2 Objectives 1.) Learning the source of monopoly 2.) Understand how a monopolist sets price and output to maximize profits3.) Evaluate the efficiency of monopoly4.) Learn some of the various public policies toward a monopoly5.) Understand how and why a monopolist would price discriminate1
3 MONOPOLY Monopoly is a market structure characterized by One seller Homogeneous productVery much control over price(pricemaker)Very great difficulty in entering or exiting the market .
4 MonopolyA Pure Monopoly exists when a single firm is the only producer or seller of a product that has no close substitute.3
5 Why Learn About Monopolies? It is estimated that about five (5) percent of domestic output is supplied under monopoly conditionsIt helps to understand more common market structures such as monopolistic competition and oligopoly.4
6 Why Monopolies AriseThe fundamental cause of a monopoly is Barriers to Entry.5
7 Monopoly: Barriers to Entry Ownership of Key Resource6
8 Monopoly: Barriers to Entry Ownership of Key ResourceLegal Barriers By Government7
9 Monopoly: Barriers to Entry Ownership of Key ResourceLegal Barriers By GovernmentLarge Economies of Scale8
10 Barrier: Monopoly Resources A single owner of an important resource that cannot be readily duplicated, as with some natural resources.9
11 Government-Created Monopolies Patent and copyright laws are a major source of government-created monopolies.Certain new pharmaceutical drugsGovernments also restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.Local cable television10
12 Natural MonopoliesAn industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.The minimum efficient scale of one firms plant is so large that only one firm can supply the market efficiently.11
13 Economies of Scale as a Cause of Monopoly CostAveragetotal costQuantity of Output
14 Quick Quiz!What are the three reasons that a market might have a monopoly?Give two examples of monopolies, and explain the reason for each.12
16 Monopoly Behavior Competitive Firm verses Monopoly One of manyHorizontal Demand CurvePrice TakerSells a lot or a little at same priceMarginal Revenue curve is horizontal14
17 Demand Curves for Competitive and Monopoly Firms... Quantity of OutputDemand(a) A Competitive Firm’sDemand Curve(b) A Monopolist’sPrice2
18 Monopoly’s Revenue Total Revenue: Q x P = TR Average Revenue: TR ÷ Q = ARMarginal Revenue: TR ÷ Q = MRA monopolist’s Marginal Revenue is always less than the price of its good, because of the downward sloping demand curve.The Marginal-Revenue curve lies below its demand curve.15
22 Total, Average, and Marginal Revenue for a Competitive Firm QualityPriceTotalRevenueAverageRevenueMarginalRevenueQP(TR=P*Q)(AR=TR/Q)(MR= TR / Q)12345678gallon$66$612182430364248$66$6612
23 $ elastic portion inelastic portion Marginal Revenue Demand Quantity $ TotalRevenuealong the elasticportion of thedemand curve,lower prices andgreater quantitiesresult in risingtotal revenuealong the inelasticportion of thedemand curve,lower prices andgreater quantitiesresult in decliningtotal revenueQuantity17
24 Monopoly’s Marginal Revenue When a monopoly drops price to sell more product, the additional revenue received from previous amounts sold will decrease.Two effects on revenue when price is dropped:The Output EffectThe Price Effect18
25 Profit Maximization of a Monopoly The monopolist’s profit-maximizing quantity of output is determined by the intersection of the Marginal-Revenue curve and the Marginal-Cost curve.Same rule of profit maximization as perfectly competitive firmMR = MC19
29 Profit Maximization of a Monopoly In competitive markets, price equals marginal cost. In Monopolized markets, price exceeds marginal cost.As long as Average Total Cost is below the monopolist’s price, economic profits will be earned.23
30 Monopoly’s Profit Maximization Price MC = SupplyDQuantityMR24
31 Monopoly’s Profit Maximization Price MC = SupplyPrice consistent with profit maximizing quantityPMDQuantityQMMR25
32 Profit Maximization of a Monopoly In competitive markets, price equals marginal cost. In Monopolized markets, price exceeds marginal cost.As long as Average Total Cost is below the monopolist’s price, economic profits will be earned.26
36 Comparing Monopoly and Competition For a competitive firm, price equals marginal cost.P = MR = MCFor a monopoly firm, price exceeds marginal cost.P > MR = MC2331
37 Profit = (TR/Q - TC/Q) x Q Profit = (P - ATC) x Q A Monopoly’s ProfitProfit equals total revenue minus total costs.Profit = TR - TCProfit = (TR/Q - TC/Q) x QProfit = (P - ATC) x Q4032
38 Quick Quiz!Explain how a monopolist chooses the quantity of output to produce and the price to charge.30
39 The Welfare Cost of Monopoly A monopoly leads to an inefficient allocation of resources, leading to a failure to maximize total economic well-being,The monopolist produces less than the socially efficient quantity of output.31
40 The Welfare Cost of Monopoly At monopoly prices, some potential consumers value the good at more than its marginal cost but less than the monopolist’s price.These consumers do not end up buying the good.Monopoly pricing prevents some mutually beneficial trades from taking place.32
41 The Welfare Cost of Monopoly: Deadweight Loss Because a monopoly sets price above MC it places a wedge, similar to a tax.The wedge causes the quantity sold to fall short of the social optimum.33
46 Monopolistic Deadweight Loss: Example Cable TV market. Assume:Competitive Market Price = $15Monopolist Market Price = $25Marginal Cost = $5Deadweight loss to society is $10:Consumer does not value cable TV at more than its cost. Hence the consumer will not subscribe to cable TV.038
47 The Market for Drugs... Marginal cost Marginal revenue Demand Costs and RevenuePrice during patent lifePrice after patent expiresMarginal costMarginal revenueDemandMonopoly quantityCompetitive quantityQuantity
48 Public Policy Toward Monopoly: Government may intervene by. . . Creating a competitive marketImplement/Enforce Anti-Trust LawsRegulating the behavior of monopoliesPrice control and regulationPublic OwnershipGovernment runs the monopoly itselfDoing Nothing39
49 Marginal-Cost Pricing for a Natural Monopoly PriceAverage total costLossRegulatedpriceMarginal costDemandQuantity
50 Quick Quiz!Describe the ways policymakers can respond to the inefficiencies caused by monopolies.List a potential problem with each of these policy responses.40
51 Price Discrimination: Monopoly Tool The practice of selling the same good to different customers at different prices.Not possible in a competitive market.Two Important Effects:Can increase the monopolist’s profitsCan reduce deadweight lossA Parable About Pricing (Figure 15-10)41
52 Welfare With and Without Price Discrimination (a) Monopolist with Single Price(b) Monopolist with Perfect PriceDiscriminationPricePriceConsumer SurplusProfitDeadweight LossProfitMarginal costMarginal costDemandMarginalRevenueDemandQuantitysoldQuantityQuantity
53 Examples: Price Discrimination Movie Tickets, i.e., children, adult, senior CitizensAirline Tickets, i.e., first class, coach, stay over, one-way verses round-tripDiscount CouponsFinancial AidTwo-Part Tariff, i.e., amusement park entrance fee, and then a fee for each ride42
54 The Prevalence of Monopoly How prevalent are the problems of monopolies?Monopolies are common.Most firms have some control over their prices because of differentiated products.Firms with substantial monopoly power are rare.Few goods are truly unique.4477
55 Quick Quiz! Give two examples of price discrimination. How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus?43
56 The Prevalence of Monopoly How prevalent are the problems of monopolies?Monopolies are common. Most firms have some control over the prices because of differentiated products.Ben & Jerry’s Ice Cream vs Breyer’sFirms with substantial monopoly power are rare. Few goods are truly unique.44
57 Summary A monopoly is a firm that is the sole seller in its market. It faces a downward-sloping demand curve for its product.A monopoly’s marginal revenue is always below the price of its good.
58 SummaryLike a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal.Unlike a competitive firm, its price exceeds its marginal revenue, so its price exceeds marginal cost.
59 SummaryA monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus.A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.
60 SummaryPolicymakers can respond to the inefficiencies of monopoly behavior with antitrust laws, regulation of prices, or by turning the monopoly into a government-run enterprise.If the market failure is deemed small, policymakers may decide to do nothing at all.
61 SummaryMonopolists can raise their profits by charging different prices to different buyers based on their willingness to pay.Price discrimination can raise economic welfare and lessen deadweight losses.