Transcript ATC
MONOPOLY Monopoly Recall characteristics of a perfectly competitive market: – many buyers and sellers – market participants are “price takers” – economic profit = 0 in long run None of these features are present in a monopoly market Monopoly • Word means “one seller” – the opposite of competition (and no close substitutes) • A monopolist can “set” market price: – A monopolist is a price setter NOT a price taker • Unlike firms in a perfectly competitive market, a monopolist can earn profits in the long-run Monopoly Conditions BARRIERS TO ENTRY: means of eliminating or discouraging competition, allowing firm to operate as monopoly All monopolies are protected by some kind of barrier to entry. Main sources: • Ownership of key resource – DeBeers diamond cartel • Government grants exclusive rights to market – Patents and copyrights • Cost of production such that single producer more efficient than many producers – Natural monopolies “Economies of Scale” and Natural Monopoly ECONOMIES OF SCALE: falling long-run Average Total Cost (ATC) as output increases. When a firm’s ATC curve continually declines the firm is a natural monopoly. If production is divided among two firms (Firm 1 and Firm 2 below), each firm must produce less and ATC rises. Thus, it is more efficient to have a single firm. Price ATC1 ATC0 ATC q1 = q2 Q0 Quantity Pricing and Output Decisions of a Firm in a Perfectly Competitive Market • A competitive firm is small relative to the market and takes the price of its output as given. – Because a competitive firm sells a product with many perfect substitutes, it faces a perfectly elastic (horizontal) demand curve. – If a competitive firm tries to sell its product at a price higher than the market price, demand falls to zero. – For a competitive firm, MR=AR=P Demand Curve Facing a Firm in a Perfectly Competitive Market P Competitive Firms are Price Takers and Face a Horizontal Demand Curve: MC P0 = MR q0 q Pricing and Output Decisions of Monopolists • A monopolist is the only firm in the market and therefore can alter the price of its good by altering output. – Because a monopolists makes up the entire market, it faces a downward sloping (market) demand curve. – Because the demand curve for its product is downward sloping, when a monopolist raises output by one unit, price will fall. – As a result, for a monopolist, marginal revenue is less than price. Total and Marginal Revenue of a Monopolist Thingamajigs Are Us is a monopolist that controls the market for thingamajigs (are really cool product) Quantity 0 1 2 3 4 5 6 Price $10 9 8 7 6 5 4 TR 0 9 16 21 24 25 24 MR 9 7 5 3 1 -1 Price Demand and Marginal Revenue Curves for a Monopolist D Quantity MR Profit Maximizing Monopoly • Basic profit maximization condition the same as with competitive firms: MR = MC But now MR Price… …MR < Price. P A monopolist maximizes profits where MR=MC. Note that at Q*, price is greater than MR. MC PM D QM Q MR A Monopolist’s Profits P MC Monopoly Profit ATC PM ATC D MR QM Q Monopoly: Welfare Analysis • Monopolist charges P > MC (and P > ATC) • Monopoly profits can be earned in long run, because no entry by competitors • Monopoly clearly a better outcome than competition from FIRM’S point of view… … but what about SOCIAL WELFARE? Market Efficiency Efficiency is the property of a resource allocation of maximizing the total surplus received by all members of society. – If an allocation of resources is efficient it is impossible to make anyone better off without making someone else worse off Major Point: The equilibrium in a competitive market maximizes the total welfare of buyers and sellers. Price Why A Competitive Equilibrium is Efficient A = loss in consumer surplus from under production. Supply B = loss in producer surplus from under production. A B P1 Demand Q2 Q1 Quantity P Monopoly Deadweight Loss MC (Competitive Supply) PM D MR QM QC Quantity Public Policy Toward Monopoly • Monopoly is bad for consumers – Price is higher than with competition – Quantity supplied is lower than with competition • Monopoly is inefficient from society’s standpoint – Deadweight loss – Monopolist’s market power is a source of “market failure” So what, if anything, should government do about it? Public Policy I: Anti-Trust Law • Sherman Anti-Trust Act (1890) • Clayton Act (1917) • These acts of congress, as interpreted since by the courts, give power to US Federal Government to promote competition by: – approving mergers – breaking up dominant firms – Imposing fines for “price-fixing”, other collusion Public Policy II: Regulated Natural Monopolies • With natural monopoly, one firm can produce output at minimum cost (good) • Unregulated, a natural monopolist will charge an inefficiently high price (bad) • Compromise: “Average Cost Pricing”, or “Rate of Return Regulation” – Allow firm to charge P = ATC, where ATC includes a set return on capital invested – Traditional form of regulation of public utilities (SDG&E) P Unregulated Monopoly Profit PM PR D QR QM MR ATC MC Q