Monopoly (KINH tế VI mô SLIDE)

Microeconomics Chapter Part 2: Monopoly Topics to be discussed  Monopoly  Demand and Marginal Revenue  Profit maximization  Market power  Price discrimination Why Monopolies Arise  Monopoly    Firm that is the sole seller of a product without close substitutes Price maker Barriers to entry    Monopoly resources Government regulation The production process 3 Why Monopolies Arise   Monopoly resources  A key resource required for production is owned by a single firm  Higher price Government regulation  Government gives a single firm the exclusive right to produce some good or service  Government-created monopolies  Patent and copyright laws  Higher prices; Higher profits 4 Why Monopolies Arise   The production process  A single firm can produce output at a lower cost than can a larger number of producers Natural monopoly  Arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms  Economies of scale over the relevant range of output 5 Economies of scale as a cause of monopoly Costs Average total cost Quantity of output When a firm’s average-total-cost curve continually declines, the firm has what is called a natural monopoly In this case, when production is divided among more firms, each firm produces less, and average total cost rises As a result, a single firm can produce any given amount at the smallest cost Demand and Revenue    Monopoly versus competition Competitive firm  Price taker  One producer of many  Demand – horizontal line (Price): P = P market Monopoly  Price maker  Sole producer  Downward sloping demand  Market demand curve: P = f (Q) 7 Demand curves for competitive and monopoly firms (a) A Competitive Firm’s Demand Curve Price (b) A Monopolist’s Demand Curve Price Demand Demand Quantity of output Quantity of output Because competitive firms are price takers, they in effect face horizontal demand curves, as in panel (a) Because a monopoly firm is the sole producer in its market, it faces the downwardsloping market demand curve, as in panel (b) As a result, the monopoly has to accept a lower price if it wants to sell more output Demand and Revenue    A monopoly’s revenue  Total revenue: TR = PxQ = f (Q) x Q  Average revenue: AR = TR/Q  Marginal revenue: MR = △TR/△Q = TR’(Q)  Can be negative Always: MR < P MR curve – is below the demand curve 9 A monopoly’s total, average, and marginal revenue Quantity of water (Q) Pric e (P) Total revenue (TR=P ˣ Q) Average revenue (AR=TR/Q) Marginal revenue (MR=ΔTR/ΔQ) gallons $11 10 $0 10 18 24 28 30 30 28 24 $10 $10 -2 -4 10 10 First-Degree Price Discrimination  Examples of imperfect price discrimination  Lawyers, doctors, accountants  Car salesperson (15% profit margin)  Colleges and universities (differences in financial aid) 30 First-Degree Price Discrimination in Practice Six prices exist resulting in higher profits With a single price P*4, there are fewer consumers $/Q P1 P2 P3 MC P*4 Discriminating up to P6 (competitive price) will increase profits P5 P6 D Q* MR Quantity 31 Second-Degree Price Discrimination  In some markets, consumers purchase many units of a good over time  Demand for that good declines with increased consumption Electricity, water, heating fuel Firms can engage in second degree price discrimination    Practice of charging different prices per unit for different quantities of the same good or service- Block pricing 32 Second-Degree Price Discrimination $/Q Without discrimination: P = P0 and Q = Q0 With second-degree discrimination there are three blocks with prices P1, P2, & P3 Different prices are charged for different quantities or “blocks” of same good P1 P0 P2 AC MC P3 D MR Q1 1st Block Q0 2nd Block Q2 Q3 Quantity 3rd Block 33 Third-Degree Price Discrimination  Practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group  Divides the market into two-groups Each group has its own demand function Examples: airlines, premium v nonpremium liquor, discounts to students and senior citizens, frozen v canned vegetables, magazines 34 Third-Degree Price Discrimination  How can the firm decide what to charge each group of consumers? Total output should be divided between groups so that MR for each group are equal Total output is chosen so that MR for each group of consumers is equal to the MC of production 35 Third-Degree Price Discrimination  Algebraically  P1: price first group  P2: price second group  C(QT) = total cost of producing output QT = Q1 + Q  Profit: π = P1Q1 + P2Q2 - C(QT) 36 Third-Degree Price Discrimination   Firm should increase sales to each group until incremental profit from last unit sold is zero Set incremental π for sales to group and =    First group of consumers:MR1= MC Second group of customers:MR2 = MC Combining these conclusions gives  MR1 = MR2 = MC 37 Third-Degree Price Discrimination $/Q Consumers are divided into two groups, with separate demand curves for each group MRT = MR1 + MR2 D2 = AR2 MRT MR2 MR1 D1 = AR1 Quantity 38 Third-Degree Price Discrimination $/Q MC = MR1 at Q1 and P1 P1 •QT: MC = MRT •Group 1: more inelastic •Group 2: more elastic •MR1 = MR2 = MCT •QT control MC MC P2 D2 = AR2 MCT MRT MR2 D1 = AR1 MR1 Q1 Q2 QT Quantity 39 Other Types of Price Discrimination  Intertemporal Price Discrimination   Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time Initial release of a product, the demand is inelastic    Hard back v paperback book New release movie Technology 40 Intertemporal Price Discrimination $/Q Initially, demand is less elastic resulting in a price of P1 P1 Over time, demand becomes more elastic and price is reduced to appeal to the mass market P2 D2 = AR2 AC = MC MR1 Q1 MR2 D1 = AR1 Q2 Quantity 41 Other Types of Price Discrimination  Peak-Load Pricing   Practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be higher Demand for some products may peak at particular times     Rush hour traffic Electricity - late summer afternoons Ski resorts on weekends Movies on weekends 42 Peak-Load Pricing $/Q MC MR=MC for each group Group has higher demand during peak times P1 D1 = AR1 P2 MR1 D2 = AR2 MR2 Q2 Q1 Quantity 43 Competition versus monopoly: A summary comparison Similarities Goal of firms Rule for maximizing Can earn economic profits in short run? Differences Number of firms Marginal revenue Price Produces welfare-maximizing level of output? Entry in long run? Can earn economic profits in long run? Price discrimination possible? Competition Monopoly Maximize profits MR=MC Maximize profits MR=MC Yes Yes Many MR=P P=MC One MR

MC Yes Yes No No No No Yes Yes 44 44 ... The inefficiency of monopoly Costs and Revenue Deadweight loss Marginal cost Monopoly price Demand Marginal revenue Monopoly Efficient quantity quantity Quantity Because a monopoly charges a price... Marginal cost Marginal revenue Monopoly quantity Competitive quantity Demand Quantity When a patent gives a firm a monopoly over the sale of a drug, the firm charges the monopoly price, which is well... Marginal cost B Monopoly E price Average total cost Monopoly profit Demand Average total cost D C Marginal revenue QMAX Quantity The area of the box BCDE equals the profit of the monopoly firm