Transcript barrier to entry

ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 25: Monopoly
Materials include content from Pearson Addison-Wesley which has been modified
by the instructor and displayed with permission of the publisher. All rights reserved.
Definition of a Monopolist

Monopolist
A
single supplier of a good or service for
which there is no close substitute
2
Barriers to Entry

The source of monopoly
A
barrier to entry that allows the firm to make
long-run economic profits
3
Barriers to Entry

Ownership of resources without close
substitutes
 If
you owned all the oil reserves, who could
enter the refining business?
 The Aluminum Company of America (ALCOA)
at one time owned 90 percent
of the world’s bauxite.
4
Barriers to Entry

Problems in raising adequate capital
 Choose
a product that requires a substantial
capital investment
 Why not enter the microprocessor market and
compete with Intel?
5
Barriers to Entry

Economies of scale
 Low
unit costs and prices drive out rivals
 The largest firm can produce at the lowest
average total cost
6
Barriers to Entry

Natural Monopoly
A
monopoly that arises from the peculiar
production characteristics in an industry
 It usually arises when there are large
economies of scale
7
Price per Kilowatt
The Cost Curves that Might Lead to
a Natural Monopoly: The Case of Electricity
LAC
LMC
Kilowatts of Electricity per Time Period
Figure 25-1
8
Barriers to Entry

Legal or governmental restrictions
 Licenses,
franchises, and certificates of
convenience
 Is the postal service still a monopoly?

Consider
UPS
 FedEx
 Fax machines
 The Internet

9
Barriers to Entry

Legal or governmental restrictions
 Patents

Intellectual property
 Tariffs

Taxes on imported goods
 Regulation
10
Barriers to Entry

Cartels
 An
association of producers in an industry
that agree to set common prices and output
quotas to prevent competition
11
The Demand Curve
a Monopolist Faces

Recall
 In




perfectly competitive markets:
All firms combined create the industry supply
Industry supply relative to market demand (D) determines
equilibrium price and quantity
The industry faces the market demand
Monopolist’s demand = market demand
 Monopolist
is the industry
12
d
Price per Unit
Price per Unit
Demand Curves for the Perfect
Competitor
and
the
Monopolist
Panel (a)
Panel (b)
d=D
q
Demand If Individual Supplier Is in
Perfect Competition
Figure 25-3, Panels (a) and (b)
Q
Demand If Individual Supplier
Is the Only Supplier in a
Pure Monopoly
13
Comparing Perfect Competition and Monopoly
Perfect Competition
Monopoly
One of many sellers
Single Seller
Perfectly elastic demand
(price takers)
Faces market demand
Must only produce more
to sell more
Must lower price
to sell more
All units sold for same
price (P = MR)
MR < P
14
Marginal Revenue:
Always Less Than Price
Price of Electricity
MR = area A – area B
P1
P2
Area B (–)
Demand curve = AR curve
Loss
D
Area A (+)
Gain
Q
Figure 25-4
Q+1
Quantity of Electricity per
Time Period
15
Elasticity and Monopoly
A monopoly is a single seller of a welldefined good or service with no close
substitutes.
 The more imperfect substitutes there are,
and the better these substitutes are, the
greater the price elasticity of demand of
the monopolist’s demand curve

16
Cost and Monopoly
Profit Maximization

Price Maker (Searcher)
A
firm that must determine the price-output
combination that maximizes profit because it
faces a downward-sloping demand curve
17
Monopoly Costs,
Revenues, and Profits
Figure 25-5, Panel (a)
18
Monopoly Costs,
Revenues, and Profits
Panel (b)
Panel (c)
100
9
Losses
80
70
TR
60
50
Maximum
profit
40
30
20
Price, Marginal Costs, and
Marginal Revenue per Unit ($)
90
Total Costs and Total Revenue ($)
10
TC
8
7
6
D
5
MC = MR
4
MR
3
2
10
MC
1
Profitmaximizing
rate of output
Losses
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Output per Time Period
Figure 25-5, Panels (b) and (c)
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Output per Time Period
19
Cost and Monopoly
Profit Maximization

Why produce where marginal revenue
equals marginal cost?
 Producing

Incremental cost > Incremental revenue
 Producing

past where MR = MC
less than where MR = MC
Incremental revenue > Incremental cost
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Price, Marginal Cost, and Marginal Revenue per Unit
Maximizing Profits
MC
Pm
A
B
C
F
D
Q1 Qm Q 2
MR
Quantity per Time Period
Figure 25-6
21
Price, Marginal Revenue, and Cost
per unit ($)
Calculating Monopoly Profit
18
17
16
15
14
13
12
11
10
9
8
Pm 7
6
5
4
3
2
1
0
Figure 25-7
MC
ATC
D
Monopoly
profit
MR
1
2
3
4
5
6
7
8
9 10 11 12 13
Qm
Output per Time Period
22
Monopolies: Not Always Profitable
Price, Marginal Revenue, and Cost
per unit
MC
ATC
Losses
C1
Pm
A
D
Qm
MR
Output per Time Period
Figure 25-8
23
On Making Higher Profits:
Price Discrimination & Differentiation

Price Discrimination (Illegal)
 Selling
a given product at more than one
price, with the difference being unrelated to
differences in cost

Price Differentiation (Legal)
 Establishing
different prices for similar
products to reflect differences in marginal cost
in providing those commodities to different
groups of buyers
24
On Making Higher Profits:
Price Discrimination

Necessary conditions for price
discrimination




The firm must face a downward-sloping demand
curve
The firm must be able to separate markets at a
reasonable cost
The buyers in the various markets must have
different price elasticities of demand
The firm must be able to prevent resale of the
product or service
25
The Social Cost of Monopolies

Original Scenario
 Start
with a perfectly competitive market in
long-run equilibrium
MR = MC
 Pe = MC (marginal cost pricing)
 Zero economic profits

26
The Social Cost of Monopolies

New Scenario: Now, assume the industry is acquired
by one firm with no impact on cost.
 End
with a monopoly in long-run equilibrium
MR = MC
 Higher prices since Pe > MC
 Lower quantity
 Potential positive economic profits

27
The Effects of Monopolizing an Industry
Before and after scenarios:
Panel (a)
Panel (b)
E
Pe
D
Qe
Quantity per Time Period
S = MC
Price, Marginal Revenue, and
Marginal Cost per Unit
Price per Unit
S = ΣMC
Pm
MCm
D
Qm
MR
Quantity per Time Period
28
ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 25: Monopoly
Materials include content from Pearson Addison-Wesley which has been modified
by the instructor and displayed with permission of the publisher. All rights reserved.