economics 2010 lecture 13 monopoly. monopoly how monopoly arises single price monopoly
TRANSCRIPT
Economics 2010Economics 2010
Lecture 13
Monopoly
MonopolyMonopoly
How monopoly arisesSingle price monopoly
How Monopoly ArisesHow Monopoly Arises
A monopoly is an industry in which there is a single supplier of a good, service, or resource, that has no close substitutes and in which there is a barrier preventing the entry of new firms
How Monopoly ArisesHow Monopoly Arises
Barriers to entry can be: legal barriers natural barriers
Legal barriers to entry create legal monopolies, examples are:
Public franchise (Canada Post, Royal Mail, in some countries the train companies of the telecomm or the electricity even the tobacco production or the selling of gas)
Government license (in most countries doctors, dentists, architects, bus drivers need a license to operate, sometimes hairdressers too!!!)
Patent (20 years in Canada); copyright is the same idea
Barriers to EntryBarriers to Entry
Natural barriers to entry create natural monopolies
Natural barriers arise if economies of scale are still available when a single firm can meet the entire market demand
The following figure shows this situation
Barriers to EntryBarriers to Entry
Barriers to EntryBarriers to Entry
The firm’s average total cost curve is ATC
The market demand curve is D
Barriers to EntryBarriers to Entry
Suppose the price is 5 cents per kilowatt-hour and the quantity demanded is 4 million killowatt-hours (per day)
Barriers to EntryBarriers to Entry
1 firm can produce this quantity for 5 cents a kilowatt-hour
But with 2 firms sharing the production, it costs 10 cents
Barriers to EntryBarriers to Entry
And with 4 firms sharing the production, it costs 15 cents per kilowatt-hour
This industry is a natural monopoly
Barriers to EntryBarriers to Entry•Knowing about the Minimum Efficient Scale of a type of business and the level of demand will help us predict the number of firms in a market in the long run
•We can then check whether an industry should be expected to be competitive
•Now we can check if it is expected to be a monopoly but it is for the same reasons
•Train services, electricity services, water, gas distributions, telecommunications services: they all have very high fixed costs and they have economies of scale for long ranges
Barriers to EntryBarriers to Entry•Therefore it is very easy than when we compare the MES with the demand level we see that one firm should be expected
•Sometimes even only one firm is too much => losses need to be subsidized if the service is deemed essential: most countries treat the railways this way...
Most real-world monopolies are regulated
You can read a brief intro about regulation at the end of Ch. 13 and a lot more in advanced courses
but we are going to focus on unregulated monopoly so that we can: understand why monopoly is regulated, understand monopolistic elements in many
markets
Monopoly and regulationMonopoly and regulation
Single-Price MonopolySingle-Price Monopoly
A single-price monopoly is a firm that sells all its output for one single price
All the firm’s customers pay the same price for each unit
Many monopolies operate in this way, but many do not: they price-discriminate instead
A price-discriminating monopoly is a firm that sells each unit of output for the highest price it can get by:
Discriminating among customers--different customers pay different prices
Discriminating across quantities--one customer pays different prices for different quantities
Single-Price MonopolySingle-Price Monopoly
We’re going to study a single-price monopoly first
What is the price charged by a monopoly and what is the quantity produced?
Monopoly costs are just like those we have seen for competitive industries
But monopoly revenue is special
Single-Price MonopolySingle-Price Monopoly
A monopolist faces the market demand curve He sees the big picture (like the astronauts, who
can see the Earth round, while the competitive firm could only see the small picture, as we see a flat horizon)
A monopolist’s demand curve is downward-sloping
A monopolist is a price maker, in contrast to a perfectly competitive firm, which is a price taker
Demand and RevenueDemand and Revenue
A monopolist’s marginal revenue is the addition to total revenue from selling one more unit
Recall that in perfect competition, marginal revenue equaled price
In single-pricing monopoly, marginal revenue is always less than price
Demand and RevenueDemand and Revenue
The following table illustrates a monopoly’s demand and revenue schedules
Demand and RevenueDemand and Revenue
Price Quantity
demanded
a 20 0
b 18 1
c 16 2
d 14 3
e 12 4
f 10 5
g 8 6
Single-Price Monopoly RevenueSingle-Price Monopoly Revenue
Total
revenue
0
18
32
42
48
50
48
Marginal
revenue
…………18
…………14
…………10
………… 6
………… 2
…………–2
This illustrates the demand curve and marginal revenue curve of a single-price monopolist
Demand and RevenueDemand and Revenue
The demand curve is D
The price is cut from $16 to $14
Marginal revenue is $10
The marginal revenue curve is MR
Demand and RevenueDemand and Revenue
A single-price monopoly always charges a price at which demand is elastic
The easiest way to see why is to look again at the demand curve and marginal revenue curve and recall what you learned weeks ago about the elasticity along a linear demand curve
Revenue and ElasticityRevenue and Elasticity
Look at this monopoly’s demand curve and marginal revenue curve
Check the three elasticity ranges
Revenue and ElasticityRevenue and Elasticity
At prices above $10, demand is elastic
At prices below $10, demand is inelastic
At $10, demand is unit elastic
Revenue and ElasticityRevenue and Elasticity
When demand is unit elastic, total revenue is maximized
Marginal revenue becomes negative at prices below $10
Revenue and ElasticityRevenue and Elasticity
Revenue and Revenue and ElasticityElasticity
When demand is unit elastic, total revenue is maximized
Marginal revenue becomes negative at prices below $10
Revenue and Revenue and ElasticityElasticity
When demand is unit elastic, total revenue is maximized
Marginal revenue becomes negative at prices below $10
Revenue and Revenue and ElasticityElasticity
When demand is unit elastic, total revenue is maximized
Marginal revenue becomes negative at prices below $10
Revenue and Revenue and ElasticityElasticity
Producing more than 5 haircuts a day brings in less revenue that producing 5 a day
Price and Output DecisionPrice and Output Decision
But revenue is not all that matters!!!A single-price monopoly produces the
quantity that maximizes profitThis quantity occurs where total
revenue minus total cost is largest
Price and Output DecisionPrice and Output Decision
Here, economic profit is maximized by producing 3 haircuts an hour
Price and Output DecisionPrice and Output Decision
The profit-maximizing output also can be found as the quantity at which marginal cost equals marginal revenue (as we know from competition)
The following figure shows this way of looking at the profit-maximizing decision
Price and Output DecisionPrice and Output DecisionMarginal
cost equals marginal revenue at 3 haircuts an hour
Economic profit is $12 an hour
Price and Output DecisionPrice and Output DecisionThis figure
also shows how a monopoly sets its price
Price and Output DecisionPrice and Output DecisionThe price is
the highest at which the profit-maximizing quantity can be sold
Price and Output DecisionPrice and Output DecisionHere, that
price is $14 per haircut
Price and Output DecisionPrice and Output Decision
There is no monopoly supply curveJust a decision about how much to
produce and at what price to sell it
NextNextPrice discriminating
monopolyREAD THE CHAPTER!!!