Market Structures: Monopoly

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1 Market Structures: Monopoly Principles of Micro, Lecture 8 Petar Stankov petar.stankov@gmail.com Nov P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

2 Monopoly Core characteristics What defines a Monopoly?: 1 Number of firms: single producer 2 Similarity of the products: unique product > no close substitutes 3 Entry and exit: blocked 4 Market power: price maker (market power significant) P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

3 Monopoly Core characteristics What defines a Monopoly?: 1 Number of firms: single producer 2 Similarity of the products: unique product > no close substitutes 3 Entry and exit: blocked 4 Market power: price maker (market power significant) Does pure monopoly exist in the real world? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

4 Monopoly Core characteristics What defines a Monopoly?: 1 Number of firms: single producer 2 Similarity of the products: unique product > no close substitutes 3 Entry and exit: blocked 4 Market power: price maker (market power significant) Does pure monopoly exist in the real world? Why do we care? Why do we study it? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

5 Why Do Monopolies Emerge? Reasons for a monopoly to emerge: 1 Barriers to entry: legal > legal monopoly: patents, copyright laws natural > natural monopoly: the minimum efficient scale is higher than the entire market demand > it is natural to have only one firm key resource > supertalents 2 Political barriers to competition: no competitors because of informal networks within a given system (similar to key resource in a political context) P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

6 Core characteristics Implications for demand Demand is downward sloping rather than horizontal. It makes the entire difference! P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

7 Downward sloping demand Implications for marginal revenues (MR) When D is downward sloping, MR also slope downward! P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

8 Downward sloping MR Implications for profits π When MR are downward sloping, P > MC! P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

9 Downward sloping MR Implications for profits π When MR are downward sloping, P > MC! So what? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

10 Core characteristics Implications for profits π There is a monopoly profit which stays there in the long-run! Why? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

11 Core characteristics Implications for profits π There is a monopoly profit which stays there in the long-run! Why? Is the monopoly profit guaranteed? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

12 The Welfare Costs of Monopoly Does society lose from monopolies? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

13 Competitive and Monopoly Markets A comparison What are the policy implications from this comparison? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

14 Competitive and Monopoly Markets A comparison What are the policy implications from this comparison? Pluses and minuses from breaking up a monopoly. P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

15 Policy Responses to Monopolies The Practice Policy Responses to Monopolies: 1 increasing competition (Antitrust Laws, Competition protection authorities) 2 price regulation by the government > numerous issues 3 making the public monopoly private, and vice versa 4 doing nothing, while promoting competition in the wider market 5 doing nothing, while blocking competition (vested interests, pet politicians) P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

16 Competitive and Monopoly Markets A revision P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

17 Price Discrimination by a Monopolist Implications for welfare Price Discrimination The same good sold to different consumers at different prices. How does the monopoly profit change? How does the consumer change? How does the overall surplus change? How does the output change? P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13

18 Further Info Reading: M-T, ch.14 (about: Monopoly) Do not miss: economist.com; wsj.com; cnbc.com P.Stankov (UNWE, AUBG) Lecture 8 Nov / 13