Transcript Monopolies Lecture - Mr. Tyler`s Lessons

Chapter 25
Monopolies
FOUR MARKET MODELS
• Obey your Thirst
– Sprite
• Is it in you
– Gatorade
• Two for me, none for you
– Twix
• Hungry, why wait?
– Snickers
• Give me a break
– Kit Kat
• Like a good neighbor…
• State Farm
• My heart to yours
– Pillsbury
Name
The Product
• There is no wrong way to eat a
– Reese’s
Name
• I’m love’n it
– McDonalds
The Product
• Once you pop you can’t stop
– Pringles
• Choosy mothers choose _______.
– Jiff
• You can do it, we can help.
– Home Depot
• Zoom, zoom, zoom
– Mazda
• What is in your wallet?
– Capital One
• It just keeps going and going and going…
– Energizer
Name
• Bet ya can’t eat just one.
The Product
– Lays Potato Chips
• Double your pleasure, double your fun
– Doublemint Gum
• Have it your way
– Burger King
• Don’t leave home without it.
– American Express
• The quicker picker upper.
– Bounty
5 Characteristics of a Monopoly
1. Single Seller
• One Firm controls the vast majority of a
market
• The Firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
• The firm can manipulate the price by
changing the quantity it produces (ie.
shifting the supply curve to the left).
•Ex: California electric companies
5 Characteristics of a Monopoly
4. High Barriers to Entry
• New firms CANNOT enter market
• No immediate competitors
• Firm can make profit in the long-run
5. Some “Nonprice” Competition
• Despite having no close competitors,
monopolies still advertise their products
in an effort to increase demand.
Barriers to Entry
• Question
– How does a firm obtain monopoly power?
• Answers
– Barriers to entry that allow the firm to make
long-run economic profits
– Barriers to entry are restrictions on who can
start as well as stay in business.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-9
Four Origins of Monopolies
1. Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, Cable TV,
-Location or control of resources limits competition
and leads to one supplier.
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army,
Pharmaceutical drugs, rubix cubes…
-Government allows monopoly for public benefits or
to stimulate innovation.
-The government issues patents to protect inventors
and forbids others from using their invention.
(They last 20 years)
Four Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Intel, Frisbee, Band-Aid…
-Patents and widespread availability of certain products
lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to Entry
Ex: Electric Companies
• If there were three competing electric companies
they would have higher costs.
• Having only one electric company keeps prices low
Natural Monopoly- It is NATURAL for only one firm to
produce because they can produce at the lowest cost.
International Policy Example:
Malaysia’s Drug-Labeling Monopoly
• Sellers of drugs and medical products are required to
affix holographic labels providing information on
usage.
• To obtain these labels, sellers have only one choice.
They must buy the labels from a company called
Mediharta.
• This company is the only label manufacturer that
Malaysia’s Registrar of Companies has approved to
produce holographic labels.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-12
Barriers to Entry (cont'd)
• Legal or governmental restrictions
– Patents
• Intellectual property
– Tariffs
• Taxes on imported goods
– Regulation
• Safety and quality
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-13
Barriers to Entry (cont'd)
• Cartels
– An association of producers in an industry that
agree to set common prices and output quotas
to prevent competition
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-14
The Demand Curve
a Monopolist Faces
• The monopolist faces the industry demand
curve because the monopolist is the entire
industry.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-15
The Demand Curve
a Monopolist Faces (cont'd)
• Recall that under perfect competition
– Firm faces perfectly elastic demand curve, it is
a price taker
– The forces of supply and demand establish the
price per unit
– Marginal revenue, average revenue, and price
are all the same
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-16
Comparing Monopoly and Perfect
Competition
Monopoly
Perfect Competition
Single seller
Many sellers
Faces entire
industry demand
Faces perfectly
elastic demand
Must lower price
to sell more
Must produce more
to sell more
Not all units sold for
same price
All units sold for same
price (P = MR)
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-17
Elasticity and Monopoly
• The monopolist faces a downward-sloping
demand curve, and cannot charge any price.
• Thus, depending on the price charged a
different quantity will be demanded.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-18
Cost and Monopoly
Profit Maximization
• We assume profit maximization is the goal
of the pure monopolist, just as it is for the
prefect competitor.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-19
Cost and Monopoly
Profit Maximization (cont'd)
• Perfect competitor has only to decide on the
profit-maximizing output rate because price
is given.
• For the pure monopolist, we must
seek a profit-maximizing price
output combination.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-20
Cost and Monopoly
Profit Maximization (cont'd)
• Price Searcher
– A firm that must determine the price-output
combination that maximizes profit because it
faces a downward-sloping demand curve
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-21
Cost and Monopoly
Profit Maximization (cont'd)
• We can determine the profit-maximizing
price-output combination with either of two
equivalent approaches.
– By looking at total revenues and total costs or
by looking at marginal revenues and marginal
costs.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-22
Cost and Monopoly
Profit Maximization (cont'd)
• Total revenues-total costs approach
– Maximize the positive difference between total
revenues and total costs
• Marginal revenue-marginal
cost approach
– Profit maximization will also occur where
marginal revenue equals marginal cost.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-23
When graphing monopolies…
Only one graph because the firm
IS the industry.
1.The cost curves are the same
2.The MR= MC rule still applies
3.Shut down rule still applies
The Main Difference
• Monopolies (and all Imperfectly
competitive firms) have downward
sloping demand curve.
• Which means, to sell more a firm must
lower its price.
• This changes MR…
THE MARGINAL REVENUE
DOESN’T EQUAL THE PRICE!
This is what a monopoly looks like when
graphed…always!
MC
Costs (dollars)
ATC
D
MR
Quantity
Remember…Perfect Competition
Cost and Revenue
$20
MC
15
14
MR=P
ATC
10
AVC
6
5
0
1 2 3 4 5 6 7 8 9 10
Calculating Monopoly Profit
• Monopoly profit is given by the shaded
area, which is equal to total revenues (P 
Q) minus total costs (ATC  Q).
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-28
Figure 25-6 Monopoly Profit
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-29
Calculating Monopoly Profit (cont'd)
• No guarantee of profit
– The term monopoly conjures up the notion of a
greedy firm ripping off the public…Not always
true!
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-30
Figure 25-7
Monopolies: Not Always Profitable
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-31
Conclusion: A monopolists produces where
MR=MC, buts charges the price consumer are
willing 200
to pay identified by the demand curve.
Price, costs, and revenue
175
MC
$9
150
8
125
7
100
6
ATC
5
4
50
3
D
75
25
MR
2
0
1
2
3
4
5
6
7
8
9
10
Q
Calculating Marginal
Revenue
Calculate TR and Marginal Revenue
Quantity
0
1
2
3
4
5
6
7
8
9
10
Price
$16
15
14
13
12
11
10
9
8
7
6
TR
MR
Calculate TR and Marginal Revenue
Quantity
0
1
2
3
4
5
6
7
8
9
10
Price
$16
15
14
13
12
11
10
9
8
7
6
TR
0
15
28
39
48
55
60
63
64
63
60
MR
Calculate TR and Marginal Revenue
Quantity
0
1
2
3
4
5
6
7
8
9
10
Price
$16
15
14
13
12
11
10
9
8
7
6
TR
0
15
28
39
48
55
60
63
64
63
60
MR
15
13
11
9
7
5
3
1
-1
-3
On Making Higher Profits:
Price Discrimination
• Price Discrimination
– Selling a given product at more than one price,
with the difference being unrelated to
differences in cost
• Senior discounts
• Military discounts
• Student discounts
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-37
On Making Higher Profits:
Price Discrimination (cont'd)
• Price Differentiation
– Establishing different prices for similar
products to reflect differences in marginal cost
in providing those commodities to different
groups of buyers
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-38
The Social Cost of Monopolies
• Comparing monopoly with
perfect competition
– Let’s assume a monopolist comes in and buys up every
single perfect competitor.
– Notice the monopolist produces a smaller quantity and
sells at a higher price.
– Monopolists raise the price and restrict production
compared to a perfectly competitive situation.
– Consumers pay a price that exceeds the marginal cost
of production and resources are misallocated in such a
situation.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-39
Monopolies are inefficient because they…
•Charge a higher price
•Don’t produce enough
•No allocative efficiency
•Produce at higher costs
•No productive efficiency
•Have little incentive to innovate
Why?
Because there is little external pressure to
be efficient
Regulating
Monopolies
Why Regulate?
Since monopolies are inefficient
if unregulated, the government
seeks to make them efficient
How do they regulate?
Rate Regulation in the form of
price ceilings
End of
Chapter 25
Monopoly