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McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Pure Monopoly
Chapter 10
Chapter Objectives
• Characteristics of pure monopoly
• Profit-maximizing output and price
• Economic effects of monopoly• Charging different prices in
different markets
10-2
Characteristics of Monopoly
• Single seller• No close substitutes• “Price maker”• Blocked entry• Nonprice competition
10-3
Examples of Monopoly
• Regulated or natural monopolies–electricity
• Near monopolies–Western Union–Frisbee–De Beers
• Geographic monopolies–Professional sport teams
• Dual objectives of study
10-4
Barriers to Entry
• Economies of scale• Legal barriers to entry
–Patents–Licenses
• Ownership or control of essential resources
• Pricing and other strategic barriers to entry
10-5
Monopoly Demand
• Assumptions:–Monopoly status is secure
–No government regulation
–Single-price monopolist
• Face down-sloping demand–Entire market demand
10-6
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal RevenueMarginal revenue is less than price
D
• A monopolist isselling 3 units at$142
• To sell 4, price mustbe lowered to $132
• All customers must pay the sameprice
• TR increases $132 minus $30 (3x$10)
Gain = $132
Loss = $30
10-7
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
D
• A monopolist isselling 3 units at$142
• To sell 4, price mustbe lowered to $132
• All customers must pay the sameprice
• TR increases $132 minus $30 (3x$10)
• $102 becomes a point on the MR curve
• Try other prices todetermine other MR points
Gain = $132
Loss = $30
The Constructed Marginal Revenue CurveMust Always Be Less Than the Price
MR
Price and Marginal RevenueMarginal revenue is less than price
10-8
Down-Sloping Demand
• Marginal revenue < price–To increase sales, must lower price
• Firm is a price maker–Choose P,Q combination
• Operate in the elastic region–Marginal revenue > 0
–Total-revenue test (recall)10-9
Profit Maximization
• Output-price determination–Marginal revenue marginal cost
rule
–Same cost definitions
• No supply curve
10-10
Monopoly Revenue and Costs
(1)Quantity
Of Output
(2)Price
(AverageRevenue)
(3)Total
Revenue(1) X (2)
(4)MarginalRevenue
(5)Average
Total Cost
(6)Total Cost
(1) X (5)
(7)Marginal
Cost
(8)Profit (+)
or Loss (-)
0123456789
10
$172162152142132122112102928272
$0162304426528610672714736738720
$16214212210282624222
2-18
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
$100190270340400470550640750880
1030
$90807060708090
110130150
$-100-28+34+86
+128+140+122
+74-14
-142-310
Revenue Data Cost Data
]]]]]]]]]]
]]]]]]]]]]
Can you See Profit Maximization?10-11
$200
150
100
50
0
$750
500
250
0
2 4 6 8 10 12 14 16 18
2 4 6 8 10 12 14 16 18
Pri
ceT
ota
l Rev
enu
e
Monopoly Revenue and Costs
Elastic InelasticDemand and Marginal-Revenue Curves
Total-Revenue Curve
DMR
TR
10-12
Profit Maximization
0
$200
175
150
125
25
100
75
50Pri
ce, C
ost
s, a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
Quantity
D
MR
ATC
MC
MR=MC
Pm=$122
A=$94
EconomicProfit
10-13
Misconceptions
• Not the highest price
• Total, not unit, profit
• Possibility of losses
10-14
Loss Minimization
0
Pri
ce, C
ost
s, a
nd
Rev
enu
e
Quantity
D
MR
ATC
MC
MR=MC
Loss
AVCPm
Qm
V
A
10-15
Economic Effects
PurelyCompetitive
Market
PureMonopoly
D D
S=MC MC
P=MC=Minimum
ATC
MR
Pc
Qc
Pc
Pm
QcQm
Pure competition is efficientMonopoly is inefficient
a
b
c
10-16
• Pure competition is efficient–Productive efficiency–Allocative efficiency–CS+PS maximized
• Monopoly is inefficient–Charge P>MC–Deadweight loss
• Income transfer
Economic Effects
10-17
Cost Complications
• Economies of scale–Simultaneous consumption–Network effects
• X-inefficiency–Lowest ATC not achieved
• Rent seeking behavior• Technological advance
–More likely with monopoly?
10-18
Policy Options
• Use antitrust laws–Divide the firm
• Natural monopoly–Regulate price
• Ignore–Unstable in long run
10-19
Price Discrimination
• Three forms– Charge each customer max
willingness to pay– Charge one price for first unit
and a lower price for subsequent units
– Charge different customers different prices
10-20
• Conditions – Monopoly power– Market segregation– No resale
• Examples – Airfares– Electric utilities– Theaters & golf courses
Price Discrimination
10-21
Regulated Monopoly
• Natural monopolies• Rate regulation• Socially optimum price
P = MC• Fair return price
P = ATC
10-22
0
Pri
ce a
nd
Co
sts
(Do
llars
)
Quantity
Dilemma of RegulationMonopoly
Price
Fair-ReturnPrice
SociallyOptimal
Price
Pr
D
r
f
b
aPf
Pm
Qm Qf Qr
MR
MC
ATC
Regulated Monopoly
10-23
De Beers Diamonds
• 66 years of monopoly pricing–Independent producers went along
• Mid-2000 abandoned monopoly–New discoveries–Independent producers withdrew–Political considerations
• New strategy–“The diamond supplier of choice”
10-24
Key Terms
• pure monopoly
• barriers to entry
• simultaneous consumption
• network effects
• X-inefficiency
• rent-seeking behavior
• price discrimination
• socially optimal price
• fair-return price10-25
Next Chapter Preview…
Monopolistic Competitionand Oligopoly
10-26
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