Business 33001: Microeconomics
|
|
- Berenice Atkins
- 6 years ago
- Views:
Transcription
1 Business 33001: Microeconomics Owen Zidar University of Chicago Booth School of Business Week 7 Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 1 / 88
2 Today s Class 1 Introduction Context: how monopolies fit into microeconomics Overview of Monopolies 2 Revenues Marginal revenue Relation to elasticities Amazon example 3 Monopoly production: how much to sell and at what markup Example problem Markups 4 Social Costs of Monopoly Uber example 5 Advertising Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 2 / 88
3 Motivation: why should you care? 1 Understand why monopolies exist 2 Production decisions of firms with market power Framework for thinking about how much to sell Framework for thinking about how much to advertise 3 Pricing Strategy Framework for thinking about optimal pricing and how much to mark up prices over costs 4 Applications Amazon pricing strategy Benefits of uber Introduction to some key anti-trust tradeoffs (see Tirole Nobel lecture) Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 3 / 88
4 Context: Market Structure and Individual Firm Demand Competitive Industry that we have studied thus far: Individual firms are small Products have close substitutes Market demand is downward sloping Individual firm demand is perfectly elastic (flat) Individual demand for my product goes to 0 if I offer above market price Individual demand very large for below market price Can sell any amount at market price Industries like this: Sellers of commodities (natural gas, wheat) Close enough: small businesses, with many (potential) entrants Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 4 / 88
5 Context: Market Structure and Individual Firm Demand Monopoly : Only producer of a good Market demand is downward sloping Individual demand curve is Market demand curve Oligopoly : in between One of a few large producers Individual firm demand depends on behavior (pricing) of other firms Firm may or may not have pricing power Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 5 / 88
6 Overview of Monopolies Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 6 / 88
7 What is a Monopoly?: Definition A monopolist is a producer that faces no competition from other firms Two key aspects for being the sole producer of a good: 1 No Entry: competitors cannot enter the industry 2 No close substitutes for the product produced by the monopolist Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 7 / 88
8 Examples: producers that are the only seller in a market Examples: Coca-cola has a monopoly on Dasani water. Is this a real monopoly? No, because there are many close substitutes Comcast has a monopoly on cable in Chicago. Is this a real monopoly? Probably, but there are some close substitutes (e.g., DirectTV), but they really are not the same Question: does Microsoft have a monopoly on operating systems? This is very complicated and comes down to the definitions of a monopoly, of entry, and of the market These firms have some pricing power not perfectly competitive. Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 8 / 88
9 Reasons for Monopoly Where does pricing power come from? Neither close substitutes nor entry 1 Scarcity: Land, Property (beachfront, city blocks) Natural Resources Comparative advantages (experience, skill) China Consolidates Grip on Rare Earths NYT, Sept 2011 China produces nearly 95 percent of the world s rare earth materials, which are vital for green-energy products including giant wind turbines, hybrid gasoline-electric cars and compact fluorescent bulbs. China has been imposing tariffs and quotas on its rare earth exports for several years, curtailing global supplies and forcing prices to rise eightfold to fortyfold during that period for the various 17 rare earth elements... The average price for fluorescent bulbs has risen 37 percent this year. Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 9 / 88
10 Reasons for Monopoly Where does pricing power come from? Neither close substitutes nor entry 2 Legal entry restrictions: Patents, Copyrights Zoning restrictions Liquor licenses Taxi medallions Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 10 / 88
11 Reasons for Monopoly Where does pricing power come from? Neither close substitutes nor entry 2 Legal entry restrictions: Drug Firms Face Billions in Losses as Patents End NYT, March 2011 Because of patent expirations, this year the drug industry will lose control over more than 10 megamedicines whose combined annual sales have neared $50 billion. At the end of November, Pfizer stands to lose a $10-billion-a-year revenue stream when the patent on its blockbuster cholesterol drug Lipitor expires and cheaper generics begin to cut into the company s huge sales. Sales of Lipitor are Leveling Off NYT, Jan 2012 Two new generic versions came on the market at the beginning of December, and in the first full week of the month, they had siphoned off a combined 59 percent of sales. Pfizer is fighting hard to retain sales, with big discounts to patients and insurers. Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 11 / 88
12 Monopolies Where does pricing power come from? Neither close substitutes nor entry 3 Entry Costs: Branding / Marketing Trade Secrets Fixed investment costs (factories, train tracks, storefronts) Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 12 / 88
13 Monopolies Where does pricing power come from? Neither close substitutes nor entry 3 Entry Costs: Thomas : The Original Nooks and Crannies English Muffins Owen Zidar (Chicago Booth) Microeconomics Competitor: Left Thomas : Right Week 7: Monopoly 13 / 88
14 Monopolies For our purposes today, a monopoly is a firm with pricing power. Consider an individual firm facing some fixed demand curve Demand not perfectly elastic ie, some pricing power Legal monopoly? Other firms in its market? Not relevant Key assumption: other firms might exist, but don t react How much to sell, and at what prices? Future lecture: Interaction of firms with some market power (oligopoly) Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 14 / 88
15 Monopoly Pricing NYTimes, 2012: White House and the F.D.A. Often at Odds In February 2011, the F.D.A. approved an application from KV Pharmaceutical to sell 17P, a decades-old drug used to prevent premature births. Since KV s version, called Makena, was the only one officially approved, the F.D.A. would normally have banned the sale of cheaper unapproved ones. For years, pharmacists had been making unapproved versions of this injectable form of progesterone for $200 to $400 for a 20-week course. Though F.D.A. officials were then not aware of any safety complaints about the pharmacy-made 17P, they worried about repeated instances over the years when other pharmacy-made drugs had been found to lack potency or be contaminated with deadly bacteria. Once it had won F.D.A. approval, KV announced its price $30,000 for a 20-week course. Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 15 / 88
16 Maximizing Profit A firm seeks to maximize Profit: Profit = Revenue Costs Say firm produces a single output good Revenue is Price Quantity (linked by demand curve) Costs depend on Quantity produced Optimal quantity equates marginal revenue and marginal cost Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 16 / 88
17 Revenues and Marginal Revenues Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 17 / 88
18 Preliminaries: Inverse Demand Curves Demand Curve Q(P) : At a given price, what is the most units can I sell? Q declining in P Revenue as a function of price: P Q(P) Inverse Demand Curve P(Q) : For a given number of sales, what is the highest price I can charge? P declining in Q Revenue as a function of quantity: Q P(Q) Demand and Inverse Demand are equivalent Let Q(P) = 10 2P. What is P(Q)? P(Q) = 5 Q 2 Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 18 / 88
19 Perfect competition: perfectly elastic (flat) demand curve Revenue = P Q P Revenues at q P Revenues at q + 1 p p Rev Rev q Q q 1 Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 19 / 88
20 Monopoly: downward-sloping demand curve Revenue = P Q P Revenues at q P Revenues at q + 1 p Rev P Q p Rev P Q q Q q 1 Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 20 / 88
21 Monopolists face price-quantity tradeoff Monopolist: High Price: large profit per unit, sell few units Low Price: small profit per unit, sell many units Best choice: set price that maximizes total profits, given this tradeoff Perfectly competitive firms do not face this trade-off: Higher Price: no purchases Lower Price: lose money on every unit Your own output does not affect price Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 21 / 88
22 Monopolists face price-quantity tradeoff Revenue as a function of quantity: Rev(Q) = P(Q) Q P Rev p P Q Rev q Q High P, Low Q Low P, High Q Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 22 / 88
23 Example Suppose P(Q) = 5 Q 2 What is the expression for demand? What is revenue? Rev(Q) = P(Q) Q = ( 5 Q ) Q 2 Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 23 / 88
24 Example Revenue Table Revenues Graph Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 24 / 88
25 Marginal Revenue The slope of the revenue function is marginal revenue MR = drevenue dq Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 25 / 88
26 Marginal Revenue Since Revenue = P(Q) Q, we have 1 MR = dp dq Q + P This expression shows the quantitive price-quantity tradeoff. Since dp dq < 0 (i.e., demand is downward-sloping), marginal revenue is less than the price MR is decreasing in Q because producing more quantity lowers the price, so get less revenue per unit 1 by Product Rule for differentiation Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 26 / 88
27 Example MR = drevenue dq = d dq ) (5Q Q2 = 5 Q 2 MR Table MR Graph Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 27 / 88
28 Revenue and Marginal Revenue Marginal Revenue is the derivative of Revenue Rev measured in $, MR in $/unit Rev P P Q MR Q Positive MR Negative MR 0 q Q q Q If Rev is upside-down-u-shaped, then MR is decreasing Goes from positive to negative Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 28 / 88
29 Revenue and Marginal Revenue P MR Q P Q 0 q Q Notice that MR(0) = P(0): MR(Q) = P(Q) + QP (Q), so MR(0) = P(0) + 0P (0) = P(0) What is the interpretation of this? Normally, you gain P(Q) but lower the price of all previous units. On the first unit, there are no previous units you only gain P(Q) Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 29 / 88
30 Revenue and Marginal Revenue Linear (Inverse) Demand: P(Q) = A BQ Rev(Q) = AQ BQ 2 MR(Q)? MR(Q) = A 2BQ P A P Q AB Q A 2 MR Q A2 B Q A 2 B A B Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 30 / 88
31 Recall Elasticities from Week 1: Example We have demand Q(P) = 10 2P from the example before dq(p) dp = 2 So the demand elasticity ε D is: ε D = dq(p) dp P Q = 2 P Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 31 / 88
32 Revenues and Elasticities MR = dp dq Q + P ( ) dp Q MR = P dq P + 1 ( ) MR = P MR = P 1 dq dp P Q ( 1 ε D + 1 MR is positive if the price elasticity of demand is less than -1 (i.e., on the elastic portion of the demand curve) + 1 ) Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 32 / 88
33 Revenues and Elasticities: Example We can plug the demand elasticity ε D = 2 P Q into the MR formula: ( ) 1 MR = P ε D + 1 So MR is: ( 1 MR = P 2 P Q + 1 ) = Q 2 + P = Q 2 + (5 Q 2 ) = 5 Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 33 / 88
34 Revenues and Elasticities: Example Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 34 / 88
35 Revenues and Elasticities: Example Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 35 / 88
36 Revenues and Elasticities: Example Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 36 / 88
37 Revenues and Elasticities: Example Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 37 / 88
38 Revenues and Elasticities P Elastic Rev Unit Elasticity p Unit Elasticity Rev P Q Inelastic q Q Elastic Inelastic Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 38 / 88
39 Revenues and Elasticities Hachette wants to set own prices for ebooks, not charge flat $9.99 Spring 2014: Amazon delays shipping or stops selling Hachette books Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 39 / 88
40 Revenues and Elasticities Amazon releases statement, July 2014: Many e-books are being released at $14.99 and even $ That is unjustifiably high for an e-book. With an e-book, there s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market e-books cannot be resold as used books. E-books can be and should be less expensive. It s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved: [Customer, Author, Publisher, Retailer]. Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 40 / 88
41 Profit-Maximization Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 41 / 88
42 The Monopolist s Problem The firm s goal is to maximize profit Π Convenient to write as choice over quantity Q: At optimum, Π (Q) = 0: Π (Q) = Profit Rev Cost {}}{{}}{{}}{ Π(Q) = P(Q) Q C(Q) Marginal Revenue {}}{ Marg Cost {}}{ P(Q) + QP (Q) C (Q) = 0 = Marginal Revenue {}}{ P(Q) + QP (Q) = Given a solution for Q, price P(Q) is chosen Marg Cost {}}{ C (Q) Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 42 / 88
43 The Solution: Marginal Revenue = Marginal Costs Marginal Revenue {}}{ P(Q) + QP (Q) = Marg Cost {}}{ C (Q) Benefit of selling one additional unit: Revenue increases by MR Cost of selling one additional unit: Costs increase by MC If MR > MC, sell more If MR < MC, sell less MC is positive, so we must have positive MR. Selling the last unit was costly, so it must have increased revenue to be worthwhile Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 43 / 88
44 Math Example Let Costs be C(Q) = 4Q Let Demand be Q = 48 2P Inverse Demand: P = 24 Q/2 Profit-Maximization 1 Set Marginal Revenue equal Marginal Cost MC = dc(q) = 4 dq Rev(Q) = Q P = 24Q Q 2 /2, so MR = drev(q) dq MR = MC at 24 Q = 4, so Q = 20. Plug into demand to get P = 24 20/2 = 14. = 24 Q NOTE: Write revenue in terms of Q, not P, before differentiating for MR! Rev(P) = P(48 2P), derivative 48 4P If we said MR = 48 4P and set equal to MC = 4, we would get P = 11 wrong answer Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 44 / 88
45 The Monopolist s Problem, in Graphs Math example continued Solution: Q = 20, P = 14, Profit $200 P MC MR Demand P Q Q Where are revenues, costs, and profits on this graph? What is the efficient level of production? Cost was C(Q) = 4Q. What happens to graph, output & profits if C(Q) = 4Q + 100? What about C(Q) = 4Q + 300? Now firm goes out of business Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 45 / 88
46 The Monopolist s Problem, in Graphs P p m MC MR D q m Q Monopolist chooses quantity q m, price p m Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 46 / 88
47 The Monopolist s Problem, in Graphs P p m PS MC MR D q m Producer Surplus, i.e., Profit Revenue = p m q m rectangle Cost = Area under MC curve (ignoring fixed costs) If MC is derivative of Cost, then Cost is integral of MC Fixed costs affect profit and entry decision, but not pricing Profit = Revenue Cost Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 47 / 88 Q
48 Markups Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 48 / 88
49 Monopoly Production Marginal Revenue = Marginal Cost Suppose Marginal Costs are 0 Digital Goods software, music downloads Prescription drugs under patent How do we choose price/quantity? Choose quantity to set MR = 0, i.e., maximize revenue Equivalent to choosing price to set price-elasticity ε D = 1 Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 49 / 88
50 Revenues and Elasticities P Elastic Rev Unit Elasticity p Unit Elasticity Rev P Q Inelastic q Q Elastic Inelastic Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 50 / 88
51 Revenues and Elasticities If MC = 0: set elasticity ε D = 1 to maximize revenue. If MC > 0: ε D < 1 (inelastic): Raising prices increases revenue Raising prices decreases quantity Costs go down Raise prices! ε D = 1 (unit elasticity): Raising prices doesn t change revenue Raising prices decreases quantity Costs go down Raise prices! ε D > 1 (elastic): Raising prices decreases revenue Raising prices lowers quantity and costs Trade off decrease in revenue vs. decrease in costs Always raise prices (reduce quantity) until demand is elastic! Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 51 / 88
52 Elasticities and Profit Maximization Set Marginal Revenue = Marginal Cost Maximize profit condition: MR = MC MR in terms of elasticity: MR = P ( ) ε D Put these together: MR = MC ( ) 1 P ε D + 1 = MC = P = MC ε D Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 52 / 88
53 Elasticities and Profit Maximization P = MC ε D, or P = MC 1 1 ε D with ε D > 1 This relates the elasticity to the percentage mark-up over costs: Elasticity ε D 1 1 Markup ε D ε D % % % % Under perfectly elastic demand (competitive markets) with ε D = : Choose P = MC P is constant for any choice of Q, so MR = P More elastic demand lower markup Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 53 / 88
54 Math Example Example from before: Elasticity: Costs C(Q) = 4Q, MC = 4 Demand Q = 48 2P, or P = 24 Q/2 Solution: P = 14, Q = 20 Mark-Up Equation: P P Q dq dp = P Q 2 = 7 5 P = MC ε D = MC MR Demand P Q Q at optimum = 14 Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 54 / 88
55 Application: Firm Information When setting prices, what do firms need to know? Scientist analyses brainwaves to work out how much we re willing to pay for a coffee - and claims Starbucks should INCREASE its prices Daily Mail, Oct 2013 A German neurobiologist Muller is convinced that... Starbucks is effectively throwing away millions of dollars in profit as it could be charging more for its coffees. He said that while Starbucks charges e 1.80 for a small white coffee in Stuttgart, people would be willing to pay up to e The scientist showed people the same cup of coffee on a screen but with different prices while monitoring the brain s activity. People reacted strongly to prices that seem very low or too high - such as 10 cents or e 10 per cup. But the experiment showed that people were comfortable paying 60 cents more than Starbucks was charging. Should Starbucks hire him to run brain scans to determine their prices? Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 55 / 88
56 Application: Firm Information Firms set prices based on knowledge of Marginal Costs and Demand Curve. Do firms need to know their full individual demand curve? No, just the local elasticity (i.e., marginal revenue). P = MC ε D If P is lower, raise price until equal; if P is higher, lower price Equivalently: Find marginal revenue, raise price if MR > MC Is it realistic to think that firms know the local elasticities? Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 56 / 88
57 Application: Firm Information Do firms know the local elasticity for a given product? Probably... 1 If they have any ability to experiment with prices... Supermarkets, online retailers, gas stations: yes. Postal service, CTA: probably not Amazon, after setting $9.99 flat price for ebooks: maybe not 2 If they don t need to know how it affects other goods they sell... Restaurant: Easy to measure number of meat loafs sold as a function of price Hard to measure what people buy instead when the price is higher Shift to higher priced entrees? Good Shift to lower priced entrees? Bad Stop coming to my restaurant? Really bad Amazon: Drop price of one ebook from $14.99 to $9.99 (1.74x sales), vs. cutting price of all ebooks at once (more or less than 1.74x?) 3 And if they only care about short-term elasticity. If I keep the price of meat loaf low for a year, will people slowly start coming to my restaurant more often? Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 57 / 88
58 Application: Firm Information Amazon is probably better at experimenting with prices, measuring sales, analyzing data than most other retailers With rare exceptions, the volume increase in the short term is never enough to pay for the price decrease. However, our quantitative understanding of elasticity is short-term. We can estimate what a price reduction will do this week and this quarter. But we cannot numerically estimate the effect that consistently lowering prices will have on our business over five years or ten years or more. Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. We ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and we believe important and valuable in the long term. Jeff Bezos, Founder & CEO of Amazon.com, 2005 Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 58 / 88
59 Social Costs of Monopoly Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 59 / 88
60 The Monopolist s Problem, in Graphs P p m CS PS MC MR D q m Q Consumer Surplus is area between Demand Curve and Price To maximize total surplus PS + CS, set Q & P equal to intersection of MC and Demand Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 60 / 88
61 The Monopolist s Problem, in Graphs P p m p e MR MC D Monopolist: quantity q m, price p m Efficient: quantity q e, price p e q m q e Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 61 / 88
62 The Monopolist s Problem, in Graphs P p m CS PS DWL MC MR D q m Deadweight Loss: Decline in Consumer Surplus + Producer Surplus from efficient output Moving from efficient to monopoly output: Firm is better off Consumer is more worse off Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 62 / 88 Q
63 The Monopolist s Problem, in Graphs P p m CS PS DWL MC MR D q m Q Why are monopolies bad? Price > Marginal Cost implies Inefficiency (DWL) P > WTP > MC sale should go through, but it doesn t Doesn t just transfer $ from Consumer to Firm lowers total welfare In Supply-and-Demand free market, we get efficiency Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 63 / 88
64 How large is the social loss from monopoly? DWL triangle with P MC for height and length q e q m DWL = 1 2 (pm MC)(q e q m ) DWL = 1 (p m MC) (q e q m ) 2 p m q m (p m q m ) DWL 1 2 (% markup in price)(% reduction in output)(monopoly revenues) A monopolist with a markup of 40% who reduces output 40% below the competitive level would have a distortion of roughly 40% 40% = 8% of monopoly revenues 1 2 Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 64 / 88
65 Example: Taxi Medalions and Uber Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 65 / 88
66 Taxi Medalions and Uber Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 66 / 88
67 The Effect of a Restriction on the Number of Cabs Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 67 / 88
68 The Effect of a Restriction on the Number of Cabs When government doesn t restrict, we are at the first equilibrium n 1 cab firms in the market, making no profit as p 1 q 1 = AC 1 Suppose taxi industry gets government to restrict medallions to n 2 When government restricts medallions, we are at the second equilibrium n 2 < n 1 cab firms in the market, making profit as p 2 q 2 > AC 1 Can think of impact of uber as going from E2 to E1 Can also think of other occupational restrictions (e.g., doctors and the number of AMA residency slots) similarly One could argue that one of more effective ways to reduce inequality would be to lower the price of skill by increasing the supply of skill For example, we could increase residency slots or allow qualified doctors to obtain US citizenship and practice Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 68 / 88
69 Application: Monopoly Pass-Through What happens to prices and profits when costs or taxes go up? Monopoly: If costs go up, will prices go up? If costs go up, will profits go up? If costs go up by $1, how much do prices go up? Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 69 / 88
70 Application: Monopoly Pass-Through What happens to prices and profits when costs or taxes go up? Competitive Market: P D p' p p't D S' t S q' q Q Surplus loss shared by firms and consumers Price goes up, but not by full cost increase Depends on supply/demand elasticities Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 70 / 88
71 Application: Monopoly Pass-Through Consider a firm with constant marginal costs, linear demand: Demand P = A BQ Marginal Revenue: A 2BQ = 2P A Marginal cost MC per unit P MC MR D Solution: Set MR = MC, plug in MR = 2P A to get P = A 2 + MC 2 What happens if MC increases by? (eg, tax of per sale) Price goes up by /2 Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 71 / 88
72 Application: Monopoly Pass-Through Linear demand: Cost increases by, Price goes up by /2 Is it generally true that firms do not fully pass through cost increases? No for other demand functions, firms might increase costs by less than,, or more than Example: Let Q(P) = P 2 (with inverse demand P(Q) = Q 1 2 ) Special Case of Constant Elasticity Demand Q = AP εd for ε D < 0 Elasticity: ε D = 2 Mark-up equation: P = MC 1+ 1 ε D = MC = 2MC Cost increases by, price goes up by 2 Even if we pass on >100% of cost increase, profits still lower! Could have set New Price with Old Costs would be worse off New Price with New Costs even worse Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 72 / 88
73 Advertising Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 73 / 88
74 Advertising can increase demand Simple model of advertising A is that it can impact demand Demand is Q = D(P, A) where Q is the quantity demanded, P is price of Q, and A is expenditures on advertising Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 74 / 88
75 Advertising can increase demand Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 75 / 88
76 Advertising can increase demand An increase in advertising shifts the firm s demand curve outward The firm can earn additional profits by increasing sales at the same price (as shirt in left-hand figure) or by increasing price at a given quantity (middle figure) or lead to some combination of an increase inp and Q Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 76 / 88
77 Advertising, Prices, and the Elasticity of Demand The firm will keep the price constant when demand increases due to advertising if the changes in advertising do not affect the elasticity of demand The firm will increase price with advertising if advertising reduces the elasticity of demand The firm will reduce price if advertising makes demand more elastic Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 77 / 88
78 How much should a firm advertise? Profits = Revs - Costs First consider the case in which advertising increases demand by increasing sales at the same price Then we will consider the case in which advertising increases demand by increasing willingness to pay at a given level of output Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 78 / 88
79 How much should a firm advertise? π= Revs - Costs Revs are P Q(P, A) Costs are the sum of constant marginal costs c times quantity plus advertising expenses, i.e., costs=c Q + A max PQ(P, A) cq A A Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 79 / 88
80 How much should a firm advertise? The optimal level of advertising solves P dq da c dq da 1 = 0 (P c) dq da = 1 A (P c)dq PQ da = A PQ 1 dq A = A da Q PQ P c P }{{} = 1/ε D }{{} =ε A This shows advertising as a share of revenues should equal εa ε D Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 80 / 88
81 How much should a firm advertise? Firms will spend more on advertising when the advertising elasticity ε A is larger and when the price elasticity of demand ε D is lower However, the incentive to advertise does not depend on how advertising affects the elasticity of demand In general, firms do not advertise in order to reduce the elasticity of demand for their product They advertise in order to increase demand for their product (whether it makes demand more elastic or not) Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 81 / 88
82 How much should a firm advertise? π= Revs - Costs Revs are P(Q, A) Q This formulation amounts to looking at how a consumers willingness to pay P depends on the quantity consumed Q and the level of advertising Costs are the sum of constant marginal costs c times quantity plus advertising expenses, i.e., costs=c Q + A max P(Q, A)Q cq A A Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 82 / 88
83 How much should a firm advertise? The optimal level of advertising solves dp da Q 1 = 0 dp da Q = 1 A PQ ε PA = dp da Q = A PQ A PQ 1 This shows advertising as a share of revenues should equal ε PA where ε PA is the elasticity of the willingness to pay with respect to advertising This is consistent with the first formulation since ε PA = εa ε D Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 83 / 88
84 How much should a firm advertise? Therefore another way to express the optimal advertising condition is that firms will spend more on advertising when advertising has a greater impact on consumer s willingness to pay Note that the elasticity of demand doesn t enter this expression The gain from advertising depends on how much advertising shifts the firm s demand curve upward independent of the elasticity of demand Hence, the elasticity of demand matters for the level of advertising only when we hold the effect of advertising on sales constant Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 84 / 88
85 How does advertising affect consumer welfare? The effects of advertising on consumer welfare depend on how advertising affects price Consider first the case where advertising affects the level of demand but does not affect its elasticity In this case prices are unchanged and the graph looks like the figure on the following slide Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 85 / 88
86 How does advertising affect consumer welfare? Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 86 / 88
87 How does advertising affect consumer welfare? In the figure, advertising shifts demand from D1 to D2 Since the elasticity of demand is unchanged and the marginal costs are constant, the optimal monopoly price is unaffected As a result, the quantity increases from X 1 to X 2 and the monopolist s revenues increase by the darker shaded region Clearly, as shown in the figure, WTP was increased by advertising Even with the increases in expenditures, consumer surplus grows by the lightly shaded region Unless the advertising lowers utility substantially at zero consumption, the great consumer surplus implies that the consumer has gained from the advertising. The advertising has increased the consumer s value of the good to the consumer and this generates increased surplus Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 87 / 88
88 How does advertising affect consumer welfare? If advertising increases prices significantly, the story can be different In this case, the demand increases consumer surplus (at a fixed price) but the increase in price reduces consumer surplus If the price increase is large enough, consumer surplus and hence consumer welfare can decline Advertising can also reduce price. Of course, this makes it even more likely that consumers will gain Owen Zidar (Chicago Booth) Microeconomics Week 7: Monopoly 88 / 88
Pricing with Market Power
Chapter 7 Pricing with Market Power 7.1 Motives and objectives Broadly The model of perfect competition is extreme (and hence wonderfully powerful and simple) because of its assumption that each firm believes
More informationECN 3103 INDUSTRIAL ORGANISATION
ECN 3103 INDUSTRIAL ORGANISATION 3. Monopoly Mr. Sydney Armstrong Lecturer 1 The University of Guyana 1 Semester 1, 2016 OUR PLAN Monopoly Reference for reviewing these concepts: Carlton, Perloff, Modern
More informationEco 300 Intermediate Micro
Eco 300 Intermediate Micro Instructor: Amalia Jerison Office Hours: T 12:00-1:00, Th 12:00-1:00, and by appointment BA 127A, aj4575@albany.edu A. Jerison (BA 127A) Eco 300 Spring 2010 1 / 61 Monopoly Market
More informationECON 2100 Principles of Microeconomics (Summer 2016) Monopoly
ECON 21 Principles of Microeconomics (Summer 216) Monopoly Relevant readings from the textbook: Mankiw, Ch. 15 Monopoly Suggested problems from the textbook: Chapter 15 Questions for Review (Page 323):
More informationMarginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good.
McPeak Lecture 10 PAI 723 The competitive model. Marginal willingness to pay (WTP). The maximum amount a consumer will spend for an extra unit of the good. As we derived a demand curve for an individual
More informationIntroduction. Managerial Problem. Solution Approach
Monopoly Introduction Managerial Problem Drug firms have patents that expire after 20 years and one expects drug prices to fall once generic drugs enter the market. However, as evidence shows, often prices
More informationECON 200. Introduction to Microeconomics
ECON 200. Introduction to Microeconomics Homework 5 Part II Name: [Multiple Choice] 1. A firm is a natural monopoly if it exhibits the following as its output increases: (d) a. decreasing marginal revenue
More informationEcon Microeconomics Notes
Econ 120 - Microeconomics Notes Daniel Bramucci December 1, 2016 1 Section 1 - Thinking like an economist 1.1 Definitions Cost-Benefit Principle An action should be taken only when its benefit exceeds
More informationLecture 10: Market Power and Monopoly
Lecture 10: Market Power and Monopoly November 8, 2016 Overview Course Administration Sources of Market Power Market Power and Marginal Revenue Profit Maximization and Market Power How a Firm With Market
More informationMarket structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product.
Market structure 1: Perfect Competition The perfectly competitive firm is a price taker: it cannot influence the price that is paid for its product. This arises due to consumers indifference between the
More informationPractice Midterm Exam Microeconomics: Professor Owen Zidar
Practice Midterm Exam Microeconomics: 33001 Professor Owen Zidar This exam is comprised of 3 questions. The exam is scheduled for 1 hour and 30 minutes. This is a closed-book, closed-note exam. There is
More informationMarket structures. Why Monopolies Arise. Why Monopolies Arise. Market power. Monopoly. Monopoly resources
Market structures Why Monopolies Arise Market power Alters the relationship between a firm s costs and the selling price Charges a price that exceeds marginal cost A high price reduces the quantity purchased
More informationMonopolistic Competition. Chapter 17
Monopolistic Competition Chapter 17 The Four Types of Market Structure Number of Firms? Many firms One firm Few firms Differentiated products Type of Products? Identical products Monopoly Oligopoly Monopolistic
More informationEconS Perfect Competition and Monopoly
EconS 425 - Perfect Competition and Monopoly Eric Dunaway Washington State University eric.dunaway@wsu.edu Industrial Organization Eric Dunaway (WSU) EconS 425 Industrial Organization 1 / 47 Introduction
More informationLecture 11: Market Power and Monopoly
Lecture 11: Market Power and Monopoly November 13, 2018 Overview Course Administration Sources of Market Power Market Power and Marginal Revenue Profit Maximization and Market Power How a Firm With Market
More informationEconS Monopoly - Part 1
EconS 305 - Monopoly - Part 1 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 23, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 23 October 23, 2015 1 / 50 Introduction For the rest
More informationThese notes essentially correspond to chapter 11 of the text.
These notes essentially correspond to chapter 11 of the text. 1 Monopoly A monopolist is de ned as a single seller of a well-de ned product for which there are no close substitutes. In reality, there are
More informationLecture 11: Market Power and Monopoly
Lecture 11: Market Power and Monopoly November 14, 2017 Overview Course Administration Sources of Market Power Market Power and Marginal Revenue Profit Maximization and Market Power How a Firm With Market
More informationEcn Intermediate Microeconomic Theory University of California - Davis June 11, 2009 Instructor: John Parman. Final Exam
Ecn 100 - Intermediate Microeconomic Theory University of California - Davis June 11, 2009 Instructor: John Parman Final Exam You have until 8pm to complete the exam, be certain to use your time wisely.
More informationLecture 2: Market Structure I (Perfect Competition and Monopoly)
Lecture 2: Market Structure I (Perfect Competition and Monopoly) EC 105. Industrial Organization Matt Shum HSS, California Institute of Technology October 1, 2012 EC 105. Industrial Organization ( Matt
More informationMonopolistic Markets. Regulation
Monopolistic Markets Regulation Comparison of monopolistic and competitive equilibrium output The profits of a monopolist are maximized when MC(Q M ) = P(Q M ) + Q P (Q M ) negative In a competitive market:
More informationChapter 24: Monopoly. Watanabe Econ Monopoly 1 / 61. Watanabe Econ Monopoly 2 / 61. Watanabe Econ Monopoly 3 / 61
Econ 33 Microeconomic Analysis Chapter 4: Monopoly Instructor: Hiroki Watanabe Spring 13 Watanabe Econ 33 4 Monopoly 1 / 61 1 Introduction Monopolist s Profit Maximization Problem 3 Inefficiency of Monopoly
More informationCharpter 10 explores how firms can have more sophisticated behavior to extract surplus from consumers and maximize surplus.
Introduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 11 Price discrimination (ch 10) Charpter 10 explores how firms can have more sophisticated behavior to extract surplus
More informationEconS Monopoly - Part 2
EconS 305 - Monopoly - Part 2 Eric Dunaway Washington State University eric.dunaway@wsu.edu October 26, 2015 Eric Dunaway (WSU) EconS 305 - Lecture 24 October 26, 2015 1 / 47 Introduction Last time, we
More informationINTERPRETATION. SOURCES OF MONOPOLY (Related to P-R pp )
ECO 300 Fall 2005 November 10 MONOPOLY PART 1 INTERPRETATION Literally, just one firm in an industry But interpretation depends on how you define industry General idea a group of commodities that are close
More informationEcon Microeconomic Analysis and Policy
ECON 500 Microeconomic Theory Econ 500 - Microeconomic Analysis and Policy Monopoly Monopoly A monopoly is a single firm that serves an entire market and faces the market demand curve for its output. Unlike
More informationBS2243 Lecture 9 Advertisement. Spring 2012 (Dr. Sumon Bhaumik)
BS2243 Lecture 9 Advertisement Spring 2012 (Dr. Sumon Bhaumik) Why advertise? Building brands Creating markets for new products (scope economies) Price competition / Price protection Barrier to entry Product
More informationLecture 2: Market Structure Part I (Perfect Competition and Monopoly)
Lecture 2: Market Structure Part I (Perfect Competition and Monopoly) EC 105. Industrial Organization Matt Shum HSS, California Institute of Technology EC 105. Industrial Organization ( Matt ShumLecture
More informationAdvanced Microeconomic Theory. Chapter 7: Monopoly
Advanced Microeconomic Theory Chapter 7: Monopoly Outline Barriers to Entry Profit Maximization under Monopoly Welfare Loss of Monopoly Multiplant Monopolist Price Discrimination Advertising in Monopoly
More informationMidterm 2 - Solutions
Econ 362 - Government Regulation of Business College of William and Mary November 2, 2011 John Parman Midterm 2 - Solutions You have until 3:20pm to complete the exam, be certain to use your time wisely.
More informationChapter 15: Monopoly. Notes. Watanabe Econ Monopoly 1 / 83. Notes. Watanabe Econ Monopoly 2 / 83. Notes
Econ 3 Introduction to Economics: Micro Chapter : Monopoly Instructor: Hiroki Watanabe Spring 3 Watanabe Econ 93 Monopoly / 83 Monopolistic Market Monopolistic Pricing 3 Inefficiency of Monopoly Price
More information14.54 International Trade Lecture 17: Increasing Returns to Scale
14.54 International Trade Lecture 17: Increasing Returns to Scale 14.54 Week 11 Fall 2016 14.54 (Week 11) Increasing Returns Fall 2016 1 / 25 Today s Plan 1 2 Increasing Returns to Scale: General Discussion
More informationMonopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials
LESSON 5 Monopoly Introduction and Description Lesson 5 extends the theory of the firm to the model of a Students will see that the profit-maximization rules for the monopoly are the same as they were
More informationClass Presentation for March 29 & 31, Chapter #25
ECO 2220, Principles of Microeconomics - Section 1C Class Presentation for March 29 & 31, 2016 Chapter #25 Copyright 2014 Pearson Education, Inc. All rights reserved. 25-1 Courage doesn't always roar,
More informationIntroduction to Monopolistic Competition
Printed Page 659 Introduction to Monopolistic Competition How prices and profits are determined in monopolistic competition, both in the short run and in the long run How monopolistic competition can lead
More informationEcon 2113: Principles of Microeconomics. Spring 2009 ECU
Econ 2113: Principles of Microeconomics Spring 2009 ECU Chapter 12 Monopoly Market Power Market power is the ability to influence the market, and in particular the market price, by influencing the total
More informationSHORT QUESTIONS AND ANSWERS FOR ECO402
SHORT QUESTIONS AND ANSWERS FOR ECO402 Question: How does opportunity cost relate to problem of scarcity? Answer: The problem of scarcity exists because of limited production. Thus, each society must make
More informationMONOPOLY SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes
1 MONOPOLY SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. A market might have a monopoly because: (1) a key resource is owned by a single firm; (2) the government gives a single firm the exclusive right
More informationFirm Supply. Market demand. Demand curve facing firm
Firm Supply 84 Firm Supply A. Firms face two sorts of constraints 1. technological constraints summarize in cost function 2. market constraints how will consumers and other firms react to a given firm
More informationNetworks, Telecommunications Economics and Strategic Issues in Digital Convergence. Prof. Nicholas Economides. Spring 2006
Networks, Telecommunications Economics and Strategic Issues in Digital Convergence Prof. Nicholas Economides Spring 2006 Basic Market Structure Slides The Structure-Conduct-Performance Model Basic conditions:
More informationNow suppose a price ceiling of 15 is set by the government.
1. The demand function is Q d = 1 2, and the supply function is = 10 + Q s. a. What is the market equilibrium price and quantity? b. What is the consumer surplus, producer surplus, dead weight loss (WL)
More informationMICROECONOMICS - CLUTCH CH MONOPOLISTIC COMPETITION.
!! www.clutchprep.com CONCEPT: CHARACTERISTICS OF MONOPOLISTIC COMPETITION A market is in monopolistic competition when: Nature of Good: The goods for sale are, but not identical - Products are said to
More informationMonopoly. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University
15 Monopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Market power Why Monopolies Arise Alters the relationship between a firm s costs and the selling price Monopoly
More informationDeadweight Loss of Monopoly
Monopoly (part 2) Deadweight Loss of Monopoly Market Failure: non-optimal allocation of goods & services with economic inefficiencies (price is not marginal cost) A monopoly sets p > MC causing consumers
More informationLecture 12. Monopoly
Lecture 12 Monopoly By the end of this lecture, you should understand: why some markets have only one seller how a monopoly determines the quantity to produce and the price to charge how the monopoly s
More information2007 Thomson South-Western
Monopolistic Competition Characteristics: Many sellers Product differentiation Free entry and exit In the long run, profits are driven to zero Firms have some control over price What does the costs graph
More informationBoston College Problem Set 6, Fall 2012 EC Principles of Microeconomics Instructor: Inacio G L Bo
Problem Set 6, Fall 01 EC 131 - Principles of Microeconomics Instructor: Inacio G L Bo Answer the questions in the spaces provided on the question sheets. If you run out of room for an answer, continue
More informationChapter 13. Microeconomics. Monopolistic Competition: The Competitive Model in a More Realistic Setting
Microeconomics Modified by: Yun Wang Florida International University Spring, 2018 1 Chapter 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Outline 13.1 Demand and
More information14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22
Monopoly. Principles of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supply-side
More informationIntroduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 1
Part 1: Introduction to this course Introduction to Industrial Organization Professor: Caixia Shen Fall 2014 Lecture Note 1 1. What is Industrial Organization? Industrial organization is concerned with
More informationAgenda. Profit Maximization by a Monopolist. 1. Profit Maximization by a Monopolist. 2. Marginal Revenue. 3. Profit Maximization Exercise
Agenda 1. Profit Maximization by a Monopolist 2. Marginal Revenue 3. Profit Maximization Exercise 4. Effect of Elasticities on Monopoly Price 5. Comparative Statics of Monopoly 6. Monopolist with Multiple
More informationLecture 4.June 2008 Microeconomics Esther Kalkbrenner:
Lecture 4.June 2008 Microeconomics Esther Kalkbrenner: Supply and Demand Familiar Concepts Supply and Demand (Chapter 2) Applying the Supply and Demand Model (Chapter 3) Consumers Choice Consumer Choice
More informationStudy Guide Final Exam, Microeconomics
Study Guide Final Exam, Microeconomics 1. If the price-consumption curve of a commodity slopes downward how can you tell whether the consumer spends more or less on this commodity from her budget (income)?
More informationPractice Midterm Exam Microeconomics: Professor Owen Zidar
Practice Midterm Exam Microeconomics: 33001 Professor Owen Zidar This exam is comprised of 3 questions. The exam is scheduled for 1 hour and 30 minutes. This is a closed-book, closed-note exam. There is
More informationThe Competitive Model in a More Realistic Setting
CHAPTER 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Summary and Learning Objectives 13.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive
More information7 The Optimum of Monopoly, Price Discrimination
Microeconomics I - Lecture #7, March 31, 2009 7 The Optimum of Monopoly, Price Discrimination 7.1 Monopoly Up to now we have analyzed the behavior of a competitive industry, a market structure that is
More informationLesson 3-2 Profit Maximization
Lesson 3-2 Profit Maximization Standard 3b: Students will explain the 5 dimensions of market structure and identify how perfect competition, monopoly, monopolistic competition, and oligopoly are characterized
More informationECON 101 KONG Midterm 2 CMP Review Session. Presented by Benji Huang
ECON 101 KONG Midterm 2 CMP Review Session Presented by Benji Huang Chapter 5 Efficiency and Equity Benefit, Cost, Surplus Consumers (1) A consumer benefits from the consumption of a product this benefit
More informationOligopoly and Monopolistic Competition
Oligopoly and Monopolistic Competition Introduction Managerial Problem Airbus and Boeing are the only two manufacturers of large commercial aircrafts. If only one receives a government subsidy, how can
More informationChapter 13 MODELS OF MONOPOLY. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.
Chapter 13 MODELS OF MONOPOLY Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Monopoly A monopoly is a single supplier to a market This firm may choose to produce
More informationFinal Exam - Solutions
Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 009 Instructor: John Parman Final Exam - Solutions You have until 1:30pm to complete this exam. Be certain to put
More informationPrinciples of. Economics. Week 6. Firm in Competitive & Monopoly market. 7 th April 2014
Principles of Economics Week 6 Firm in Competitive & Monopoly market 7 th April 2014 In this week, look for the answers to these questions:!what is a perfectly competitive market?!what is marginal revenue?
More informationnot to be republished NCERT Chapter 6 Non-competitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET
Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter
More informationEC1000 MICROECONOMICS ' MOCK EXAM
EC1000 MICROECONOMICS ' MOCK EXAM Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in both Sections The maximum mark
More informationPerfectly Competitive Markets
C H A P T E R 8 Profit Maximization and Competitive Supply CHAPTER OUTLINE 8.1 Perfectly Competitive Markets 8.2 Profit maximization 8.3 Marginal Revenue, Marginal Cost, and Profit Maximization 8.4 Choosing
More informationMonopoly CHAPTER 15. Henry Demarest Lloyd. Monopoly is business at the end of its journey. Monopoly 15. McGraw-Hill/Irwin
CHAPTER 15 Monopoly Monopoly is business at the end of its journey. Henry Demarest Lloyd McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. A Monopolistic Market A
More informationEconomics. Monopoly. N. Gregory Mankiw. Premium PowerPoint Slides by Vance Ginn & Ron Cronovich C H A P T E R P R I N C I P L E S O F
C H A P T E R Monopoly Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Vance Ginn & Ron Cronovich 2009 South-Western, a part of Cengage Learning, all rights reserved In
More informationQuiz #5 Week 04/12/2009 to 04/18/2009
Quiz #5 Week 04/12/2009 to 04/18/2009 You have 30 minutes to answer the following 17 multiple choice questions. Record your answers in the bubble sheet. Your grade in this quiz will count for 1% of your
More informationProf. Wolfram Elsner Faculty of Business Studies and Economics iino Institute of Institutional and Innovation Economics. Real-World Markets
Prof. Wolfram Elsner Faculty of Business Studies and Economics iino Institute of Institutional and Innovation Economics Real-World Markets Readings for this lecture Required reading this time: Real-World
More informationEcon 121b: Intermediate Microeconomics
Econ 11b: Intermediate Microeconomics Dirk Bergemann, Spring 01 Week of 3/6-4/3 1 Lecture 16: Imperfectly Competitive Market 1.1 Price Discrimination In the previous section we saw that the monopolist
More informationa. Sells a product differentiated from that of its competitors d. produces at the minimum of average total cost in the long run
I. From Seminar Slides: 3, 4, 5, 6. 3. For each of the following characteristics, say whether it describes a perfectly competitive firm (PC), a monopolistically competitive firm (MC), both, or neither.
More informationDemand curve - using Game Results How much customers will buy at a given price Downward sloping - more demand at lower prices
31 October Bige Kahraman Class Notes First half of course (Michaelmas) is Microeconomics, second half (Hilary) is Macroeconomics Focusing on profit maximization & price formation Looking at industry level
More informationIndustrial Organization
Industrial Organization Session 4: The Monopoly Jiangli Dou School of Economics Jiangli Dou (School of Economics) Industrial Organization 1 / 43 Introduction In this session, we study a theory of a single
More information14.23 Government Regulation of Industry
14.23 Government Regulation of Industry Class 2 MIT & University of Cambridge 1 Outline Definitions Perfect Competition and Economic Surplus Monopoly and Deadweight Losses Natural Monopolies X-inefficiency
More informationTopic 10: Price Discrimination
Topic 10: Price Discrimination EC 33 Semester I 008/009 Yohanes E. Riyanto EC 33 (Industrial Organization I) 1 Introduction Price discrimination the use of non-uniform pricing to max. profit: Charging
More informationA few firms Imperfect Competition Oligopoly. Figure 8.1: Market structures
8.1 Setup Monopoly is a single firm producing a particular commodity. It can affect the market by changing the quantity; via the (inverse) demand function p (q). The tradeoff: either sell a lot cheaply,
More informationProducer Theory - Monopoly
Producer Theory - Monopoly Mark Dean Lecture Notes for Fall 2009 Introductory Microeconomics - Brown University 1 Introduction Up until now, we have assumed that all the agents in our economies are price
More informationHomework 4 Economics
Homework 4 Economics 501.01 Manisha Goel Due: Tuesday, March 1, 011 (beginning of class). Draw and label all graphs clearly. Show all work. Explain. Question 1. Governments often regulate the price of
More informationThe Four Main Market Structures
Competitive Firms and Markets The Four Main Market Structures Market structure: the number of firms in the market, the ease with which firms can enter and leave the market, and the ability of firms to
More informationLecture on Competition 22 January 2003
Lecture on Competition 22 January 2003 Q: How common is Perfect Competition? A: It s not. It s RARE. I. Characteristics of PERFECT COMPETITION: Price Taker, Homogeneous Good, Perfect Info., No Transactions
More informationMicroeconomics. Use the graph below to answer question number 3
More Tutorial at Microeconomics 1. Opportunity costs are the values of the: a. minimal budgets of families on welfare b. hidden charges passed on to consumers c. monetary costs of goods and services *
More informationMicroeconomics. Use the graph below to answer question number 3
More Tutorial at Microeconomics 1. Opportunity costs are the values of the: a. minimal budgets of families on welfare b. hidden charges passed on to consumers c. monetary costs of goods and services *
More informationCH 15: Monopoly. Lecture
CH 15: Monopoly Lecture Characteristics of Monopolies A monopoly is a market structure in which one firm makes up the entire market Firm=Industry Characteristics of Monopolies The monopolist is a price
More informationMonopoly CHAPTER. Goals. Outcomes
CHAPTER 15 Monopoly Goals in this chapter you will Learn why some markets have only one seller Analyze how a monopoly determines the quantity to produce and the price to charge See how the monopoly s decisions
More informationOther examples of monopoly include Australia Post.
In this session we will look at monopolies, where there is only one firm in the market with no close substitutes. For example, Microsoft first designed the operating system Windows. As a result of this
More informationEcn Intermediate Microeconomic Theory University of California - Davis December 10, 2008 Professor John Parman.
Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 2008 Professor John Parman Final Examination You have until 12:30pm to complete the exam, be certain to use your
More informationMonopolistic Competition
16 Monopolistic Competition PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Monopolistic Competition Imperfect competition Between perfect competition and monopoly Oligopoly
More informationMONOPOLY. Characteristics
OBJECTIVES Explain how managers should set price and output when they have market power With monopoly power, the firm s demand curve is the market demand curve. A monopolist is the only seller of a product
More informationChapter 14 Oligopoly and Monopoly
Economics 6 th edition 1 Chapter 14 Oligopoly and Monopoly Modified by Yulin Hou For Principles of Microeconomics Florida International University Fall 2017 Oligopoly: a very different market structure
More informationSeminar 3 Monopoly. Simona Montagnana. Week 25 March 20, 2017
Seminar 3 Monopoly Simona Montagnana Week 25 March 20, 2017 2/41 Question 2 2. Explain carefully why a natural monopoly might occur. a Discuss the problem of using marginal cost pricing to regulate a natural
More informationProfit Maximization and Competitive Supply
C H A P T E R 8 Profit Maximization and Competitive Supply Prepared by: Fernando & Yvonn Quijano CHAPTER 8 OUTLINE 8.1 Perfectly Competitive Markets 8.2 Profit Maximization 8.3 Marginal Revenue, Marginal
More informationAt P = $120, Q = 1,000, and marginal revenue is ,000 = $100
Microeconomics, monopoly, final exam practice problems (The attached PDF file has better formatting.) *Question 1.1: Marginal Revenue Assume the demand curve is linear.! At P = $100, total revenue is $200,000.!
More informationFinal Exam - Solutions
Ecn 00 - Intermediate Microeconomic Theory University of California - Davis September 9, 009 Instructor: John Parman Final Exam - Solutions You have until :50pm to complete this exam. Be certain to put
More informationINTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION
ECO105 (F) / Page 1 of 12 Section A INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION Instructions: This section consists
More informationBasic Microeconomics. Basic Microeconomics 1
Basic Microeconomics Basic Microeconomics 1 Efficiency and Market Performance Contrast two polar cases perfect competition monopoly What is efficiency? no reallocation of the available resources makes
More informationANTITRUST ECONOMICS 2013
ANTITRUST ECONOMICS 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, ITAM, CPI TOPIC 3: DEMAND, SUPPLY AND STATIC COMPETITION Date Topic 3 Part 2 14 March 2013 2 Overview
More informationc) Will the monopolist described in (b) earn positive, negative, or zero economic profits? Explain your answer.
Economics 101 Summer 2015 Answers to Homework #4b Due Tuesday June 16, 2015 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on
More informationUnit 6: Non-Competitive Markets
Unit 6: Non-Competitive Markets Name: Date: / / Simple Monopoly in the Commodity Market A market structure in which there is a single seller is called monopoly. The conditions hidden in this single line
More informationEconomics 101 Spring 2001 Section 4 - Hallam Quiz 10. For questions 1-9, consider firms using a technology with cost and marginal cost functions:
Economics 101 Spring 2001 Section 4 - Hallam Quiz 10 For questions 1-9, consider firms using a technology with cost and marginal cost functions: Cost (q) = 256 + 16 q + q 2 MC(q) = 16 + 2q 1. What is the
More informationLesson-29. Monopoly. We have seen that p-competition has some remarkable results. It defines an ideal market structure in two senses:
Lesson-29 Monopoly We have seen that p-competition has some remarkable results. It defines an ideal market structure in two senses: 1. In p-competition, price competition dominates all other forms of competition
More information