1. Monopoly Chapter 15 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

2. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly While a competitive firm is a price taker, a monopoly firm is a price maker.

3. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly u A firm is considered a monopoly if...  it is the sole seller of its product.  its product does not have close substitutes.

4. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Why Monopolies Arise The fundamental cause of monopoly is barriers to entry.

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Why Monopolies Arise Barriers to entry have three sources: u Ownership of a key resource. äThis tends to be rare. De Beers is an example u The government gives a single firm the exclusive right to produce some good. äPatents, Copyrights and Government Licensing. u Costs of production make a single producer more efficient than a large number of producers. äNatural Monopolies

6. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economies of Scale as a Cause of Monopoly... Average total cost Quantity of Output Cost 0

7. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Monopoly versus Competition Monopoly u Is the sole producer u Has a downward- sloping demand curve u Is a price maker u Reduces price to increase sales Competitive Firm u Is one of many producers u Has a horizontal demand curve u Is a price taker u Sells as much or as little at same price

8. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Quantity of Output Demand (a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve 0 Price 0Quantity of Output Price Demand Demand Curves for Competitive and Monopoly Firms...

9. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Revenue u Total Revenue P x Q = TR u Average Revenue TR/Q = AR = P u Marginal Revenue  TR /  Q = MR

10. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Marginal Revenue A monopolist’s marginal revenue is always less than the price of its good. u The demand curve is downward sloping. u When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.

11. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Total, Average, and Marginal Revenue Quantity (Q) Price (P) Total Revenue (TR=PxQ) Average Revenue (AR=TR/Q) Marginal Revenue (MR= ) 0 $11.00 $0.00 1$10.00 2$9.00 $18.00 $9.00$8.00 3 $24.00 $8.00$6.00 4$7.00 $28.00 $7.00$4.00 5$6.00 $30.00 $6.00$2.00 6$5.00 $30.00 $5.00$0.00 7$4.00 $28.00 $4.00-$2.00 8$3.00 $24.00 $3.00-$4.00 QTR  /

12. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P x Q). u The output effect—more output is sold, so Q is higher. u The price effect—price falls, so P is lower.

13. Demand and Marginal Revenue Curves for a Monopoly... Quantity of Water Price $11 10 9 8 7 6 5 4 3 2 1 0 -2 -3 -4 12345678 Marginal revenue Demand (average revenue) Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

14. Profit-Maximization for a Monopoly... Monopoly price QuantityQ MAX 0 Costs and Revenue Demand Average total cost Marginal revenue Marginal cost A 1. The intersection of the marginal-revenue curve and the marginal- cost curve determines the profit-maximizing quantity... B 2....and then the demand curve shows the price consistent with this quantity. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

15. Comparing Monopoly and Competition u For a competitive firm, price equals marginal cost. P = MR = MC u For a monopoly firm, price exceeds marginal cost. P > MR = MC

16. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Monopoly’s Profit Profit equals total revenue minus total costs. Profit = TR - TC Profit = (TR/Q - TC/Q) x Q Profit = (P - ATC) x Q

17. Monopoly profit The Monopolist’s Profit... Quantity0 Costs and Revenue Demand Marginal cost Marginal revenue Q MAX B Monopoly price E Average total cost D Average total cost C Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

18. The Monopolist’s Profit The monopolist will receive economic profits as long as price is greater than average total cost.

19. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Public Policy Toward Monopolies Government responds to the problem of monopoly in one of four ways. u Making monopolized industries more competitive. u Regulating the behavior of monopolies. u Turning some private monopolies into public enterprises. u Doing nothing at all.

20. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Two Important Antitrust Laws u Sherman Antitrust Act (1890) u Reduced the market power of the large and powerful “trusts” of that time period. u Clayton Act (1914) u Strengthened the government’s powers and authorized private lawsuits.

21. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Marginal-Cost Pricing for a Natural Monopoly... Regulated price Quantity 0 Loss Price Demand Marginal cost Average total cost Average total cost

22. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Discrimination Price discrimination is the practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same. In order to do this, the firm must have market power.

23. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Price Discrimination u Two important effects of price discrimination: u It can increase the monopolist’s profits. u It can reduce deadweight loss. u But in order to price discriminate, the firm must u Be able to separate the customers on the basis of willingness to pay. u Prevent the customers from reselling the product.