Transcript
PART 3 MICROECONOMICS OF
PRODUCT MARKETS
Prepared by Dr. Amy Peng
Ryerson University
© 2013 McGraw-Hill Ryerson Ltd.
List the characteristics of monopoly.
Explain how a monopolist sets its maximizing output and price.
Discuss the economic effects of monopoly.
Describe why a monopolist prefers to charge different prices in different markets.
Discuss the choices facing governments that regulate monopolies.
Explain the deadweight loss associated with monopoly.
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 10
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Single seller – a sole producer
No close substitutes – unique product
Price maker – control over price
Blocked entry – strong barriers to entry block potential competition
Non-price competition – mostly PR or advertising the product
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Chapter 10, LO1
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Public utility companies
Natural Gas
Electric
Water
Near monopolies
Intel
Wham-O
Professional Sports Teams
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Chapter 10, LO1
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Barrier to Entry: a factor that keeps firms from entering an industry.
Economies of Scale
Legal Barriers: Patents and Licenses
Ownership of Essential Resources
Pricing
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Chapter 10, LO1
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10
15
$20
50
100
200
ATC
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Chapter 10, LO1
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The monopolist is the industry
Demand curve is the market demand curve
Downsloping demand curve
Marginal revenue is less than price
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Chapter 10, LO1
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Revenue Data
Cost Data
(1) Quantity of Output
(2)
Price (Average Revenue)
(3)
Total Revenue
(1) X (2)
(4) Marginal Revenue
(5)
Average Total Cost
(6)
Total Cost
(1) X (5)
(7)
Marginal Cost
(8)
Profit (+) or
Loss (-)
0
$ 172
$0
$ 100
$ -100
1
162
162
$ 162
$ 190.00
190
$ 90
-28
2
152
304
142
135.00
270
80
+34
3
142
426
122
113.33
340
70
+86
4
132
528
102
100.00
400
60
+128
5
122
610
82
94.00
470
70
+140
6
112
672
62
91.67
550
80
+122
7
102
714
42
91.43
640
90
+74
8
92
736
22
93.75
750
110
-14
9
82
738
2
97.78
880
130
-142
10
72
720
-18
103.00
1030
150
-310
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Chapter 10, LO1
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D
Gain = $132
Loss = $30
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Chapter 10, LO1
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D
Gain = $132
Loss = $30
MR
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Chapter 10, LO1
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Marginal Revenue is less than Price
Monopolist is a price maker
Monopolist sets prices in elastic region of demand curve
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Chapter 10, LO1
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Elastic
Inelastic
Demand and Marginal-Revenue Curves
Total-Revenue Curve
D
MR
TR
Figure 10-3
Demand, Marginal Revenue, and Total Revenue for a Monopolist
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Chapter 10, LO1
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Cost Data
Assume competitive factor markets
MR=MC Rule
No monopoly supply curve
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Chapter 10, LO2
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Chapter 10, LO2
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$200
175
150
125
25
100
75
50
Price, Costs, and Revenue
1
2
3
4
5
6
7
8
9
10
Quantity
0
D
MR
ATC
MC
MR=MC
A=$94
Economic
Profit
Pm=$122
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Chapter 10, LO2
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Not highest price
Total profit
Possibility of losses
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Chapter 10, LO2
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0
D
MR
ATC
MC
MR=MC
Loss
AVC
Pm
Qm
V
A
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Chapter 1o, LO2
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Price, Output, and Efficiency
Inefficient relative to a perfectly competitive industry
Pm > MC
Pm > minimum ATC
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Chapter 10, LO3
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(a)
Perfectly Competitive Market
(b)
Monopoly
D
D
S=MC
MC
P=MC=
Minimum
ATC
MR
Pc
Qc
Pc
Pm
Qc
Qm
a
b
c
d
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Chapter 10, LO3
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Income transfer
Cost complications
Economies of scale
X-Inefficiency
Rent seeking expenditures
Technological advance
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Chapter 10, LO3
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ATC2
ATC1
ATCx
Q1
Q2
Average
total cost
X
X'
ATCx'
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Chapter 10, LO3
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Legitimate concerns
Three policy options:
Charges under Canada’s anti-combines laws
Regulate prices and operations of natural monopolies
Ignore monopolies which are unsustainable over the long term
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Chapter 10, LO3
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Chapter 10, LO3
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Charging maximum price customer will pay
Charging customer one price for 1st set purchased and lower price for subsequent units
Charging some customers one price, others another
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Chapter 10, LO4
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Necessary Conditions
Monopoly Power
Market Segregation
No Resale
Examples
Airlines
Theatres, golf courses
Coupons
International trade
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Chapter 10, LO4
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MC = ATC
MC = ATC
Qb
Qs
Ps
Pb
P
P
MRb
MRs
Db
Ds
(a) Small businesses
(b) Students
Economic profit
Economic profit
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Chapter 10, LO4
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Natural monopolies traditionally have been subject to rate (price) regulation
e.g., natural gas distributors, regional telephone companies, electricity suppliers
Trend to deregulation where possible
e.g., long distance telephone
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Chapter 10, LO5
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May be desirable to maintain but regulate a natural monopoly
Types of regulation include:
Socially optimal price where P = MC
Fair-return price where P = ATC
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Chapter 10, LO5
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Monopoly
Price
Fair-Return
Price
Socially
Optimal
Price
Pr
D
r
f
b
a
Pf
Pm
Qm
Qf
Qr
MR
MC
ATC
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Chapter 10, LO5
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Setting price at P = MC
Firm earns losses
Setting price at P = ATC
Underallocation of resources
Regulation can improve outcomes
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Chapter 10, LO5
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Net loss of consumer and producer surplus is deadweight loss
Monopolist also loses producer surplus, but gains producer surplus at the expense of consumer surplus
Consumers lose consumer surplus
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Chapter 10, LO6
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Q
P
D=MB
Pc
Qc
S = MC
Consumer
surplus
Producer
surplus
(a) Perfectly competitive industry
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Chapter 10, LO6
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Q
P
D=MB
MR
Pc
Qc
Pm
Qm
S = MC
Producer
surplus
Monopoly’s
gain
B
C
Deadweight
loss
(b) Monopoly
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Chapter 10, LO6
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De Beers once controlled about 80% of the world’s diamond market
Monopoly position eroded over time
New diamond discoveries
Nearly perfect artificial diamonds
Unfavorable media attention
Now focus on increasing demand for diamonds rather than controlling supply
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Chapter 10
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10.1 Characteristics of Monopoly
10.2 Output and Price Determination in a Monopoly
10.3 Economic Effects of Monopoly
10.4 Price Discrimination and Monopoly
10.5 Regulated Monopoly
10.6 Monopoly and Deadweight Loss
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Chapter 10
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