Transcript Slide 1 - Har Wai Mun

UBEA 1013: ECONOMICS
CHAPTER 6:
MARKET STRUCTURE: MONOPOLY
6.1 Characteristic
6.2 Short-run Decision: Profit Maximization
6.3 Short-run Decision: Minimizing Loss
6.4 Long-run Profit Maximization & Misconception
6.5 Social Cost of Monopoly
6.6 Natural Monopoly
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UBEA 1013: ECONOMICS
What is monopoly or can be
considered a monopoly?
Monopolies:
the firm almost totally dominated the
market with its competitor hardly provide
competition or their products are hardly
substitutable.

 E.g. included collusion or cartel:
Organization of Petroleum Exporting
Countries (OPEC), DeBeer, Microsoft,
Tenaga Nasional.
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UBEA 1013: ECONOMICS
6.1 Characteristic
i. One firm: Firm supply is equal to the whole market/industry supply.
ii. No close substitute : Unique product with no competition.
iii. Price maker : Monopoly can influence either the market price or
quantity supplied. Constraint by demand behavior of consumers.
iv. Barriers to entry : Heavy restrictions or barriers. Barrier to entry
is legal or natural constraints that protect a firm from potential
competitors.
Market power: “One firm”, “no close substitute” & “barriers to
entry” give market power to monopoly (to be a “price maker”).
(i) monopolist can choose a price -- consumers choose how
much they wish to buy at that price
(ii) monopolist can choose the quantity, letting the consumers
to decide what price they will pay for that quantity
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UBEA 1013: ECONOMICS
6.1 Characteristic
Further on the forth assumption, barriers to entry include:
a.
Government franchises, or firms that become monopolies
by virtue of a government directive;
b.
Patents, copyrights or barriers that grant the exclusive use
of the patented product or process to the inventor;
c.
Economies of scale and other cost advantages enjoyed by
industries that have large capital requirements. A large
initial investment, or the need to embark in an expensive
advertising campaign, deter would-be entrants to the
industry;
d.
Ownership of a scarce factor of production: If production
requires a particular input, and one firm owns the entire
supply of that input, that firm will control the industry.
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UBEA 1013: ECONOMICS
6.1 Characteristic
Figure 6.1: Monopolist’s
Demand, MR & TR Curve
 Monopolist’s marginal revenue is below
the demand.
 The MR curve shows the change in TR.
TR is maximum when marginal
revenue equals zero.
 The MR is twice as steep as the
demand curve.
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UBEA 1013: ECONOMICS
6.2 Short-run Decision: Profit Maximization
If MR < MC, it would pay for the firm to
decrease output as the saving in cost would be
bigger than loss in revenue
If the MR > MC, additional revenue will more
than additional cost, thus it would be better
off for the firm to increase output
The only point where the firm has no incentive
to change output is where the MR = MC
[ Optimization condition for
monopoly = perfect competition ]
((Only that in perfect competition: P = MR))
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UBEA 1013: ECONOMICS
6.2 Short-run Decision: Profit Maximization
• The profit-maximizing
level of output (Qm)
occurs where MR = MC.
• Notice that the outcome
is different from that of
perfect competition.
Here, the price ($4.00) is
more than the average
total cost ($3.00), and
the monopolist earns
positive economic profit
of ($4 - $3 = $1) per unit.
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UBEA 1013: ECONOMICS
6.3 Short-run Decision: Minimizing Loss
If average revenue less than average total cost, a firm
suffer losses.
Despite having market power, the monopolist still
constraint to either setting the price or output only, not
both.
Therefore, monopolist is also subject to the three profitmaximization situation as in perfect competition
structure that is incurring economic profit, economic
loss or breakeven situations.
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UBEA 1013: ECONOMICS
6.3 Minimizing loss
If the operating profit is negative (TR < TVC), the
monopoly suffers operating losses that push total losses
above fixed costs.
So, it is better to shut down.
Summary:
TR > TVC: Decision = Keep operating (in short term)
TR < TVC: Decision = Shut down
Those decisions is known as minimizing losses.
<<< Same as perfect competition structure >>>
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UBEA 1013: ECONOMICS
6.3 Minimizing loss
Figure 6.2: Profit Maximization Situations
(a) Economic profit
(b) Economic loss
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UBEA 1013: ECONOMICS
6.4 Long-run Profit Maximization & Misconception
True
Misconception
Monopolist CAN earn positive
economic profit in the long run.
Monopolist ALWAYS earn
positive economic profit in the
long run.
Monopolist seek to maximize
PROFIT.
Monopolist seek to maximize
PRICE.
Monopolist has BOTH good
and bad to the market/society.
Monopolist ALWAYS bad to
the market/society.
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UBEA 1013: ECONOMICS
6.5 Social Cost of Monopoly
There are three type of social cost of monopoly as
follow:
a) Deadweight loss as result of not producing at price
equal to marginal cost like in perfect competitive
market structure;
b) Rent-seeking behavior to preserve positive profits;
and
c) Price discrimination behavior that transfer income or
surplus from consumers to the monopolist.
To be continue next week …..
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UBEA 1013: ECONOMICS
A) Deadweight loss
From consumer surplus
to monopoly surplus
From consumer
surplus to nobody
From producer
surplus to nobody
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B) Rent Seeking
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UBEA 1013: ECONOMICS
C) Price Discrimination
Definition:
Charging different prices to different buyers or
different prices on different units sold is called price
discrimination.
First-degree price discrimination
Second-degree price discrimination
Third-degree price discrimination
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UBEA 1013: ECONOMICS
First-degree price discrimination
The monopolist sells different units of output for
different prices and these prices may differ person
to person.
Perfect price discrimination – each unit of output is
sold at the maximum price that individual
(consumer) is willing to pay for it
What happen to consumer surplus?????
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UBEA 1013: ECONOMICS
First-degree price discrimination
Need information on the maximum each consumer
willing to pay.
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UBEA 1013: ECONOMICS
Second-degree price discrimination
The monopolist sells at different price per unit of
output, depending on how much a consumer buys
Non-linear pricing.
NO need information on the maximum each
consumer willing to pay. ONLY to construct “pricequantity” package.
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UBEA 1013: ECONOMICS
Third-degree price discrimination
The monopolist sells to different group of consumer
with different price but every unit of product sold to
a given group is sold at same price
Most common.
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UBEA 1013: ECONOMICS
Other types of discrimination: Bundling
Products are sell in bundle.
Table 6.1: Bundling and Willingness to Pay
Type of consumer
Word Processor
(WP)
Spreadsheet
(Sp)
Type A
$200
$150
Type B
$150
$200
Total sales
(WP)
Total sales (Sp)
Scenario:
Total
Reve
nue
(i) Individual price (WP $150, Sp
$150)
2*$150 = $300 2*$150 = $300
$600
(ii) Individual price (WP $200, Sp
$200)
1*$200 = $200 1*$200 = $200
$400
(iii) Individual price (WP $150, Sp 2*$150 = $300 1*$200 = $200
$200)
$500
(iv) Individual price (WP $200,
Sp $150)
$500
(v) Bundle price ($350)
1*$200 = $200 2*$150 = $300
2*$350 = $700
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UBEA 1013: ECONOMICS
Other types of discrimination: Two-Part Tariff
Two kind of pricing for two related product: e.g.
a) Entrance and ride price
b) Camera and films price
c) Razor price & blade price
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UBEA 1013: ECONOMICS
6.6 Natural Monopoly
A natural monopoly is an industry that realizes such
large economies of scale in producing its product that
single-firm production of that good or service is most
efficient.
End
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