Transcript Absolute monopoly:

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Absolute monopoly:
• One seller
• The firm is the industry
• Firm’s demand is also the
market demand.
Why monopolies?
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Why monopolies?
• Governmental monopoly:
USPS
• Government-granted:
patents, copyrights
• Legal barriers to entry.
What is
• a natural monopoly?
Natural monopoly
• High fixed cost.
• Low marginal cost.
• Continuingly declining
long-run average cost.
Monopoly’s supply and demand
• If no price controls, firm is a
complete price maker.
• In a market, the firm can infuence
demand, but the demand is
determined by the customers.
• The firm can set price or quantity,
but not both.
Marginal revenue
• Always below demand, and
with steeper slope.
• Straight-line demand: MR
twice as steep
• Lower price for previous and
additional quantities.
quod erat demonstrandum
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Example: Q = 11 - P
Inverse demand: P = 11 - Q
R = PQ = (11-Q)Q = 11Q - Q2
MR = ∂R/∂Q = 11 - 2Q
The MR curve has twice the slope of
the demand curve. Q.E.D.
Maximum monopoly profit
• Quantity where MC = MR
• Quantity less than
competitive industry
• Price higher than competitive.
• Therefore, deadweight loss
Monopoly supply
• A supply point, not a curve.
• At the profit-maximizing
quantity and price.
Is monopoly bad?
• Discuss!
Monopoly bad?
• Yes, if due to government protection.
• Can be offset by incentive to creation
and invention (copyright, patent).
• Big firm can have economies of scale.
• Big firm can afford big research.
• Can have network externalities.
Policy for natural monopoly
• Efficient price: MC
• Rent can pay fixed cost.
• If price set at average cost,
incentive to increase costs.
• Firm can be owned by the
community.
Who gains
• from monopoly profit?
Who gains from monopoly
profit?
• Market price of stock goes
up to make normal returns.
• Owners at the time it
becomes a monopoly are the
gainers.
Price discrimination
• Charging different prices to various
customers for the same goods.
• Perfect price discrimination: complete,
• Each buyer pays his maximum.
• Minimal consumer surplus.
• No DWL. Max monopoly profit.
Does monopoly profit cause
DWL?
• No.
• Profit does not harm society.
• Loss of socal surplus is the
harm.
• Correlation is not causation.