Transcript mod6

Monopoly Vs. Competition
1.
Monopoly versus competition (smaller q, higher p)
2.
Imposing a tax on a monopolist similar to competition in
that producer still bears part of it.
3.
Price controls and monopoly ...a case where controls
may increase efficiency.
4.
Price discrimination.
5.
The tradeoff associated with patents and copyright deadweight loss in consumption versus possible new
products.
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Monopoly charges higher price, produces smaller quantity.
Monopoly causes Deadweight Loss 1+2. Area 3+4 is transfer to producer
from consumer
MC
S
Pm
4
3
Pc
1
2
D
Qm
2
Qc
MR
Tax on Monopoly: price goes up by less than tax, so burden of tax is still
shared. Monopolist tends to pay bigger share than would competitors.
Deadweight loss grows.
MC+t
P2
MC
P1
t
a
x
D
Q2
3
Q1
MR
A Price Control on a monopolist. Since p cannot go above Pcontrol the MR
is equal to Pcontrol , output may increase (if price control is not too low, and
deadweight loss may decrease.
MC
P1
Pcontrol
D
Q1
4
Q2
MR
A Price Control on a monopolist. Since p cannot go above Pcontrol the MR
is equal to Pcontrol , output may increase (if price control is not too low, and
deadweight loss may decrease.
MC
P1
Pcontrol
D
Q3
Q1
MR
5
Q2
Perfect Price Discrimination
1.
2.
3.
4.
5.
6.
Theoretical ideal. Cannot be fully achieved.
Find maximum price that every consumer is
willing to pay and charge them that price.
Requires more information than any firm has,
and the prevention of arbitrage.
Demand Curve becomes MR curve.
No Deadweight Loss.
Approximate examples: automobile dealers,
doctors in the old days.
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Perfect Price Discrimination.
P1
P3
S
P6
D
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Price Discrimination
1.
2.
3.
4.
5.
If markets for a single product have different
MRs, profits can be increased by shifting output
from low MR markets to high MR markets.
Raise price in low MR market and lower price in
high MR market.
High MR market is high elasticity market.
Need to Prevent Arbitrage.
Examples: Airlines with business travelers and
vacationers. Coupons.
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Market 2
Market 1
P1
price before discrimination
P2
D
mr2
D
mr
Q2
Q1
mr1
MR
MR
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Price Discrimination Rules
1.
2.
3.
4.
Raise price in market with lower elasticity
(lower responsiveness)
Lower price in market with higher
elasticity.
Do this until MRs are equalized. But
prices will not be equalized.
Examples: Airlines with business travelers
and vacationers.
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The Causes of Monopoly
1.
Natural Monopoly
2.
Government grant (U.S. postal service, electric
company),
3.
Patents and Copyright.
4.
Control of scarce resource.
5.
Technical Superiority.
6.
Network Effects.
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Natural Monopoly
1.
2.
3.
4.
Downward sloping AC curve.
More efficient to have 1 large firm than
many small firms.
Rate of return regulation is how we
regulate these firms.
Removes incentive to keep costs down.
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Natural Monopoly
Pm
Unregulated Profit
Pr
Losses with efficient output
PE
AC
MC
Qm Qr
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QE
Patent (copyright) tradeoff
1.
2.
3.
4.
With no protection, creators do not reap
much of the rewards of their creations.
They are given monopoly protection,
which increases their revenues, but raises
price to consumers.
This increases the number of inventions,
but decreases the use of each invention?
We do not know the optimal tradeoff.
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Monopsony
1.
2.
3.
Single buyer instead of single seller.
Price paid is less than competitive level.
Quantity purchased is also less.
Deadweight loss, similar but inverted
compared to monopoly.
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Monopsony pays lower price, consumes smaller quantity.
Deadweight Loss 1+2. Area 5+4 is transfer to consumer from producer.
S
MFC
3
Pc
Pm
8 1
4
6
5
2
7
D
Qm
Qc
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MR
Network Effects
1.
2.
3.
4.
Increased market size makes product more
valuable to consumers.
This is just like an economy of scale in that it
benefits large firms relative to small ones. Leads
to natural monopoly.
It implies that demand increases for large
networks, and that prices should rise.
In Microsoft case, judge decided that they are a
barrier to entry.
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