Bài giảng topic 6 monopoly

Monopoly Topic MONOPOLY- Contents 1. Monopoly Characteristics 2. Monopoly profit maximization 3. Assessment of Monopoly 4. Regulation of Monopoly 5. Price Discrimination Characteristics of a pure monopoly    Single seller High barriers to entry Unique Product Barriers to Entry  High barriers to entry explain the existence of monopolies  Block all potential competitors Barriers to Entry  Economies of scale   Legal Barriers   In some industries, efficient, low-cost production can only be achieved if producers are large – Natural monopoly Regulations, Patents and Licences Control of the supply of raw materials Monopoly Demand curve   Monopolist’s demand curve is the industry demand curve and therefore is down-sloping Monopolist is a ‘price maker’ since it can influence total supply Demand Curve of a Monopoly Firm $ D O Q Copyright 2001 Pearson Education Australia Demand, Marginal Revenue, Total Revenue Dollars 200 Elastic Unit Elasticity 150 Inelastic 200 50 MR D 10 11 12 13 14 15 16 17 18 Dollars 750 Q 500 250 TR 10 11 12 13 14 15 16 17 18 Q Demand and MR  Demand curve: P= a - bQ  MR= a – 2bQ  D & MR start from the same point  Everywhere else MR bisects the distance between D curve & vertical axis Profit maximisation under Monopoly Rules for Profit maximization same as under Perfect Competition    MR = MC (where MC cuts MR from below) Short Run: P ≥ AVC Long Run : P ≥ ATC $ Profit maximising under monopoly MC AR MR O Qm Q Copyright 2001 Pearson Education Australia $ Profit maximising under monopoly MC ATC AR AC a b AR MR O Qm Q Copyright 2001 Pearson Education Australia $ Profit maximising under monopoly MC ATC AR AC AR MR O Qm Q Copyright 2001 Pearson Education Australia Profit maximisation under Monopoly Profit Maximisation Loss Minimisation Points to remember  No supplier will produce an output corresponding to the inelastic section of the demand curve.  Why? Points to remember  A monopolist will not charge the highest price possible (A monopolist seeks to maximise profit, not necessarily price)  A monopolist will not maximize profit per units but total profits  Monopolies are not always making profit Losses are possible  Pure monopoly does not guarantee economic profits  In the short-run, monopolist may experience losses because of weak demand or high costs Assessment of Monopoly Comparison with PC (with no monopolist economies of scale)  No economies of scale: means that the cost curve ( MC & AC) are the same under both PC and Monopoly  Monopoly: higher price, lower output     smaller consumer surplus no allocative efficiency no productive efficiency deadweight loss to society (area ABE) Assessment of Monopoly Comparison with PC (with monopolist economies of scale)  Economies of scale: means that the costs will be lower under Monopoly  Monopoly: lower price, higher output   larger consumer surplus more efficient as overall costs will be lower than under PC Assessment of other factors  Income distribution:   X-inefficiency    Monopoly profits tend to concentrate in higher income groups. the difference between theoretically defined efficient behavior of firms and how they actually behave Monopoly tends to perform less well compared to PC since they face less pressure to improve efficiency & cut costs Technological progress:  Monopoly have financial resources hence more R& D than competitive firms Regulating Monopolies   Historically, monopolies have been operated or heavily regulated by the government Competition policy & Legal action:    Actions against firms overcharging price Incentives to new entrants Price ceilings  at the point where MC cuts the D curve (allocative efficiency achieved) More about price ceilings - When MC is increasing- • Price ceiling is set at PC • Increase in consumer surplus: PmAEPc • Allocative efficiency is achieved (Price = MC) •Deadweight lost ABE is eliminated • Monopolist still earn a profit: PcETPt More about price ceilings - When MC is decreasing- Two part pricing regulation:  Price ceiling is set at PC  Monopoly firm will incur a loss PaPcEB  Allow monopolist to charge a fixed fee so that the loss will be recovered Price Discrimination Prerequisites  There is Monopoly control  Clearly identifiable market segments    between which resale cannot take place Different price elasticities of demand in the different segments This is 3rd degree price discrimination Degrees of price discrimination  1st Degree   2nd Degree   Each unit sold at the highest price a buyer is willing to pay (leaving zero consumer surplus) Different prices charged for blocks of output, rather than each unit as in 1st degree discrimination 3rd Degree  Different prices to different groups of consumers. Within a group the price remains constant irrespective of the number of units consumed [...]...$ Profit maximising under monopoly MC AR MR O Qm Q Copyright 2001 Pearson Education Australia $ Profit maximising under monopoly MC ATC AR AC a b AR MR O Qm Q Copyright 2001 Pearson Education Australia $ Profit maximising under monopoly MC ATC AR AC AR MR O Qm Q Copyright 2001 Pearson Education Australia Profit maximisation under Monopoly Profit Maximisation Loss Minimisation Points... making profit Losses are possible  Pure monopoly does not guarantee economic profits  In the short-run, monopolist may experience losses because of weak demand or high costs Assessment of Monopoly Comparison with PC (with no monopolist economies of scale)  No economies of scale: means that the cost curve ( MC & AC) are the same under both PC and Monopoly  Monopoly: higher price, lower output  ... society (area ABE) Assessment of Monopoly Comparison with PC (with monopolist economies of scale)  Economies of scale: means that the costs will be lower under Monopoly  Monopoly: lower price, higher output   larger consumer surplus more efficient as overall costs will be lower than under PC Assessment of other factors  Income distribution:   X-inefficiency    Monopoly profits tend to concentrate... concentrate in higher income groups the difference between theoretically defined efficient behavior of firms and how they actually behave Monopoly tends to perform less well compared to PC since they face less pressure to improve efficiency & cut costs Technological progress:  Monopoly have financial resources hence more R& D than competitive firms Regulating Monopolies   Historically, monopolies have been... profit: PcETPt More about price ceilings - When MC is decreasing- Two part pricing regulation:  Price ceiling is set at PC  Monopoly firm will incur a loss PaPcEB  Allow monopolist to charge a fixed fee so that the loss will be recovered Price Discrimination Prerequisites  There is Monopoly control  Clearly identifiable market segments    between which resale cannot take place Different price elasticities . Monopoly Topic 6 MONOPOLY- Contents 1. Monopoly Characteristics 2. Monopoly profit maximization 3. Assessment of Monopoly 4. Regulation of Monopoly 5. Price Discrimination . of a Monopoly Firm Copyright 2001 Pearson Education Australia 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q Q Dollars Dollars 200 150 200 50 750 500 250 MR MR Elastic 0 1 2 3 4 5 6 7. and Monopoly  Monopoly: higher price, lower output  smaller consumer surplus  no allocative efficiency  no productive efficiency  deadweight loss to society (area ABE) Assessment of Monopoly Comparison