Monopoly (3) PDF

Different types of market structures Seller Entry Seller Buyer Market Structure Product Barriers Number Number Perfect Competition Homogenous No Many Many...

Different types of market structures Seller Entry Seller Buyer Market Structure Product Barriers Number Number Perfect Competition Homogenous No Many Many Monopolistic compet Different No Many Many ition Oligopoly Similar Yes Few Many Monopoly No close substitute Yes One Many Monopoly firms have Market Power Market power is the ability to alter the mar ket price of a good or service. A monopoly firm is the sole supplier that pr oduces the entire market supply of a particu lar good or service. Utility companies (Water, Natural gas, El ectricity..) Microsoft De Beers In 1901, Rockefeller’s oil company, Standard Oil… SHIRMAN ACT, Section 2 (1890) DOJ’s lawsuit against Apple SHIRMAN ACT, Section 2 (1890) Tech Monopoly past & today  Monopoly Firm that is the sole seller of a product without close sub stitutes Price maker - Thus, Monopoly charges P>marginal revenue - Whereas competitive firms’ P = marginal revenue 8  WHY MONOPOLIES ARISE? Barriers to entry, when A key resource for production is owned by a single firm. i.e.) DeBeers Government regulation: Government gives a single firm the exclusive right to produce some good or service. i.e.) Patent and copyright laws for drug companies(20yrs), authors, and composers(50~70yrs after death) Natural Monopoly: A single firm can produce output at a lower cost than a large number of other firms. i.e.) water distribution company IMPOSSIBLE TO ENTER for new firms How Monopolies Make Production& Pricing Decisions Monopoly versus competition Monopoly firm Price maker Sole producer Downward sloping demand Market demand curve Competitive firm Price taker One of many producers Demand – horizontal line (Price) 10 Demand curves for Competitive and Monopoly firms Typical downward sloping market demand curve because there are no other firms to produce the good. Perfectly elastic because there are many perfect substitutes produced by other firms. *Why monopoly can’t charge an unlimitedly high price Profit Maximization for a Monopoly The goal of a firm is to maximize Profit (=TR –TC) Average Revenue = Total Revenue(P*Q) / Q = Price Marginal Revenue = ∆Total Revenue/∆Q In a Monopoly Market, vs Competitive Market Price > MR = MC Price = MR = MC To maximize profit, If MR > MC – increase production If MR < MC – decrease production If MR = MC – stop production, profit is maximized. How much does a Monopoly make? What happens after Monopoly ends $ 65 vs $ 32 13. Which of the following are necessary 16. Because monopoly firms do not have characteristics of a monopoly? to compete with other firms, the (i) The firm is the sole seller of its product. outcome in a market with a monopoly (ii) The firm's product does not have close a. maximizes total economic well-being. substitutes. b. is efficient. (iii) The firm generates a large economic profit. c. benefits consumers more so than the (iv) The firm is located in a small geographic producer. market. d. is often not in the best interest of society. a. (i) and (iii) only b. (i) and (ii) only c. (i), (ii), and (iii) only 17. Suppose a monopolist has a demand d. (i), (ii), (iii), and (iv) curve that can be expressed as P=90-Q. Monopolist has constant marginal costs 14. The fundamental source of monopoly and average total costs of $10. The power is profit-maximizing monopolist will a. profit. produce an output level of b. decreasing average total cost. a. 80 units. P=90-Q => TR = 90Q – Q2. c. barriers to entry. b. 40 units. MR = 90 – 2Q d. a product without close substitutes. c. 20 units. MC= 10 d. 10 units. Max profit MR=MC => Q = 40  Monopoly profit maximization P Demand: P = 120 – Q Q (AR) TR MR TC MC ATC Profit Average Revenue: TR(PxQ)/Q = P 0 120 0 120 1200 0 -1200 Total Revenue: TR = PxQ = 120Q – Q2 10 110 1100 100 1250 10 125 -150 20 100 2000 80 1400 20 70 600 Marginal Revenue: MR=TR’= 120 – 2Q 30 90 2700 60 1650 30 55 1050 Total Cost: TC = 1200 + 0.5Q2 40 80 3200 40 2000 40 50 1200 ATC = TC/Q = 1200/Q + 0.5Q 50 70 3500 20 2450 50 49 1050 MC = TC’ = Q 60 60 3600 0 3000 60 50 600 70 50 3500 -20 3650 70 52 -150 AVC = TVC/Q = 0.5Q 80 40 3200 -40 4400 80 55 -1200 AFC = TFC/Q = 1200/Q 90 30 2700 -60 5250 90 58 -2550 100 20 2000 -80 6200 100 62 -4200  Demand P = 120 –Q Monopoly demand Total revenue: TR = P*Q = 120Q – Q2 Q P MR TR 0 120 120 0 Marginal revenue: MR = 120 – 2Q 10 110 100 1100 130 4000 20 100 80 2000 120 110 3500 30 90 60 2700 40 80 40 3200 100 3000 90 50 70 20 3500 80 2500 Total Revenue 60 60 0 3600 70 2000 70 50 -20 3500 60 80 40 -40 50 1500 3200 40 90 30 -60 2700 30 Demand = Price 1000 100 20 -80 2000 20 500 10 Marginal revenue 110 10 -100 1100 0 0 120 0 -120 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130  Monopoly revenue, cost, profit TR TC Profit 3800 Q P TR TC Profit 3600 3400 0 120 0 1200 -1200 3200 Total Revenue 3000 10 110 1100 1250 -150 2800 2600 2400 20 100 2000 1400 600 2200 Total cost 2000 30 90 2700 1650 1050 1800 1600 40 80 3200 2000 1200 1400 1200 1000 50 70 3500 2450 1050 800 600 60 60 3600 3000 600 400 200 Profit 0 70 50 3500 3650 -150 -200 0 10 20 30 40 50 60 70 80 90 100 110 120 130 -400 80 40 3200 4400 -1200 -600 -800 90 30 2700 5250 -2550 -1000 -1200 100 20 2000 6200 -4200  Monopoly revenue, cost, profit Q P MR MC ATC AVC AFC 140 MC ATC AVC AFC P MR 130 0 120 120 0 0 120 10 110 100 10 125 5 120 110 20 100 80 20 70 10 60 100 90 30 90 60 30 55 15 40 80 40 80 40 40 50 20 30 70 50 70 20 50 49 25 24 60 50 60 60 0 60 50 30 20 40 70 50 70 52 35 17 30 80 40 80 55 40 15 2010 90 30 90 58 45 13 0 100 20 100 62 50 12 0 10 20 30 40 50 60 70 80 90 100 110  Monopoly profit maximization 130 120 Q P MR MC ATC Profit 110 0 120 120 0 -1200 100 10 110 100 10 125 -150 90 MR 20 100 80 20 70 600 80 MC 30 90 60 30 55 1050 70 PROFIT 40 80 40 40 50 1200 60 50 ATC 50 70 20 50 49 1050 40 60 60 0 60 50 600 30 70 50 -20 70 52 -150 20 10 80 40 -40 80 55 -1200 0 90 30 -60 90 58 -2550 0 10 20 30 40 50 60 70 80 90 100 110 120 130 100 20 -80 100 62 -4200  Monopoly profit maximization 130 Q P MR MC ATC Profit 120 MR MC ATC 0 120 120 0 -3000 110 100 10 110 100 10 -1950 90 LOSS 20 100 80 20 -1200 80 30 90 60 30 115 -750 70 40 80 40 40 95 -600 60 50 50 70 20 50 85 -750 40 60 60 0 60 80 -1200 30 70 50 -20 70 78 -1950 20 80 40 -40 80 78 -3000 10 0 90 30 -60 90 78 -4350 100 20 -80 100 80 -6000 0 10 20 30 40 50 60 70 80 90100110120130 TC = 1000 + 40Q + Q2 Perfect competition firm Monopoly Monopoly revenue P = 200 P = 400 - Q maximization P, Q, TR, Profit? P, Q, TR, Profit? P = 400 - Q Profit max TR= P*Q = (400-Q)*Q = 400Q-Q2. P, Q, TR, Profit? MR=TR’=200 MR = 400-2Q MR = 400 – 2Q =0 MC=40+2Q MC = 40 + 2Q Q= 200 40 + 2Q = 200 => Q =80 Profit max => MR = MC P = 200 400-2Q = 40 + 2Q TR = 200*200= 40000 TR = 80*200=16000 Q = 90 Profit = TR – TC = Profit = 360Q – 2Q2 - 1000 P = 310 = 200Q – 1000 – 40Q – Q2. TR = 90*310 = 27900 = 360*200 – 400*200-1000 = 160Q - Q2 - 1000 Profit = 400Q – Q2 – 1000 – 40Q - Q2 = -9000 = 160*80-802-1000 Profit = 360Q – 2Q2 - 1000 = 5400 Profit = 4*90*90 – 2*90*90 – 1000 Profit = 15200 PROFIT = (P-ATC)*Q 18. In order to maximize its profit, the firm will choose to produce a. 100 units of output, and its profit will be negative. b. 100 units of output, and its profit will be zero. c. 133.33 units of output, and its profit will be negative. d. 133.33 units of output, and its profit will be zero. 19. When the firm is maximizing its profit, a. TR = $9,000 and TC =$16,000. b. TR = $14,000 and TC =$16,000. c. TR = $16,000 and TC =$16,000. d. MC exceeds MR by $66.66 on the last unit of output produced.  20. A profit-maximizing monopolist would PROFIT = (P-ATC)*Q charge the price at a. $23 b. $20. c. $15. d. $12. 21. A profit-maximizing monopolist would earn total revenues of a. $81. b. $144. c. $225. d. $240. 22. A profit-maximizing monopolist would earn profits of a. $96. b. $117. c. $120. d. $126. The Welfare Cost of Monopolies In contrast to a competitive firm, the monopoly charges a price above the marginal cost. From the standpoint of consumers, this high price makes monopoly undesirable. However, from the standpoint of the owners of the firm, the high price makes monopoly very desirable. 29 The inefficiency of monopoly Costs and Revenue Marginal cost Deadweight loss Monopoly price Demand Marginal revenue 0 Monopoly Efficient Quantity quantity quantity Because a monopoly charges a price above marginal cost, not all consumers who value the good at more than its cost buy it. Thus, the quantity produced and sold by a monopoly is below the socially efficient level. The deadweight loss is represented by the area of the triangle between the demand curve (which reflects the value of the good to consumers) and the marginal-cost curve (which reflects the costs of the monopoly producer). 30  Price Discrimination Price discrimination Sell the same good at different prices to different customers. Charges each customer a price closer to his or her willingness to pay. NO Deadweight loss. Requires the ability to separate customers according to their willingness to pay. Examples of price discrimination Movie tickets Airline prices Discount coupons Financial aid Quantity discounts 31 Welfare with Price Discrimination If monopolists can set a perfect price for every consumer, then monopoly does maximize social welfare. How? By taking all the surplus of consumers, screwing the consumers most. 130 120 110 100 90 MR 80 Monopoly Price 70 Profit w/ Price 60 Profit discrimination 50 40 Marginal Cost 30 20 10 0 32 0 10 20 30 40 50 60 70 80 90 100 110 120 130 Welfare with and without Price Discrimination 33  Public Policy Toward Monopolies Antitrust laws To increase competition, prevent companies from coordinating their activities to make markets less competitive Breakup Standard Oil into 34 smaller companies(BP, exxon, mobil..) Block AT&T and T-mobile merge Regulation: Regulate the behavior of monopolists Common in natural monopolies i.e.) water, electricity, natural gas.. Price regulations marginal cost pricing(P=marginal cost)? or fair return pricing(P=Average total cost)? Public ownership Government runs the monopoly itself. Private owners Incentive to minimize costs Public owners (government) If it does a bad job: Losers are the customers and taxpayers Do nothing 34  Price 23. The consumer surplus at the monopolist’s 100 profit-maximizing price is a. $450. 90 b. $900. 80 c. $1,350. MC d. $2,025. 70 24. Total producer surplus of a profit- 60 maximizing monopoly is 50 a. $225. b. $450. 40 c. $900. 30 d. $1,350. 20 25. The deadweight loss caused by a profit- Demand maximizing monopoly amounts to 10 MR a. $225. b. $450. 10 20 30 40 50 60 70 80 Quantity c. $900. d. $1,350. 35 26. Price discrimination is the business practice of 27. If the monopoly firm is NOT allowed to a. bundling related products to increase total sales. price discriminate, then the deadweight b. selling the same good at different prices to different loss amounts to customers. a. $500. c. pricing above marginal cost. b. $1000. c. $1500. d. hiring marketing experts to increase consumers’ d. $2,000. brand loyalty. 28. Monopoly profit without price discrimination equals a. $500. b. $1,000. c. $2,000. d. $4,000. 29. Monopoly profit with perfect price discrimination equals a. $500. b. $1,000. c. $2,000. d. $4,000.