Tài liệu Ten Principles of Economics - Part 34 docx

CHAPTER 15 MONOPOLY 341 probably be arrested for price-fixing if they ever held an official meeting in America. Most cable TV companies have government-issued licenses that keep competitors out. Thus, this business supports the hypothesis (offered, I think, by George Stigler) that private monopo- lies are not sustainable for long unless they have the weight of government be- hind them. The rapid escalation of prices and the limitations on services seem, how- ever, to be getting customers and their congressional representatives progres- sively more annoyed. Thus, it would not be surprising if legislative action leads soon to a deterioration of the cable com- panies’ monopoly power. . . . This fear about the future diminishes the claim of this otherwise worthy contestant for the first annual prize. Officials of Ivy League universities have been able to meet in semi-public fo- rums to set rules that determine prices of admission (tuition less financial aid) as a function of applicant characteristics, especially financial resources. In some cases, the schools pooled information to agree in advance on the right price to charge a specific customer. Airlines and other industries that wish to price dis- criminate can only dream about this kind of setup. Moreover, the universities have more or less successfully applied a high moral tone to the process: Rich appli- cants—especially smart rich applicants— are charged more than the competitive price for schooling in order to subsidize the smart poor, but it is unclear why this subsidy should come from the smart rich rather than from taxpayers in general. In any event, the universities’ envi- able cartel position has been damaged by the unenlightened Justice Depart- ment, which argued that the price-setting meetings were a violation of antitrust laws. Since most of the universities in- volved have agreed to stop these prac- tices, it may be that future prices for private higher education will come closer to being competitively determined. . . . The final contestant, the NCAA, has been remarkably successful in holding down “salaries” paid to college athletes. It would be one thing merely to collude to determine price ceilings (for example, to restrict payments so that they not ex- ceed tuition plus room and board and some minor additional amount), but the NCAA has also managed to monopolize all the moral arguments. Consider a poor ghetto resident who can play basketball well, but not well enough to make it to the NBA. If there were no NCAA, this player might be able legitimately to accumulate a significant amount of cash during a four-year career. But the NCAA ensures that the player will remain poor after four years and, moreover, has convinced most ob- servers that it would be morally wrong for the college to pay the player a com- petitively determined wage for his or her services. For many economists, this interfer- ence with competition—in a setting that has no obvious reasons for market fail- ure—is itself morally repugnant. But the outrage is compounded here because the transfer is clearly from poor ghetto residents to rich colleges. Compare the situation of contestant number 4, the Ivy League universities, in which the transfer from rich to poor students can readily be supported on Robin Hood grounds. The NCAA has the much more diffi- cult task of defending a policy that pre- vents many poor individuals from earning money. Incredibly, this defense has been so successful that it has even allowed the organization to maintain the moral high ground. When the NCAA maintains its cartel by punishing schools that violate the rules (by paying too much), almost no one doubts that the evil entities are the schools or people who paid the athletes, rather than the cartel enforcers who pre- vented the athletes from getting paid. Given this extraordinary balancing act, the decision of the panelists was straight- forward and the NCAA is the clear and deserving winner of the first annual prize for best monopoly in America. The panel of economists also con- sidered briefly an award for the least effi- cient monopoly in America. This choice was, however, too easy. It goes to the American Economic Association, which has been a dismal failure at establishing licensing requirements or other restric- tions on entry into the economics pro- fession. It is a sad state of affairs when almost anyone can assume the title of economist. SOURCE: The Wall Street Journal, August 27, 1991, p. A12. 342 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY willingness to pay for a ticket. In this case, movie theaters raise their profit by price discriminating. Airline Prices Seats on airplanes are sold at many different prices. Most air- lines charge a lower price for a round-trip ticket between two cities if the traveler stays over a Saturday night. At first this seems odd. Why should it matter to the airline whether a passenger stays over a Saturday night? The reason is that this rule provides a way to separate business travelers and personal travelers. A pas- senger on a business trip has a high willingness to pay and, most likely, does not want to stay over a Saturday night. By contrast, a passenger traveling for personal reasons has a lower willingness to pay and is more likely to be willing to stay over a Saturday night. Thus, the airlines can successfully price discriminate by charging a lower price for passengers who stay over a Saturday night. Discount Coupons Many companies offer discount coupons to the public in newspapers and magazines. A buyer simply has to clip out the coupon in order to get $0.50 off his next purchase. Why do companies offer these coupons? Why don’t they just cut the price of the product by $0.50? The answer is that coupons allow companies to price discriminate. Companies know that not all customers are willing to spend the time to clip out coupons. Moreover, the willingness to clip coupons is related to the customer’s willingness to pay for the good. A rich and busy executive is unlikely to spend her time clip- ping discount coupons out of the newspaper, and she is probably willing to pay a higher price for many goods. A person who is unemployed is more likely to clip coupons and has a lower willingness to pay. Thus, by charging a lower price only to those customers who clip coupons, firms can successfully price discriminate. Financial Aid Many colleges and universities give financial aid to needy students. One can view this policy as a type of price discrimination. Wealthy stu- dents have greater financial resources and, therefore, a higher willingness to pay than needy students. By charging high tuition and selectively offering financial aid, schools in effect charge prices to customers based on the value they place on going to that school. This behavior is similar to that of any price-discriminating monopolist. Quantity Discounts So far in our examples of price discrimination, the monopolist charges different prices to different customers. Sometimes, however, monopolists price discriminate by charging different prices to the same customer for different units that the customer buys. For example, many firms offer lower prices to customers who buy large quantities. A bakery might charge $0.50 for each donut, but $5 for a dozen. This is a form of price discrimination because the customer pays a higher price for the first unit bought than for the twelfth. Quan- tity discounts are often a successful way of price discriminating because a cus- tomer’s willingness to pay for an additional unit declines as the customer buys more units. QUICK QUIZ: Give two examples of price discrimination. ◆ How does perfect price discrimination affect consumer surplus, producer surplus, and total surplus? CHAPTER 15 MONOPOLY 343 CONCLUSION: THE PREVALENCE OF MONOPOLY This chapter has discussed the behavior of firms that have control over the prices they charge. We have seen that because monopolists produce less than the socially efficient quantity and charge prices above marginal cost, they cause deadweight losses. These inefficiencies can be mitigated through prudent public policies or, in some cases, through price discrimination by the monopolist. How prevalent are the problems of monopoly? There are two answers to this question. In one sense, monopolies are common. Most firms have some control over the prices they charge. They are not forced to charge the market price for their goods, because their goods are not exactly the same as those offered by other firms. A Ford Taurus is not the same as a Toyota Camry. Ben and Jerry’s ice cream is not the same as Breyer’s. Each of these goods has a downward-sloping demand curve, which gives each producer some degree of monopoly power. Yet firms with substantial monopoly power are quite rare. Few goods are truly unique. Most have substitutes that, even if not exactly the same, are very similar. Ben and Jerry can raise the price of their ice cream a little without losing all their sales; but if they raise it very much, sales will fall substantially. In the end, monopoly power is a matter of degree. It is true that many firms have some monopoly power. It is also true that their monopoly power is usually quite limited. In these cases, we will not go far wrong assuming that firms operate in competitive markets, even if that is not precisely the case. ◆ A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost than many firms could. ◆ Because a monopoly is the sole producer in its market, it faces a downward-sloping demand curve for its product. When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopoly’s marginal revenue is always below the price of its good. ◆ Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. The monopoly then chooses the price at which that quantity is demanded. Unlike a competitive firm, a monopoly firm’s price exceeds its marginal revenue, so its price exceeds marginal cost. ◆ A monopolist’s profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. That is, when the monopoly charges a price above marginal cost, some consumers who value the good more than its cost of production do not buy it. As a result, monopoly causes deadweight losses similar to the deadweight losses caused by taxes. ◆ Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. They can regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise. Or, if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all. ◆ Monopolists often can raise their profits by charging different prices for the same good based on a buyer’s willingness to pay. This practice of price discrimination can raise economic welfare by getting the good to some Summary 344 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY consumers who otherwise would not buy it. In the extreme case of perfect price discrimination, the deadweight losses of monopoly are completely eliminated. More generally, when price discrimination is imperfect, it can either raise or lower welfare compared to the outcome with a single monopoly price. monopoly, p. 316 natural monopoly, p. 318 price discrimination, p. 336 Key Concepts 1. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain. 2. Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly? 3. Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative? Explain. 4. Draw the demand, marginal-revenue, and marginal-cost curves for a monopolist. Show the profit-maximizing level of output. Show the profit-maximizing price. 5. In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer. 6. What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge. 7. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost. 8. Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy. Questions for Review 1. A publisher faces the following demand schedule for the next novel by one of its popular authors: PRICE QUANTITY DEMANDED $100 0 90 100,000 80 200,000 70 300,000 60 400,000 50 500,000 40 600,000 30 700,000 20 800,000 10 900,000 0 1,000,000 The author is paid $2 million to write the book, and the marginal cost of publishing the book is a constant $10 per book. a. Compute total revenue, total cost, and profit at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge? b. Compute marginal revenue. (Recall that MR ϭ ⌬TR/⌬Q.) How does marginal revenue compare to the price? Explain. c. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the marginal- revenue and marginal-cost curves cross? What does this signify? d. In your graph, shade in the deadweight loss. Explain in words what this means. Problems and Applications CHAPTER 15 MONOPOLY 345 e. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher’s decision regarding the price to charge? Explain. f. Suppose the publisher were not profit-maximizing but were concerned with maximizing economic efficiency. What price would it charge for the book? How much profit would it make at this price? 2. Suppose that a natural monopolist were required by law to charge average total cost. On a diagram, label the price charged and the deadweight loss to society relative to marginal-cost pricing. 3. Consider the delivery of mail. In general, what is the shape of the average-total-cost curve? How might the shape differ between isolated rural areas and densely populated urban areas? How might the shape have changed over time? Explain. 4. Suppose the Clean Springs Water Company has a monopoly on bottled water sales in California. If the price of tap water increases, what is the change in Clean Springs’ profit-maximizing levels of output, price, and profit? Explain in words and with a graph. 5. A small town is served by many competing supermarkets, which have constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus. b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss? 6. Johnny Rockabilly has just finished recording his latest CD. His record company’s marketing department determines that the demand for the CD is as follows: PRICE NUMBER OF CDS $24 10,000 22 20,000 20 30,000 18 40,000 16 50,000 14 60,000 The company can produce the CD with no fixed cost and a variable cost of $5 per CD. a. Find total revenue for quantity equal to 10,000, 20,000, and so on. What is the marginal revenue for each 10,000 increase in the quantity sold? b. What quantity of CDs would maximize profit? What would the price be? What would the profit be? c. If you were Johnny’s agent, what recording fee would you advise Johnny to demand from the record company? Why? 7. In 1969 the government charged IBM with monopolizing the computer market. The government argued (correctly) that a large share of all mainframe computers sold in the United States were produced by IBM. IBM argued (correctly) that a much smaller share of the market for all types of computers consisted of IBM products. Based on these facts, do you think that the government should have brought suit against IBM for violating the antitrust laws? Explain. 8. A company is considering building a bridge across a river. The bridge would cost $2 million to build and nothing to maintain. The following table shows the company’s anticipated demand over the lifetime of the bridge: N UMBER OF CROSSINGS PRICE (PER CROSSING)(IN THOUSANDS) $8 0 7 100 6 200 5 300 4 400 3 500 2 600 1 700 0 800 a. If the company were to build the bridge, what would be its profit-maximizing price? Would that be the efficient level of output? Why or why not? b. If the company is interested in maximizing profit, should it build the bridge? What would be its profit or loss? c. If the government were to build the bridge, what price should it charge? d. Should the government build the bridge? Explain. 9. The Placebo Drug Company holds a patent on one of its discoveries. 346 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY a. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profit-maximizing price and quantity. Also show Placebo’s profits. b. Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo’s new price and quantity. How does each compare to your answer in part (a)? c. Although it is not easy to see in your diagrams, the tax reduces Placebo’s profit. Explain why this must be true. d. Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of $10,000 regardless of how many bottles are produced. How does this tax affect Placebo’s price, quantity, and profits? Explain. 10. Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Curly wants the saloon to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram of the saloon’s demand curve and its cost curves, show the price and quantity combinations favored by each of the three partners. Explain. 11. For many years AT&T was a regulated monopoly, providing both local and long-distance telephone service. a. Explain why long-distance phone service was originally a natural monopoly. b. Over the past two decades, many companies have launched communication satellites, each of which can transmit a limited number of calls. How did the growing role of satellites change the cost structure of long-distance phone service? After a lengthy legal battle with the government, AT&T agreed to compete with other companies in the long- distance market. It also agreed to spin off its local phone service into the “Baby Bells,” which remain highly regulated. c. Why might it be efficient to have competition in long-distance phone service and regulated monopolies in local phone service? 12. The Best Computer Company just developed a new computer chip, on which it immediately acquires a patent. a. Draw a diagram that shows the consumer surplus, producer surplus, and total surplus in the market for this new chip. b. What happens to these three measures of surplus if the firm can perfectly price discriminate? What is the change in deadweight loss? What transfers occur? 13. Explain why a monopolist will always produce a quantity at which the demand curve is elastic. (Hint: If demand is inelastic and the firm raises its price, what happens to total revenue and total costs?) 14. The “Big Three” American car companies are GM, Ford, and Chrysler. If these were the only car companies in the world, they would have much more monopoly power. What action could the U.S. government take to create monopoly power for these companies? (Hint: The government took such an action in the 1980s.) 15. Singer Whitney Houston has a monopoly over a scarce resource: herself. She is the only person who can produce a Whitney Houston concert. Does this fact imply that the government should regulate the prices of her concerts? Why or why not? 16. Many schemes for price discriminating involve some cost. For example, discount coupons take up time and resources from both the buyer and the seller. This question considers the implications of costly price discrimination. To keep things simple, let’s assume that our monopolist’s production costs are simply proportional to output, so that average total cost and marginal cost are constant and equal to each other. a. Draw the cost, demand, and marginal-revenue curves for the monopolist. Show the price the monopolist would charge without price discrimination. b. In your diagram, mark the area equal to the monopolist’s profit and call it X. Mark the area equal to consumer surplus and call it Y. Mark the area equal to the deadweight loss and call it Z. c. Now suppose that the monopolist can perfectly price discriminate. What is the monopolist’s profit? (Give your answer in terms of X, Y, and Z.) d. What is the change in the monopolist’s profit from price discrimination? What is the change in total surplus from price discrimination? Which change is larger? Explain. (Give your answer in terms of X, Y, and Z.) e. Now suppose that there is some cost of price discrimination. To model this cost, let’s assume that the monopolist has to pay a fixed cost C in order to price discriminate. How would a monopolist make the decision whether to pay this fixed cost? (Give your answer in terms of X, Y, Z, and C.) CHAPTER 15 MONOPOLY 347 f. How would a benevolent social planner, who cares about total surplus, decide whether the monopolist should price discriminate? (Give your answer in terms of X, Y, Z, and C.) g. Compare your answers to parts (e) and (f). How does the monopolist’s incentive to price discriminate differ from the social planner’s? Is it possible that the monopolist will price discriminate even though it is not socially desirable? IN THIS CHAPTER YOU WILL . . . Learn about the prisoners’ dilemma and how it applies to oligopoly and other issues See what market structures lie between monopoly and competition Examine what outcomes are possible when a market is an oligopoly Consider how the antitrust laws try to foster competition in oligopolistic markets If you go to a store to buy tennis balls, it is likely that you will come home with one of four brands: Wilson, Penn, Dunlop, or Spalding. These four companies make almost all of the tennis balls sold in the United States. Together these firms deter- mine the quantity of tennis balls produced and, given the market demand curve, the price at which tennis balls are sold. How can we describe the market for tennis balls? The previous two chapters discussed two types of market structure. In a competitive market, each firm is so small compared to the market that it cannot influence the price of its product and, therefore, takes the price as given by market conditions. In a monopolized market, a single firm supplies the entire market for a good, and that firm can choose any price and quantity on the market demand curve. The market for tennis balls fits neither the competitive nor the monopoly model. Competition and monopoly are extreme forms of market structure. Com- petition occurs when there are many firms in a market offering essentially iden- tical products; monopoly occurs when there is only one firm in a market. It is OLIGOPOLY 349 350 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY natural to start the study of industrial organization with these polar cases, for they are the easiest cases to understand. Yet many industries, including the tennis ball industry, fall somewhere between these two extremes. Firms in these industries have competitors but, at the same time, do not face so much competition that they are price takers. Economists call this situation imperfect competition. In this chapter we discuss the types of imperfect competition and examine a particular type called oligopoly. The essence of an oligopolistic market is that there are only a few sellers. As a result, the actions of any one seller in the market can have a large impact on the profits of all the other sellers. That is, oligopolistic firms are interdependent in a way that competitive firms are not. Our goal in this chap- ter is to see how this interdependence shapes the firms’ behavior and what prob- lems it raises for public policy. BETWEEN MONOPOLY AND PERFECT COMPETITION The previous two chapters analyzed markets with many competitive firms and markets with a single monopoly firm. In Chapter 14, we saw that the price in a perfectly competitive market always equals the marginal cost of production. We also saw that, in the long run, entry and exit drive economic profit to zero, so the price also equals average total cost. In Chapter 15, we saw how firms with market power can use that power to keep prices above marginal cost, leading to a positive economic profit for the firm and a deadweight loss for society. The cases of perfect competition and monopoly illustrate some important ideas about how markets work. Most markets in the economy, however, include elements of both these cases and, therefore, are not completely described by either of them. The typical firm in the economy faces competition, but the competition is not so rigorous as to make the firm exactly described by the price-taking firm ana- lyzed in Chapter 14. The typical firm also has some degree of market power, but its market power is not so great that the firm can be exactly described by the monop- oly firm analyzed in Chapter 15. In other words, the typical firm in our economy is imperfectly competitive. There are two types of imperfectly competitive markets. An oligopoly is a market with only a few sellers, each offering a product similar or identical to the others. One example is the market for tennis balls. Another is the world market for crude oil: A few countries in the Middle East control much of the world’s oil re- serves. Monopolistic competition describes a market structure in which there are many firms selling products that are similar but not identical. Examples include the markets for novels, movies, CDs, and computer games. In a monopolistically competitive market, each firm has a monopoly over the product it makes, but many other firms make similar products that compete for the same customers. Figure 16-1 summarizes the four types of market structure. The first question to ask about any market is how many firms there are. If there is only one firm, the market is a monopoly. If there are only a few firms, the market is an oligopoly. If there are many firms, we need to ask another question: Do the firms sell identical or differentiated products? If the many firms sell differentiated products, the mar- ket is monopolistically competitive. If the many firms sell identical products, the market is perfectly competitive. oligopoly a market structure in which only a few sellers offer similar or identical products monopolistic competition a market structure in which many firms sell products that are similar but not identical . envi- able cartel position has been damaged by the unenlightened Justice Depart- ment, which argued that the price-setting meetings were a violation of. Show the profit-maximizing level of output. Show the profit-maximizing price. 5. In your diagram from the previous question, show the level of output that