Market Structures Mods 61-63: Monopolies

Market Structure: Monopoly Intro to Monopolies Monopoly is exact opposite of perfect competition Monopoly – one supplier of a good Demand curve for the firm = demand curve for the market

Market Structure: Monopoly

Increasing production by a monopolist PC – firm has control over output but is a price-taker Monopolists must deal with changing prices and their output level which EFFECT market price Two Effects: Quantity Effect – one more unit is sold, increasing TR by the price at which the unit is sold Price Effect – in order to sell one more unit, the monopolist must cut market price on all units Decreases TR

Monopoly’s MR is ALWAYS below Demand B/C of the price effect

Market Structure: Monopoly Determining Price First, figure out profit maximizing output (MR = MC), then focus on demand curve

Market Structure: Monopoly Then add in cost curves – can now find price, TC, TR, and profit Optimal Point Price Consumers Pay Total Cost

Market Structure: Monopoly Monopoly and Public Policy Monopolies are considered incredibly inefficient Losses to consumers due to monopolistic behavior is greater than the gains to the monopolist Consumer surplus is lost, deadweight loss is introduced…but profit gained for the monopolist Still losses outweight profit

Market Structure: Monopoly Monopolies detract from welfare of society as a whole – why gov’t prevent/break-up monopolies

Market Structure: Monopoly Natural Monopolies: What makes a monopoly natural? Monopoly in which increasing returns to scale ensure a bigger firm will have lower ATC AKA – fixed costs are so high (railways, electrical grid, etc.) that barriers of entry are very high Single producer is then most efficient (but still not necessarily equitable)

Market Structure: Monopoly Natural Monopoly Solutions Public ownership – Post Office Not a good solution, often becomes a political bargaining chip Usually very inefficient Regulation Price regulations (usually forces the monopoly to make zero profit) Price must cover ATC otherwise there is no incentive to produce

Price Regulation

Market Structure: Monopoly Monopolies and Price Discrimination Price Discrimination Sell the same good at different prices Can allow a monopolist to maximize profits Ex: Airline tickets Student travelers vs. business travelers

Market Structure: Monopoly

There is a different price elasticity for each group Students are more susceptible to price changes Perfect Price Discrimination Each consumer is charged at exactly their willingness to pay NO consumer surplus because it becomes profit for the monopoly

Market Structure: Monopoly In theory, the greater number of prices charged, the closer the monopoly is to perfect price discrimination Almost never possible in real world Cell phone plans Common real would techniques to attempt PPD: Advance Purchase Restrictions Cheaper goods are bought earlier Volume discounts Large quantity = lower price Two-Part Tariff System Sam’s Club

Market Structure: Monopoly