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Chapter 15

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152 views31 pages

Chapter 15

Sample

Uploaded by

Shiela Maea
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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15

Monopoly
PRINCIPLES OF

FOURTH EDITION

N. G R E G O R Y M A N K I W
PowerPoint Slides
by Ron Cronovich
2007 Thomson South-Western, all rights reserved

In this chapter, look for the answers to


these questions:

Why do monopolies arise?


Why is MR < P for a monopolist?
How do monopolies choose their P and Q?
How do monopolies affect societys well-being?
What can the government do about monopolies?
What is price discrimination?

CHAPTER 15

MONOPOLY

Introduction
A monopoly is a firm that is the sole seller of a
product without close substitutes.

In this chapter, we study monopoly and contrast


it with perfect competition.

The key difference:


A monopoly firm has market power, the ability
to influence the market price of the product it
sells. A competitive firm has no market power.

CHAPTER 15

MONOPOLY

Why Monopolies Arise


The main cause of monopolies is barriers
to entry other firms cannot enter the market.
Three sources of barriers to entry:
1. A single firm owns a key resource.
E.g., DeBeers owns most of the worlds
diamond mines
2. The govt gives a single firm the exclusive right
to produce the good.
E.g., patents, copyright laws
CHAPTER 15

MONOPOLY

Why Monopolies Arise


3. Natural monopoly: a single firm can produce
the entire market Q at lower ATC than could
several firms.
Example: 1000 homes
need electricity.
ATC is lower if
one firm services
all 1000 homes
than if two firms
each service
500 homes.
CHAPTER 15

MONOPOLY

Cost

$80

Electricity
Economies of
scale due to
huge FC

$50

ATC
500

1000

Q
5

Monopoly vs. Competition: Demand


Curves
In a competitive market,
the market demand curve
slopes downward.
but the demand curve
for any individual firms
product is horizontal
at the market price.
The firm can increase Q
without lowering P,
so MR = P for the
competitive firm.
CHAPTER 15

MONOPOLY

A competitive firms
demand curve

Q
6

Monopoly vs. Competition: Demand


Curves
A monopolist is the only
seller, so it faces the
market demand curve.
To sell a larger Q,
the firm must reduce P.

A monopolists
demand curve

Thus, MR P.

D
Q
CHAPTER 15

MONOPOLY

1:
A monopolys revenue
ACTIVE LEARNING
Moonbucks is
the only seller of
cappuccinos in town.
The table shows the
market demand for
cappuccinos.
Fill in the missing
spaces of the table.
What is the relation
between P and AR?
Between P and MR?

$4.50

4.00

3.50

3.00

2.50

2.00

1.50

TR

AR

MR

n.a.

ACTIVE LEARNING

Answers
Here, P = AR,
same as for a
competitive firm.
Here, MR < P,
whereas MR = P
for a competitive
firm.

1:
P

TR

AR

$4.50

$0

n.a.

4.00

$4.00

3.50

3.50

3.00

3.00

2.50

10

2.50

2.00

10

2.00

1.50

1.50

MR
$4
3
2
1
0
1
9

Moonbucks D and MR Curves


P, MR
$5
4
3
2
1
0
-1
-2
-3
0
CHAPTER 15

Demand curve (P)

MR

MONOPOLY

Q
10

Understanding the Monopolists


MR

Increasing Q has two effects on revenue:

The output effect:

More output is sold, which raises revenue


The price effect:
The price falls, which lowers revenue

To sell a larger Q, the monopolist must reduce the


price on all the units it sells.

Hence, MR < P
MR could even be negative if the price effect
exceeds the output effect
(e.g., when Moonbucks increases Q from 5 to 6).
CHAPTER 15

MONOPOLY

11

Profit-Maximization
Like a competitive firm, a monopolist maximizes
profit by producing the quantity where MR = MC.

Once the monopolist identifies this quantity,


it sets the highest price consumers are willing to
pay for that quantity.

It finds this price from the D curve.

CHAPTER 15

MONOPOLY

12

Profit-Maximization
1. The profitmaximizing Q
is where
MR = MC.

Costs and
Revenue

MC

2. Find P from
the demand
curve at this Q.

D
MR

Quantity

Profit-maximizing output
CHAPTER 15

MONOPOLY

13

The Monopolists Profit


Costs and
Revenue

As with a
competitive firm,
the monopolists
profit equals

MC

ATC

ATC

(P ATC) x Q

MR

CHAPTER 15

MONOPOLY

Quantity

14

A Monopoly Does Not Have an S


Curve

A competitive firm
takes P as given
has a supply curve that shows how its Q depends
on P
A monopoly firm
is a price-maker, not a price-taker
Q does not depend on P;
rather, Q and P are jointly determined by
MC, MR, and the demand curve.
So there is no supply curve for monopoly.
CHAPTER 15

MONOPOLY

15

Case Study: Monopoly vs. Generic


Drugs
Patents on new drugs
Price
give a temporary
monopoly to the seller.

The market for


a typical drug

PM

When the
patent expires,
PC = MC
the market
becomes competitive,
generics appear.

D
MR

QM

CHAPTER 15

MONOPOLY

QC

Quantity

16

The Welfare Cost of Monopoly


Recall: In a competitive market equilibrium,
P = MC and total surplus is maximized.

In the monopoly eqm, P > MR = MC


The value to buyers of an additional unit (P)

exceeds the cost of the resources needed to


produce that unit (MC).
The monopoly Q is too low
could increase total surplus with a larger Q.
Thus, monopoly results in a deadweight loss.

CHAPTER 15

MONOPOLY

17

The Welfare Cost of Monopoly


Competitive eqm:
quantity = QE
P = MC
total surplus is
maximized

Monopoly eqm:
quantity = QM

Price

Deadweight
MC
loss

P
P = MC
MC
D
MR

P > MC
deadweight loss

CHAPTER 15

MONOPOLY

QM QE

Quantity

18

Public Policy Toward Monopolies

Increasing competition with antitrust laws

Examples:

Sherman Antitrust Act (1890),


Clayton Act (1914)
Antitrust laws ban certain anticompetitive
practices, allow govt to break up monopolies.

Regulation

Govt agencies set the monopolists price


For natural monopolies, MC < ATC at all Q,

so marginal cost pricing would result in losses.


If so, regulators might subsidize the monopolist
or set P = ATC for zero economic profit.

CHAPTER 15

MONOPOLY

19

Public Policy Toward Monopolies

Public ownership

Example:
Problem:

U.S. Postal Service


Public ownership is usually less
efficient since no profit motive to minimize costs

Doing nothing

The foregoing policies all have drawbacks,


so the best policy may be no policy.

CHAPTER 15

MONOPOLY

20

Price Discrimination
Discrimination is the practice of treating people
differently based on some characteristic, such as
race or gender.

Price discrimination is the business practice of


selling the same good at different prices to
different buyers.

The characteristic used in price discrimination


is willingness to pay (WTP):
A firm can increase profit by charging a higher
price to buyers with higher WTP.
CHAPTER 15

MONOPOLY

21

Perfect Price Discrimination vs.


Single Price Monopoly
Here, the monopolist
charges the same
price (PM) to all
buyers.

Price

Consumer
surplus
Deadweight

PM

loss

A deadweight loss
MC
results.
Monopoly

profit
MR

QM
CHAPTER 15

MONOPOLY

Quantity
22

Perfect Price Discrimination vs.


Single Price Monopoly
Here, the monopolist
produces the
competitive quantity,
but charges each
buyer his or her WTP.
This is called perfect
price discrimination.

Price

Monopoly
profit

MC
D

The monopolist
captures all CS
as profit.

MR

But theres no DWL.

CHAPTER 15

MONOPOLY

Quantity
23

Price Discrimination in the Real


World

In the real world, perfect price discrimination is


not possible:
no firm knows every buyers WTP
buyers do not announce it to sellers

So, firms divide customers into groups


based on some observable trait
that is likely related to WTP, such as age.

CHAPTER 15

MONOPOLY

24

Examples of Price Discrimination


Movie tickets
Discounts for seniors, students, and people
who can attend during weekday afternoons.
They are all more likely to have lower WTP
than people who pay full price on Friday night.
Airline prices
Discounts for Saturday-night stayovers help
distinguish business travelers, who usually have
higher WTP, from more price-sensitive leisure
travelers.
CHAPTER 15

MONOPOLY

25

Examples of Price Discrimination


Discount coupons
People who have time to clip and organize
coupons are more likely to have lower income
and lower WTP than others.
Need-based financial aid
Low income families have lower WTP for
their childrens college education.
Schools price-discriminate by offering
need-based aid to low income families.

CHAPTER 15

MONOPOLY

26

Examples of Price Discrimination


Quantity discounts
A buyers WTP often declines with additional
units, so firms charge less per unit for large
quantities than small ones.
Example: A movie theater charges $4 for
a small popcorn and $5 for a large one thats
twice as big.

CHAPTER 15

MONOPOLY

27

CONCLUSION: The Prevalence of


Monopoly
In the real world, pure monopoly is rare.

Yet, many firms have market power, due to


selling a unique variety of a product
having a large market share and few significant
competitors

In many such cases, most of the results from


this chapter apply, including
markup of price over marginal cost
deadweight loss
CHAPTER 15

MONOPOLY

28

CHAPTER SUMMARY
A monopoly firm is the sole seller in its market.
Monopolies arise due to barriers to entry,
including: government-granted monopolies, the
control of a key resource, or economies of scale
over the entire range of output.

A monopoly firm faces a downward-sloping


demand curve for its product. As a result, it must
reduce price to sell a larger quantity, which causes
marginal revenue to fall below price.

CHAPTER 15

MONOPOLY

29

CHAPTER SUMMARY
Monopoly firms maximize profits by producing the
quantity where marginal revenue equals marginal
cost. But since marginal revenue is less than
price, the monopoly price will be greater than
marginal cost, leading to a deadweight loss.

Policymakers may respond by regulating


monopolies, using antitrust laws to promote
competition, or by taking over the monopoly and
running it. Due to problems with each of these
options, the best option may be to take no action.
CHAPTER 15

MONOPOLY

30

CHAPTER SUMMARY
Monopoly firms (and others with market power) try
to raise their profits by charging higher prices to
consumers with higher willingness to pay. This
practice is called price discrimination.

CHAPTER 15

MONOPOLY

31

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