Tài liệu Monopoly docx

© 2003 McGraw-Hill Ryerson Limited.The Monopolist’s Price and Output ◆ As in perfect competition, profit for the monopolist is maximized at a point where MC = MR.. © 2003 McGraw-Hill Ry

Chapter 12

© 2003 McGraw-Hill Ryerson Limited.

Introduction

which a single firm makes up the entire supply side of the market

perfect competition

entry into a market that prevent entry by new firms

◆ Barriers to entry include legal barriers

such as a patent, and natural barriers

such as the size of the market that can support only one firm

© 2003 McGraw-Hill Ryerson Limited.

The Key Difference

The Key Difference

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The Key Difference

Between a Monopolist

and a Perfect

Competitor

the entire market demand curve

downward sloping, and to increase

output the firm must decrease its price

A Model of Monopoly

to maximize its profit?

● The monopolist employs a two-step

profit maximizing process; it chooses

quantity and price.

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output

◆ As in perfect competition, profit for the

monopolist is maximized at a point

where MC = MR.

◆ What is different for a monopolist –

marginal revenue does not equal price;

marginal revenue is below price.

The Monopolist’s Price and Output

◆ If a monopolist deviates from the output level at which marginal cost equals

marginal revenue, profits will fall

© 2003 McGraw-Hill Ryerson Limited.

Monopolist, Table 12-1, p 257

The Monopolist’s Price and Output Graphically

additional revenue the firm will get from

an additional unit of output

the change in firm’s total cost as it

changes output

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The Monopolist’s Price and Output Graphically

and quantity:

● one first finds output (where MC =

MR), and then

● extends a vertical line for that output,

up to the demand curve to find the

price.

The Monopolist’s Price and Output Graphically

◆ If MR > MC, the monopolist gains profit

© 2003 McGraw-Hill Ryerson Limited.

The Monopolist’s Price and Output Graphically

quantity a monopolist produces

◆ That quantity determines the price the

monopolist will charge

Comparing Monopoly

and Perfect

Competition

◆ Profit-maximizing output for the

monopolist, like profit maximizing

output for the competitor in a perfectly

competitive market is where MC = MR.

© 2003 McGraw-Hill Ryerson Limited.

Comparing Monopoly

and Perfect

Competition

revenue is below its price, its

equilibrium output is less than, and

price is higher than that of a perfectly

competitive market

The Monopolist’s Price and Output Graphically,

D MR

Monopolist price and output 20.50

5.17

Perfectly competitive price and output

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Finding the

monopolist’s price and output

produce by the intersection of the MC

and MR curves.

Finding the

monopolist’s price and output

charge for that output by finding where the quantity line intersects the demand curve

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Finding the

monopolist’s price and

MC

Quantity Price

Finding the

monopolist’s price and

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Finding the

Monopolist’s Profit

profit-maximizing level of output

◆ Determine the monopolist's profit (loss)

by subtracting average total cost from

average revenue (P) at that level of

output and multiply by the chosen

output

◆ A monopolist can make a profit, it can

break even, or it can incur a loss

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A Monopolist Making a

Price

ATC MC

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A Monopolist Making a

Quantity 0

The Welfare Loss from

produced, compared to output produced

in perfect competition

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The Welfare Loss from

Monopoly

equilibrium to the equilibrium of a

perfect competitor

◆ Equilibrium in both market structures is

determined by the MC = MR condition.

The Welfare Loss from

Monopoly

price, thus its equilibrium output is

different from a competitive market

◆ The welfare loss of a monopolist is

represented by the triangles B and D.

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The Welfare Loss from

Monopoly

◆ Welfare loss is often called the

deadweight loss or welfare loss triangle

◆ It is the geometric representation of the

welfare cost in terms of misallocated

resources that are caused by monopoly.

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The

Price-Discriminating

Monopolist

charge different prices to different

customers

The

Price-Discriminating

Monopolist

◆ In order to price discriminate, a

monopolist must be able to:

● Identify groups of customers who

have different elasticities of demand;

● Separate them in some way; and

● Limit their ability to resell its product between groups.

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The

Price-Discriminating

Monopolist

charge customers with more inelastic

demands a higher price

elastic demands a lower price

The

Price-Discriminating

Monopolist

can extract the most consumers are

willing to pay for each unit of the product

it sells

◆ All consumer surplus is transferred to

the monopolist

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The

Price-Discriminating

Monopolist

will stop expanding its output when MR

= MC, which corresponds to the

perfectly competitive output

eliminated under perfect price

discrimination

Quantity (number of Price

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Barriers to Entry and

Monopoly

the monopolist’s market in response to profits the monopolist earns?

to entry

Barriers to Entry and

Monopoly

◆ In the absence of barriers to entry, the

monopoly would face competition from other firms, which would erode its

monopoly position

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Barriers to Entry and

Barriers to Entry and

Monopoly

● When production is characterized by

increasing returns to scale, the larger the

firm becomes, the lower its per unit costs

become.

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Barriers to Entry and

Monopoly

● If significant economies of scale are

possible, it is inefficient to have two

producers because if each produced

half of the output, neither could take advantage of economies of scale.

Barriers to Entry and

Monopoly

● A natural monopoly is an industry in

which one firm can produce at a lower

cost than can two or more firms.

© 2003 McGraw-Hill Ryerson Limited.

Barriers to Entry and

Monopoly

● In cases of natural monopoly, technology

is such that minimum efficient scale is so large that average total costs fall within

the range of potential output.

A Natural Monopoly, Fig

12-7b, p 267Price, Cost

Quantity D

ATC MC MR

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Barriers to Entry and

Monopoly

◆ Set-up costs:

● In many industries high set-up costs characterize production.

● The industry may be highly capital-intensive, requiring a large investment in expensive but highly specialized capital.

● Examples are an oil refinery or a diamond mine.

Barriers to Entry and

Monopoly

◆ Set-up costs:

● In some industries a lot of money may be spent on advertising.

● Heavy advertising creates a barrier to entry in those cases, such as

in the perfume industry or the automobile industry.

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Barriers to Entry and

Monopoly

◆ Legislation:

● Monopolies can also exist as a result

of government charter.

● Patents are another way in which

government can grant a company a

monopoly.

Barriers to Entry and

Monopoly

◆ Legislation:

gives the inventor a monopoly on using the invention.

government gives out patents for a wide variety of

innovations.

© 2003 McGraw-Hill Ryerson Limited.

Barriers to Entry and

Monopoly

◆ Other barriers to entry:

of the production process – a unique input, or control over a resource.

network for diamonds, the company enjoys monopoly in the diamond

industry.

Normative Views of

Monopoly

monopoly include:

● Income distributional effects

associated with monopoly

● Rent-seeking activities in which

people spend resources to lobby

government for the monopoly power.

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Government Policy and Monopoly: AIDS Drugs

by a small group of pharmaceutical

companies

◆ They are in a position to charge a very

high price for a drug whose marginal

cost is very low

Government Policy and Monopoly: AIDS Drugs

◆ What, if anything, should the

other life-threatening diseases.

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Government Policy and Monopoly: AIDS Drugs

◆ Another alternative is for the

government to buy the patents and

allow anyone to produce the drugs

and would be quite expensive.

it would raise the question as to which

patents the government should buy.

End of Chapter 12