The monopoly market. Telecommunications in Portugal. Managerial Economics MBACatólica

Transcription

1 Fernando Branco Fall uarter Sesson 5 Part I The monopoly market A sngle company supples an output, over whch t has relevant market power: The relevant market; Dmenson of the company. Market power: Ablty to consstently prce above margnal cost; The market demand. The evoluton of market power. Example: Telecommuncatons n Portugal. Telecommuncatons n Portugal Portugal Telecom was the sole provder of fxed telephony n Portugal untl the early 90s, enjoyng an mportant market power. Ths has been reduced wth the development of moble telephony and, most recently, wth the lberalzaton n the fxed telephnoy market. 1

2 Sources of market power Entry barrers Economes of scale Economes of scope Cost complementartes Sources of market power Entry barrers Economes of scale Economes of scope Cost complementartes Legal barrers: patents lcenses Entry costs Ext costs Sources of market power Entry barrers Economes of scale Economes of scope Cost complementartes Small organzatons are neffcent. Mnmum effcent scale: scale that mnmzes the average cost. Example: Mnmum effcent scale and the market dmenson 2

3 Mnmum effcent scale and the market dmenson USA Canada Sweden Steel Footwear Beer Cgarettes Cement Freezers Source: Baye, 2000 (pp. 287). Sources of market power Entry barrers Economes of scale Economes of scope Cost complementartes Mult-output organzatons. Margnal cost of one output decreases n the level of the other output. Large organzatons have lower margnal costs. The monopolst s decson What level of output? What prce? The manager takes decsons to maxmze proft: Max P(q)q C( q) MR ( q) = MC( q) A graphcal approach. p MC 1 = p ε q, p 3

4 The monopolst s decson: A graphcal approach MC P* * MR D AC The fxed costs and the monopolst s decson In the analyss of the monopolst s decson, the fxed costs played no role! Is that really the case? The fxed costs do not affect the prcng and output decsons. The fxed costs affect the level of proft and, hence, affect the decson on whether to stay n the market. The effect of the fxed costs MC P* AC * MR D 4

5 The monopolst s supply The monopolst does not have a supply curve: At a gven prce, he may be wllng to supply dfferent levels of output, dependng on the demand functon. Monopolst decsons n rcher envronments A monopolst wth two plants. A monopolst n two (segmented) markets. A monopolst wth two plants How to splt producton between the two plants? ( q + q ) C ( q ) C ( ) Max P( q1 + q2) q2 P ( q1 + q2 ) + p = MC1 = MC2 Equalze the margnal cost across plants. A graphcal approach. 5

6 A monopolst wth two plants: A graphcal approach P* MC 2 MC 1 MC D MR 2 * 1 * * A monopolst n two (segmented) markets What level of output n each market? What prce n each market? Max P 1( q1 ) q1 + P2 ( q2) q2 C( q1 + q2) P q + p = MC q Equalze margnal revenue across markets. A graphcal approach. A monopolst n two (segmented) markets: A graphcal approach P 1 * P 2 * MC 2 * 1 * * D 2 D 1 6

7 The monopolstc competton market Many supplers and buyers Each suppler provdes a dfferentated product: Although each product has some close substtutes. There s free entry and ext. Example: Restaurants Restaurants The market of restaurantes s a monopolstc competton market. In a bg town thousands of restaurants may exst wth a great varety of cusnes, prces, and servces. Entry (and ext) n the market s easy, and advertsng may play an mportant dfferentaton role. Example adapted form Domnck Salvattore, 1996, n a Global Economy, Thrd Edton, Irwn McGraw-Hll, New York, USA (pp. 392). Product demand Gven a set of products, each product wll have ts own demand. Whenever a new product s ntroduced, the exstng product demands may change. The poston and the elastcty of each product s demand s affected by the set of exstng products. 7

8 Product demand p D q Product demand curve: ntroducton of a new product p D D q Prcng decson Proft maxmzaton: Max Π = P ( q ; n) q C ( q ) p MC ( q ) 1 = p ε q, p ; n Short run (fxed n) vs long run (n vares) 8

9 Prcng decsons n the short run Short run decson s smlar to that of a monopolst: Gven the short-run product demand, prce s chosen to equalze the prce-cost margn to the symmetrc of the nverse of the elastcty. In general, profts wll be non-zero. Prcng decsons n the short run: A graphcal approach MC P * MR * D AC Prcng decsons n the long run There wll be entry or ext. Product demand curves change. The market dynamcs ensure that all products wll yeld zero profts. p MC ( q ) 1 = p ε q, p ; n p = AC 9

10 Prcng decsons n the long run: A graphcal approach MC P * P * * * D AC The mportance of product dfferentaton Short-run profts are due to product dfferentaton. Strateges for dfferentaton: advertsng; ntroducton of new products; Clents lock-n. Example: Telecom operators Advertsng decsons. Telecom operators The servces provded by telecom operators are hghly substtutable. The frms are nterested n developng strateges that ncrease clents swtchng costs. 10

11 Advertsng decsons An advertsng rule Max Π ( p, A) = p( p, A) C( ( p, A)) A p MC 1 = p ε A ε = R ε q, A q, p q, p 11