- pure monopoly: only one seller of a good/service with no close substitutes

Transcription

1 Micro 101, Chapter 10 1 Chapter 10: Monopoly Main objectives: 1. Define what constitutes a monopoly - pure monopoly: only one seller of a good/service with no close substitutes 2. Describe types of barriers to entry that allow monopolies to develop and persist (a) a natural monopoly might exist if there are economies of scale (decreasing ATC curve) even in range of very large - once an established firm is producing lots of output, it is producing at a low cost per unit - a new firm would produce at a lower output and a higher cost per unit, so it can t win a price war (b) a firm might control some scarce input ex. decades ago, Alcoa produced all aluminum in U.S. because it owned nearly all deposits of bauxite (c) gov t may create barriers to entry ex. patents (purpose is to encourage R&D) (d) superior entrepreneurs? Ex. Henry Ford, Bill Gates 3. Describe goals and constraints of a monopolist - main point: cannot charge whatever they want! - but they are price-makers instead of price-takers - still choose where MR=MC, but mark price up above MC 4. Explain why a monopolist faces a downward-sloping demand curve for its product - faces entire market D curve - to sell more output, must lower P (unlike competitive firms)

2 Micro 101, Chapter Given a downward-sloping demand curve, recall why MR < P for an extra unit sold 6. Learn how to find a monopolist s equilibrium P and 7. Compare the monopoly outcome with perfect competition - if a monopolist bought up a set of competitive firms, it would maximize profits by reducing output and raising price - but technology might change as well, affects cost curves 8. Analyze effects of changes in costs or demand - increase in variable costs partially passed on to consumers - increase in fixed costs usually absorbed by firm (doesn t affect MR or MC) 9. Explain why economic profits might be close to zero even for a monopolist (a) government regulations (b) rent-seeking activities: spend money lobbying to preserve monopoly status 10. Learn about price discrimination and its consequences

3 Micro 101, Chapter 10 3 Demand Curve Facing a Monopolist P TR MR = 3<P P 12 Demand for Monopolist's Product MR D

4 Micro 101, Chapter 10 4 Under perfect competition: total revenue if selling 3 units is $21: unit: at =3: quantity price revenue =21 - additional revenue if selling one more unit is P = $7: unit at =4: quantity price revenue =28 MR = = $7 (=P) Now compare with single-price monopoly: unit: at =3: quantity price revenue =21 additional revenue if selling one more unit is only $3: unit at =4: quantity price revenue =24 MR = = $3 (<P) conclusion: the monopolist has less incentive to increase output; will only do so if MC is less than $3 (instead of less than $7)

5 Micro 101, Chapter 10 5 $ Monopolist $50 Maximum Profit MC ATC D $35 MR 100 find optimal at MR=MC like perfectly competitive firm, charge highest price consumers willing to pay (height of D curve at selected quantity) - unlike competitive firm, P>MC (MR is no longer the same as P) profit = P* ATC* = (P-ATC)*

6 Micro 101, Chapter 10 6 having monopoly power does not guarantee economic profits - profits depend on curves in relation to demand curve The Unhappy Monopolist $ MC ATC m ATC P m m MR D could also add AVC curve to show shut-down point

7 Micro 101, Chapter 10 7 Objections to monopolies: monopolists make too much money... economists focus on inefficiencies: (1) less incentive to and cut costs (2) the monopolist fails to produce output that society would have valued by more than it would have cost to produce (1) Competitive firms have a tremendous incentive to cut costs to enjoy short-run economic profits theoretically, the monopolist DOES have that incentive: cutting costs increases the monopolist s profit empirical work, however, suggests that monopolists do not aggressively attempt to innovate and cut costs (2) Also, monopolies are still inefficient from society s perspective since they operate where P > MC to society of another unit being produced (amount consumers willing to pay) to society of another unit being produced - the marginal benefit to society of another unit would exceed the marginal cost, but it s not produced - recall that MR is less than P for a monopolist, so less incentive to produce output

8 Micro 101, Chapter 10 8 Deadweight from monopoly: = the net loss to society due to the monopoly not producing the extra units between M and p.c. that the competitive firm would produce P M P p.c $ Deadweight Loss MC a d b c M MR e p.c. D the cost to society of producing the extra units would be the extra production costs, measured by area (adding up the marginal costs for each extra unit) the benefit to society of producing the extra units would be the area cade (the height of the D curve for each unit measures the value of that unit to consumers adding up these values for all the units between c and e yields the area cade) benefits costs = cade cbde = this deadweight loss is the net amount society gives up by not producing these units of the good

9 Micro 101, Chapter 10 9 Consumer surplus ( = consumer s profit ) = the difference between the most you d be willing to pay for a good and what you actually do pay Ex. willing to pay $4 for first bottle of Gatorade, but can purchase it for $1: then consumer surplus for that bottle is $ Ex. willing to pay $4 for first bottle, $2 for second bottle, and $1 for third bottle: then at price=1 for each unit, total consumer surplus = $ (total value=7, total cost=3) P Consumer Surplus P * = the store would like to extract away all the consumer surplus (somehow get $7 from that consumer) in general, add up all the vertical distances between the most willing to pay for each unit and the P actually paid P - if linear demand curve, end up with a triangle Consumer Surplus total consumer surplus is shaded area: CS for 30 th unit P * D 30 *

10 Micro 101, Chapter Price Discrimination = charging different customers different prices for reasons unrelated to costs try to charge higher prices to those willing to pay more under price discrimination, charge each customer exactly the most that customer would be willing to pay - the firm would capture the entire consumer surplus area (converting it from consumer profit to firm profit) difficulties for the firm: (1) doesn t work under perfect competition - need downward-sloping demand curve (2) must be able to low-price customers from re-selling to high-price customers (3) hard to identify how much people are willing to pay

11 Micro 101, Chapter price discrimination hurts consumers who end up paying more, but it can eliminate the deadweight loss P M P p.c $ Perfect Price Discrimination MC a d P=MR=D b c M MR e p.c. = M - recall that single price monopolies produce too little since MR is below the demand curve (MR<P) - under price discrimination, (like perfect competition) because the monopolist does not have to reduce price of other units sold - now, MR=MC at point d instead of b, leading to the same output as a competitive industry - there is no longer any deadweight loss: another unit produced beyond e would lead to a higher MC than benefit to consumers, so we don t want it produced