Transcript Monopoly - VesperEconomics

Monopoly
Monopoly
•
•
•
•
A firm that is the sole seller of a product
No close substitutes
Many barriers to entry
Sources of market power:
– Firm owns a key resource
– Government gives a firm exclusive selling rights
(patents)
– The costs of production make a single producer
more efficient than a larger number of
producers
Natural Monopoly
• Market that run most efficiently when
one large firm provides all of the output
• Firm’s costs continuously decrease with
increased output when providing for
entire market.
• What resources do you need for public
water?
How do Monopolies Maximize Profits?
Let’s pretend that I wrote an economics book that
explains the concepts of economics SO well that you
are GUARANTTEED to score a 5 on the A.P.
Microeconomics exam. Also, it only takes one hour
to read!!! Lastly, lets assume I was able to obtain a
patent for this amazing book.
First, lets review: What would my firm’s demand look like if the
Figure
3 Demand
and
Marginal-Revenue
book sold in a competitive market?
Curves for a Monopoly
Price
$11
10
9
8
7
6
5
4
3
2
1
0
–1
–2
–3
–4
1
2
3
4
5
6
7
8
Quantity of Vespernomics
Textbooks
In reality, do you think the demand for
my book would really look like that?
P
Qd
11
0
10
1
9
2
8
3
7
4
6
5
5
6
4
7
3
8
TR
MR
In reality, do you think the demand for
my book would really look like that?
P
Qd
TR
MR
11
0
0
-
10
1
10
10
9
2
18
8
8
3
24
6
7
4
28
4
6
5
30
2
5
6
30
0
4
7
28
-2
3
8
24
-4
Graph demand and MR for my books
Price
$11
10
9
8
7
6
5
4
3
2
1
0
–1
–2
–3
–4
If a monopoly wants to sell
more, it must lower price.
Price falls for ALL units sold.
This is because monopolies are
STILL impacted by the law of
demand.
Demand
(average
revenue)
1
2
3
4
5
6
7
8
Quantity of Vespernomics
Marginal
revenue
The dilemma for monopolies
• As a monopoly produces more, the price and
revenue of their goods will fall
• WHY?????
So let’s go back to the main question,
how do I maximize my profits!?!?
Remember profit maximization is where
MR = MC
- My profit
Price
$11
10
9
8
7
6
5
4
3
2
1
0
–1
–2
–3
–4
MC
maximization
quantity is 5, where
my MR = MC
- But, at that
quantity, the five
people who will buy
the book are willing
to spend $6
So, the firm would
sell the good for $6
1
2
3
Demand
(average
revenue)
4
5
6
7
8
Quantity of Vespernomics
Marginal
revenue
Inefficiency of Monopolies
FIRMS
BUYERS
The Deadweight Loss
• A monopoly sets a price above its
MC
–Price is higher than the market price
–Quantity is lower than the market
quantity
–This causes markets to be inefficient
• Deadweight loss
Figure 8 The Inefficiency of Monopoly
Price
Deadweight
loss
Marginal cost
Monopoly
price
Marginal
revenue
0
Monopoly Efficient
quantity quantity
Demand
Quantity
Review: Monopoly Key Concepts
• Monopoly's are able to charge a higher
price because they have high market
power
• MR is below demand
• The price that a monopoly sets is equal
to the demand at the profit maximizing
production level (MR=MC)
• P > MC
• Monopolies cause inefficient markets
– Produce less and a higher price
Price Discrimination
Price Discrimination
• Selling the same good at different prices to
different customers
Price Discrimination
• Selling the same good at different prices to
different customers
• This can be done only if a firm:
– Has market power
– Can separate consumers into groups
– Can prevent resale between consumers
Lets say I want to start selling the
critically acclaimed book: Vespernomics
Let’s also assume that it costs me $5 to
produce one book of Vespernomics
Now assume that there are two types of
people who want to buy Vespernomics
• Type 1: These are the
die hard readers. There
are currently two type 1
people and are willing
to spend $50 for the
book
I can sell the book for $50 and make a
profit of $90. But, there would be 5
students who don’t have the book.
• Type 2: These are the, “I
just want to make Mr.
Vesper happy so I can
pass” readers. There
are currently five type 2
people and are willing
to spend $10 for the
book
I can sell the book for $10 and make a
profit of $25. Obviously, a much
smaller profit.
Now assume I can price discriminate
• Type 1: The die hard
readers
• I can sell them the
books for $50 and make
a profit of $90
• Type 2: The “just want
to pass” readers
• I can sell them the book
for $10 and make a
profit of $25
So, as a firm, I make the most profit possible of $115 AND
everyone who wanted the book will be able to obtain it.
THE BIG IDEA
Contrary to popular belief, price
discrimination actually makes a market
more efficient! More consumers are
able to purchase the product and there
is less surplus lost (deadweight loss). The
monopoly firm will just share most of
the surplus.
Final Question
If a firm can PERFECTLY price
discriminate, who would obtain all of
the surplus?
Natural Monopolies
All of you used a good/service today
produced by a natural monopoly…
Natural Monopoly
• A monopoly that exists because it would be
most efficient for the market
• A natural monopoly provides a good/service
to the entire market at a smaller cost than two
or more firms
– Natural monopoly is always in economies of scale
– The firm’s ATC is still decreasing when it earns
normal profit (where ATC = D)
Natural Monopoly
Regulating Natural Monopolies
• The government sets the price and quantity
• The regulated price is where the natural
monopoly earns normal profit
– When price = ATC
Regulating Natural Monopolies
MC