Transcript Chapter_ten_lecture

Chapter 10:
Monopoly, Cartels, and
Price Discrimination
Copyright © 2014 Pearson Canada Inc.
Chapter Outline/Learning Objectives
Section
Learning Objectives
After studying this chapter, you will be able to
10.1 A Single-Price
Monopolist
1.
2.
explain why marginal revenue is less than price
for a profit-maximizing monopolist.
understand how entry barriers can allow
monopolists to maintain positive profits in the
long run.
10.2 Cartels as
Monopolies
3.
describe why firms would form a cartel to restrict
industry output and how this would increase their
profits.
10.3 Price
Discrimination
4.
explain how some firms can increase their profits
through price discrimination.
Copyright © 2014 Pearson Canada Inc.
Chapter 10, Slide 2
Monopoly
LO1
Monopoly
• a market in which a single firm (the monopolist) is
the sole producer
• protected from new competitors by barriers to
entry
Barriers to Entry
• obstacles that make it difficult for new
participants to enter a market
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10-3
Barriers to Entry
LO1
1. technical barriers such as sole ownership of a
resource
2. legal barriers such as public franchise, licences,
patents, and copyrights
3. economic barriers caused by economies of
scale
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10-4
Self-Test
LO1
Entry into the following industries is very difficult. What
type of barrier to entry is involved?
a) Computer operating systems
b) Commercial aircraft manufacturing
c) West coast wild salmon fishing
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10-5
Monopoly
LO1
• able to set price rather than having to accept the
market-determined price
• can set either price or quantity sold, but not both
• since the monopolist is the industry, it faces the
market demand for the product
• demand is a downward-sloping curve
• must decrease the price in order to sell more
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10-6
10.1 A Single-Price Monopolist
Revenue Concepts for a Monopolist
A monopolist faces a negatively sloped demand curve.
If the monopolist charges the same price for all units sold, its total
revenue (TR) is:
TR = p x Q
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Chapter 10, Slide 7
Revenue Concepts for a Monopolist
Average revenue (AR) is total revenue divided by quantity:
AR = TR/Q = (p x Q)/Q = p
Marginal revenue (MR) is the revenue resulting from the sale of an
additional unit of production:
MR =  TR/ Q
The monopolist must reduce the price to increase its sales—
therefore the MR curve is below the demand curve.
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Chapter 10, Slide 8
Fig. 10-1
A Monopolist's Average and Marginal Revenue
Computing Average and Marginal Revenue
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Average and Marginal Revenue Curves
Chapter 10, Slide 9
Short-Run Profit Maximization
Fig. 10-2
Short-Run Profit Maximization for a Monopolist
The profit-maximizing level
of output is where MC = MR.
A profit-maximizing
monopolist has p > MC.
The size of fixed costs
determine whether a
monopolist earns positive
economic profits.
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Chapter 10, Slide10
Short-Run Profit Maximization
Unlike a competitive firm, the monopolist does not have a supply
curve because it chooses its price.
Can we compare the monopoly outcome to the competitive
outcome?
In a perfectly competitive industry price equals MC. But a monopolist
produces at a lower level of output, with price exceeding MC.
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Chapter 10, Slide11
Fig. 10-3
The Inefficiency of Monopoly
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Chapter 10, Slide12
Entry Barriers and Long-Run Equilibrium
Despite incentives to enter, effective entry barriers allow monopoly
profits to persist in the long run.
Entry barriers are of two types:
• "natural" – such as economies of scale
• "created" – by advertising campaigns, or
– by government regulation
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Chapter 10, Slide13
LO4
Perfect Competition v Monopoly
•
Monopolies charge higher prices than perfectly
competitive firms.
•
Monopolies produce lower outputs than
perfectly competitive firms and these outputs
are below economic capacity.
•
Monopolies, unlike perfectly competitive firms,
may make economic profits in the short run and
in the long run.
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10-14
APPLYING ECONOMIC CONCEPTS 10-1
Entry Barriers for Irish Pubs During the Booming 1990s
The Very Long Run and Creative Destruction
In the very long run, technological changes and innovations can
circumvent effective entry barriers.
Joseph Schumpeter defended monopoly on the basis that the
pursuit of monopoly profits provides incentives to innovate.
Schumpeter called the replacement of one monopolist by another
through innovation the process of creative destruction.
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Chapter 10, Slide 15
Joseph Schumpeter (1882–1950)
"What we have to accept is that [monopoly] has come to be the
most powerful engine of progress and in particular of the long-run
expansion of total output not only in spite of, but to a considerable
extent through, this strategy [of creating monopolies], which looks
so restrictive when viewed in the individual case and from the
individual point of time."
Copyright © 2014 Pearson Canada Inc.
Chapter 10, Slide 16
10.2 Cartels as Monopolies
Fig. 10-4
Several firms in an industry
may form a cartel to maximize
joint profits.
The Effect of Cartelizing
a Competitive Industry
The Effects of Cartelization
Cartelization will reduce output
and raise price from the
perfectly competitive levels.
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Chapter 10, Slide 17
Problems that Cartels Face
Cartels tend to be unstable because members have an incentive
to cheat.
Fig. 10-5
A Cartel Member's Incentive to Cheat
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Chapter 10, Slide 18
Problems that Cartels Face
Any one firm within the cartel has an incentive to cheat.
But if all firms cheat, the price will fall back toward the competitive
level, and joint profits will not be maximized.
Enforcing output restrictions and preventing entry are difficult.
Thus, cartels rarely last for long.
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Chapter 10, Slide 19
10.3 Price Discrimination
A producer practices price discriminates by charging different prices
for different units of its product for reasons not associated with
differences in cost.
Central to this is that different consumers value the product by
different amounts.
Any firm facing a downward-sloping demand curve can increase profits
if it is able to price discriminate.
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Chapter 10, Slide 20
When Is Price Discrimination Possible?
1. When firms have market power.
2. When consumers differ in their valuations of the product.
3. When firms can prevent arbitrage.
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Chapter 10, Slide 21
Different Forms of Price Discrimination
Price Discrimination Among Units of Output
A firm captures consumer surplus by charging different prices
for different units sold.
"Perfect" price discrimination transfers all consumer surplus
to the seller.
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Chapter 10, Slide 22
Fig. 10-6
Price Discrimination Among Units of Output
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Chapter 10, Slide 23
Fig. 10-7
A Numerical Example of Profitable Price Discrimination
Profit maximization requires that MR be equalized across the two
segments.
 price is higher in the segment with less elastic demand.
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Chapter 10, Slide 24
The Consequences of Price Discrimination
Price discrimination increases firms' profits (otherwise they wouldn't
do it!).
For price discrimination by the unit, firms will often increase their
output and overall efficiency will increase.
The effect on consumers is unclear—they may lose consumer surplus,
but they could also gain surplus (if output increases as a result).
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Chapter 10, Slide 25