Presentation on theme: "Chapter 10 Monopoly Monopoly = market with just one seller but many buyers market power when choosing -max level of output, faces market demand curve (which."— Presentation transcript:
Chapter 10 Monopoly Monopoly = market with just one seller but many buyers market power when choosing -max level of output, faces market demand curve (which slopes downward), rather than facing perfectly elastic horizontal demand curve. Implies that q* decision affects P. For monopolist: mkt D curve is NOT same as MR and P MR. Result: Higher P and lower Q than in perfect competition.
More on Monopoly When say monopolist faces the market down-sloped D curve: means this firm must consider the market inverse relationship between P and Q; I.e., when Q, must P. Has implications for AR, MR, and -max q* (which equals Q*). AR: price per unit sold: this is market demand curve. MR P since when sell extra Q and P, this P affects ALL Q sold, not just last Q sold.
Monopolists -max Decision AR is market demand curve. MR lies below AR curve (See Figure 10.1 and Table 10.1.) Monopolists production decisions: 1) Pick q* where MR = MC. (This is same rule as in PC except in PC, MR=P.) 2) Then get P off of D curve. (At q*, how much are buyers willing to pay?) Note that 0. See Figure 10.2.
PC vs Monopolist PC has lower price and higher quantity, has zero profits in LR, and is more efficient (efficiency due to P=MC). Monopolist has higher price and lower quantity, can have positive profits in LR (due to restricted firm entry), and is less efficient; I.e., imposes a deadweight loss (because P MC). –See Figure 10.3
Pricing for a Monopolist Eqn. (10.2): P = MC/[1+(1/E d )] Comes from equation (10.1) showing price mark-up over MC as a % of price. Recall for PC: P = MC. For monopolist: P MC. So HOW much is P greater than MC? Difference depends inversely on E d. If demand very elastic little mark- up, so little benefit to operating as a monopolist. See Figure KEY: Monopolist operates only on elastic portion of demand curve.
Price vs MR Remember two points: –Monopolist operates only on elastic portion of demand curve; –MR P. MR = P[1+1/E D ]. So if E D -1 then MR 0. In other words: if D is inelastic, then MR is negative. At point that D becomes inelastic, MR curve drops below horizontal axis. So monopolist will not operate on inelastic portion of demand curve.
Examples 1. Demand not very elastic; So, demand not very responsive to P: E d = -1.1: P = MC/[1+(1/E d )] P = MC/[1+(1/-1.1)] P = 10 * MC. 2. Demand very elastic: E d =-5. P = 1.25 * MC. Rule: Monopolist gains most when operating on least elastic range (of the elastic portion of D curve).
Other Industry Structures Some industries dont have zero market power like PC and not lots of mkt power like monopoly; they lie somewhere in between. # firms: not huge but not 1. Product differentiation. Result: firms dont face perfectly elastic D curve like in PC but dont face full market D curve like in monopoly. See Figure 10.7.
Measuring Market Power By how much will P exceed MC? Lerner Index of Monopoly Power: excess of price over MC as fraction of price (from eq.1). L = (P-MC)/P; 0 L 1. L = 0 for PC (when P=MC). Remember: L = -1/E D but now this E D is for a specific firm. Examples of two groups of buyers: supermarket vs convenience store. See Figure 10.8.
Sources of Monopoly Power Factors that affect degree to which a single firm can exert some control over price? 1) E D power. 2) # firms power. -Depends on ease of entry for new firms. 3) how firms interact: more aggressive competition leads to less market power.
PC vs Monopoly I. Compare P and Q: PC has lower price and higher Q. II. Compare PS and CS: Monopoly involves deadweight loss (related to loss in efficiency from non-MC pricing). This deadweight loss is the social cost of monopoly. See Figure
Natural Monopoly NM occurs in industry in which cost structure differs: now cost advantage to monopoly. KEY: strong economies of scale so that AC slopes down at all levels of Q. So MC AC at all Q. With this cost structure: MORE efficient to operate as NM than PC. See Figure
Exercise Given that MC = constant = $10 and the following P and Q information,: Calculate firms MR, -max P and Q.