limited.

12 - 44

Barriers to Entry and Monopoly

 Economies of scale:  In cases of natural monopoly, technology is such that minimum efficient scale is so large that average total costs fall within the range of potential output.

© 2003 McGraw-Hill Ryerson Limited.

12 - 45

A Natural Monopoly, Fig. 12-7b, p 267

Price, Cost P M C M C C P C Q M MR ATC MC Q C D Quantity

© 2003 McGraw-Hill Ryerson Limited.

12 - 46

Barriers to Entry and Monopoly

 Set-up costs:  In many industries high set-up costs characterize production.

 The industry may be highly capital intensive, requiring a large investment in expensive but highly specialized capital.

 Examples are an oil refinery or a diamond mine.

© 2003 McGraw-Hill Ryerson Limited.

12 - 47

Barriers to Entry and Monopoly

 Set-up costs:  In some industries a lot of money may be spent on advertising.

 Heavy advertising creates a barrier to entry in those cases, such as in the perfume industry or the automobile industry.

© 2003 McGraw-Hill Ryerson Limited.

Barriers to Entry and Monopoly

 Legislation:  Monopolies can also exist as a result of government charter.

 Patents are another way in which government can grant a company a monopoly.

12 - 48

© 2003 McGraw-Hill Ryerson Limited.

12 - 49

Barriers to Entry and Monopoly

 Legislation: 

A patent

is a legal protection of technical innovation that gives the inventor a monopoly on using the invention.

 To encourage research and development of new products, government gives out patents for a wide variety of innovations.

© 2003 McGraw-Hill Ryerson Limited.

12 - 50

Barriers to Entry and Monopoly

 Other barriers to entry:  Sometimes one company can gain ownership of some essential aspect of the production process – a unique input, or control over a resource.

 An example is DeBeers. By controlling the world-wide distribution network for diamonds, the company enjoys monopoly in the diamond industry.

© 2003 McGraw-Hill Ryerson Limited.

Monopoly End of Chapter 12

© 2003 McGraw-Hill Ryerson Limited.

Download