monopoly Harpal harpal harpal chatgpt adn marstal.pptx

monopoly Harpal harpal harpal chatgpt adn marstal.pptx

• 1.
  1 Monopoly
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  2 Four Basic MarketStructures  Perfectly Competitive: many firms, identical products, free entry and exit, full and symmetric info  Monopoly: single firm, no close substitutes, barriers to entry, full and symmetric info  Oligopoly: several firms, similar products, degree of product differentiation varies depending upon the market, might be barriers, full and symmetric info  Monopolistic competition: many firms, similar products, slightly differentiated products, free entry and exit, full and symmetric info
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  3 Competitive Market  Thisis the classic “textbook” market structure.  Firms in a competitive market all make a product that is perfectly substitutable: all demanders are equally satisfied with any supplier’s product.
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  4 Monopoly  The singleseller makes a product that has no “good” substitute.  Other firms may be able to produce the good or service but choose not to enter the market or are barred from it.
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  5 Oligopoly  A fewsellers make products that are good, but not perfect, substitutes.  Consumers can be induced to change suppliers but have only a limited number of choices.
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  6 Monopolistic Competition  Themarket has many firms but each supplier’s product is differentiated.  Consumers can be induced to change brands but they have brand preferences.
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  7 Monopoly  single firm no close substitutes  barriers to entry  full and symmetric information
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  8 Sources of MonopolyEntry Barriers  Natural monopoly: the most efficient scale of production is so large, relative to market demand, that a single firm dominates the market.  Patents, copyrights, licenses, franchises: government protection of a firm’s right to produce a unique product.  Economic and/or legal restrictions, strategies or situations that make entry more difficult for new competitors than for the existing monopoly firm.
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  9 Natural Monopolies  Goodsand services whose delivery requires the construction of a physical network (wires, pipes, etc..)  In such industries (local phone service, water, sewage removal, electricity, gas) the physical networks display decreasing marginal cost over essentially all quantities.  Thus, average total cost is always declining and the minimum efficient scale is much larger than the size of the market.  Natural monopolies are often regulated: they cannot charge a higher price without government approval.
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  10 Patents: Are There“Good” Monopolies?  Consider the protease inhibitor Crixivan from Merck.  A very effective AIDS therapy.  Development costs were more than one billion dollars.  Annual revenue now from treating around 90,000 patients is $500,000,000.
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  11 What is a“Good” Monopoly?  Why is Merck given a monopoly?  The granting of a patent on the drug Crixivan guarantees that Merck can earn monopoly profits on its sale.  These monopoly profits provide the incentive to invest in the research and development required to create the new drug.
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  12 “Good” Monopolies  Thegranting of patent protection (legal monopoly) gives firms a strong incentive to invest in new product development.  Would firms make the R&D investments if they could not protect them through patents and trade secrets?  Probably not because competitors could steal the design at a fraction of the cost after the product is brought to market.
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  13 Classic Simple Monopoly Polar extreme from perfect competition.  Monopolist is a “price maker.”  Cost curves are pretty much the same (except in the case of natural monopoly).  The big change from before is in the demand side of the profit function.
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  14 The Simple Monopolist The simple monopolist abides by the “law of one price.” Everyone pays the same market price for all units purchased.  A monopolist faces the declining market demand curve for its product and simultaneously chooses price and quantity.  Now P>MR (before P=MR) because the simple monopolist must lower the price on all preceding units to sell an additional unit.  A monopolist has no “supply curve.”
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  15 Simple Monopoly  Economicprofits equal total revenue minus total costs.  Marginal revenue is the rate of change of total revenue (just like marginal cost is the rate of change of total cost) as quantity increases.  Economic profits are maximized when marginal revenue equals marginal costs Monopoly Selling in a Single Market at a Single Price Quantity Market Demand Price Total Costs Marginal Cost (midpoint formula) Average Total Cost Total Revenue Marginal Revenue (midpoint formula) Economic Profits 0 100.00 800 0.00 -800 10 95.00 1,500 82.50 150.00 950.00 90.00 -550 20 90.00 2,450 65.00 122.50 1,800.00 80.00 -650 30 85.00 2,800 42.50 93.33 2,550.00 70.00 -250 40 80.00 3,300 32.50 82.50 3,200.00 60.00 -100 50 75.00 3,450 20.50 69.00 3,750.00 50.00 300 60 70.00 3,710 18.50 61.83 4,200.00 40.00 490 70 65.00 3,820 9.50 54.57 4,550.00 30.00 730 80 60.00 3,900 9.00 48.75 4,800.00 20.00 900 90 55.00 4,000 10.00 44.44 4,950.00 10.00 950 100 50.00 4,100 12.50 41.00 5,000.00 0.00 900 110 45.00 4,250 17.50 38.64 4,950.00 -10.00 700 120 40.00 4,450 20.00 37.08 4,800.00 -20.00 350 130 35.00 4,650 25.00 35.77 4,550.00 -30.00 -100 140 30.00 4,950 30.00 35.36 4,200.00 -40.00 -750 150 25.00 5,250 35.00 35.00 3,750.00 -50.00 -1,500 160 20.00 5,650 45.00 35.31 3,200.00 -60.00 -2,450 170 15.00 6,150 60.00 36.18 2,550.00 -70.00 -3,600 180 10.00 6,850 75.00 38.06 1,800.00 -80.00 -5,050 190 5.00 7,650 100.00 40.26 950.00 -90.00 -6,700 200 0.00 8,850 44.25 0.00 -8,850
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  16 Implications of the Monopolist’sProfit Maximum  Price will exceed the competitive price.  Quantity will be less than the competitive quantity.  The monopolist sells the output at a price greater than marginal costs but the monopoly price can be above or below average total costs. Thus, the monopolist need not always make a profit. In the long run, of course, unprofitable monopolists will either stop production or raise the price further above marginal cost until it covers average total costs.  The monopolist will always try to operate on the elastic portion of the demand curve because when the elasticity of demand is greater than -1 (inelastic, between 0 and 1 in absolute value), marginal revenue is negative and, necessarily, less than marginal cost.  Since there is no entry to consider monopolists can have persistent long run economic profit.
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  17 Price Discriminating Monopolists  Amonopolist might be able to charge different prices for different units sold and enhance its profits. – charge different people different prices – charge the same person different prices for different units  price discrimination – charging different prices for different units with no cost basis – charging the same price for different units when there are cost differences
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  18 Requirements for Price Discrimination Some amount of monopoly power.  An ability to prevent resale.  Detailed information about who is buying what unit and what demanders are willing to pay.
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  19 Two classic formsof Price Discrimination  Perfect or First Degree Price Discrimination – charge a different price for each unit sold – the most extreme form of price discrimination  Third Degree Price Discrimination – segment market and then charge a different price in each market – exploit the observation that at the simple monopoly price the own price elasticity of demand differs across the defined segmented markets  Price discrimination comes in many other “flavors”
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  20 Should the Government RegulateMonopolies?  Essentially all monopolies are regulated.  Natural monopolies are regulated by price commissions that determine the rates the monopolies may charge.  Patent, copyright and license protections are a form of ex ante regulation: firms that follow the rules for establishing the validity of their innovations receive the protection of the patent, copyright or license.  Should the government do more? Good question.