Transcript Monopoly

Monopoly
A Price Searcher Model
Monopoly

Pure monopolist has no close
substitutes
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Sherman Act (1890) “anti-trust” law
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Section 1: Every contract,
combination…or conspiracy, in restraint
of trade…is declared to be illegal"
Section 2: "Every person who shall
monopolize, or attempt to
monopolize…shall be deemed guilty of a
felony”
John Sherman
Relevant Market
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Product Market
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DuPont (1956)
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Cellophane
Flexible wrapping paper
Alcoa (1945)
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Cellophane
75%
Primary aluminum
All aluminum
Butcher
Paper
Primary
90%
Aluminum
Foil
Newspaper
Learned Hand
Flexible Wrapping Paper
Secondary
20%
Imported
All Aluminum
33%
Relevant Market
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Geographic Market
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Local
Regional
National
Global
Local
Regional
National
Global
Barriers to Entry
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Economies of Scale
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$
“natural monopoly”
Control over key inputs
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Alcoa--bauxite
DeBeers
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GE Superabrasives (Diamond Innovations)
LRAC
Quantity
…more barriers to entry
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Government restrictions
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Patents
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Copyrights
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Number of Patents Issued per year in US
Life of artist plus 70 years
Licenses
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20 year duration
Occupational licenses: doctors, lawyers, accountants,
engineers
For what purpose: Public health or private interest?
Franchises
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Taxi medallions: 12,779
$336,000 per medallion
Source: The New York City Taxicab Fact Book, Schaller Consulting, March 2006. Available at http://www.schallerconsult.com/taxi/taxifb.pdf
Profit Maximizing Behavior
Assume that Monopolist
charges single price to all
buyers
$
TR = $20,000
TR = $21,000
π = TR – TC
π = P(Q)*Q – TC
MR = ∆TR/ ∆Q
$40
Loss
$30
Gain
D
MR
MR = ∆TR / ∆Q = [∆Q*P - ∆P*Q] / ∆Q
500
Quantity
700
MR = [6000 – 5000]/200 = $1000 / 200
MR = $5
MR < P
A single-price monopoly can sell 2 units for $8.50 per unit. In order
to sell 3 units, the price must be $8.00 per unit. The marginal
revenue from selling the third unit is
a)
b)
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d)
e)
$6.00
$7.00
$8.00
$8.50
$24.00
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MR, P, and Elasticity
MR = ∆TR / ∆Q = [∆Q*P - ∆P*Q] / ∆Q
MR = P [ 1 – 1/E ]
The table below shows the quantity demanded at different prices. If this
is the demand curve faced by a monopoly with constant marginal costs of
$2, what price should the monopoly set to maximize profit?
a)
b)
c)
d)
e)
f)
$9
$8
$7
$6
$5
$4
Price
Quantity
$10
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Profit Maximization
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π-max rule:
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$
Set output where MR = MC
Set price off of demand curve
MC
ATC
$30
$20
TR = P*Q = ($30)(700)
= $21,000
D
TC = ATC*Q = ($20)(700) = $14,000
π = TR - TC
= $ 7,000
MR
700
Quantity
The table below shows the quantity demanded at different prices. If this
is the demand curve faced by a monopoly with constant marginal costs of
$2, what price should the monopoly set to maximize profit?
a)
b)
c)
d)
e)
f)
$9
$8
$7
$6
$5
$4
Price
Quantity
$10
0
$9
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$8
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$7
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$6
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$5
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Profit Maximization
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π-max rule:
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$
Set output where MR = MC
Set price off of demand curve
MC
ATC
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How will monopolist
react to:
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an increase in marginal cost?
an increase in fixed cost?
an increase in demand?
$30
$20
D
MR
700
Quantity
Assume that at the current output level, a monopolist is earning positive
economic profit, has a marginal revenue of $7, and a marginal cost of $4.
Which of the following is an accurate conclusion with regard to the
monopolist's profit?
the firm is producing the profit
maximizing output.
the firm could increase its profit
by increasing its price
the firm could increase its profit
by decreasing its output.
the firm could increase its profit
by decreasing its price
c)
d)
0%
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Welfare Comparison: PC vs. Monop
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Perfect Competition: PC , QC
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Monopoly: PM , QM
$
A
PM
B
C
MC = ATC
PC
CS
PS
Social Welfare
DWL
PC
Monop
A+B+C
A
--A+B+C
---
B
A+B
C
D
MR
QM
Qc
Quantity
What is the deadweight loss due to monopoly power in
the diagram below?
a)
b)
c)
d)
$
70
50
$800
$400
$200
$100
MC = ATC
30
D
MR
40
0%
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0%
800
400
200
0%
Quantity
80
100
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Price Discrimination
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Definition: price differentials that do not reflect
cost differentials
Motivation: to increase profits by capturing more
consumer surplus
Necessary Conditions
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Market Power
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Segment the market
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Downward sloping demand curve
Arsenic ?
Demographics
Usage rates
Prevent resale
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Movie theatres
Röhm-Haas: plastic molding compound
Industrial: $0.85/lb
Dentists: $22/lb
Types of Price Discrimination
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First Degree
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Charge each buyer their WTP
Captures all CS and DWL
Second Degree
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$
Quantity discounts
PM
Third Degree
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Set prices based on price
elasticity
Movie Theatre
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PC
MC
D
MR
MRA = MRK = MC
QM
MC = $4
Qc
MRA = PA[1 – 1/EA]
EA = 2
MRA = MC
EK = 5
PA[1 – 1/2] = 4
PA = $8
PK = $5
Charge higher price
to more inelastic group
Quantity
A monopolist has divided its market into two segments according to
gender. The elasticity of demand for the product by men is equal to 3.
The elasticity of demand for the product by women is equal to 5. If the
marginal cost of selling the product to each segment is a constant $20 per
unit, what price should the monopolist charge each segment?
a)
b)
c)
d)
e)
Price for men = $20; Price for women = $20
Price for men = $25; Price for women = $30
Price for men = $30; Price for women = $25
Price for men = $60; Price for women = $4
Impossible to determine from the information
provided.
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b)
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Monopoly Advisor
Firm
P
MR
TR
Q
TC
MC
ATC
AVC
Decision
A
3.90
3.00
7800
2000
7400
2.90
3.70
3.24
2
B
5.90
59,000
10,000
47,400
5.90
4.74
4.24
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C
11.00
9.00
44,000
4000
47,600
9.00
11.90
10.74
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D
35.90
37.90
179,500
5000
179,500
37.90
35.90
E
35.00
26.30
35,000
1000
44,600
26.30
44.60
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36.94
Recommendations:
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2.
3.
4.
5.
Remain at the current output level.
Increase output.
Reduce output.
Shut down.
Go back and recalculate your figures because the ones
supplied can’t possibly be right.
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