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Monopoly and Perfect Competition and † 90-100: a the Consequences for Society’S Welfare

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Monopoly and Perfect Competition and † 90-100: a the Consequences for Society’S Welfare Monopoly Announcements 2 Lecture 18 outline: Read Chapter 11 and the Homework #8 is posted. It is due a week from today. assigned reading. We will return the midterms in section this week. Announcements A provisional curve for midterm #2. Be clear – this What is a monopoly? has less meaning than it would if I were not How a monopolis t dtdeterm ines its profit-maxiiiimizing outpu t and price dropping the low midterm! The difference between monopoly and perfect competition and 90-100: A the consequences for society’s welfare. 80-89: A/B Problems posed by monopoly. 72-79: B What is price discrimination and why is it prevalent when 62-71: B/C producers have market power? 48-61: C 33-47: D 0-32: F What is a Monopoly? Monopoly and Perfect Competition 3 4 Monopoly is a market structure where a single seller Monopolist of a product with no close substitutes serves the entire Perfectly S=MC S=MC market. P competitive firm P Examples of monopolistic behavior might include Microsoft; Walmart (who gets accused of “predatory pricing” ); American airlines (trying to fix prices with Braniff). There are famous (and not so famous) cartels for Diamonds, Ostriches, Oil, and Ivy League schools (fixing financial aid offers). D=MR Under perfect competition each firm is small relative to the size of the market. D The monopolist, in contrast, is the market, and hence faces downward sloping demand. Q Q 1 There Must Be Barriers to Entry for One Example: Economies of Scale Will Monopolies to Exist Create a Natural Monopoly 5 Monopolists will charge higher prices and produce less output than would occur in a perfectly competitive industry. This generates short- and long-run profit. There must be barriers to entry for there to be long- run economic profit. These include: Control of natural resources or inputs. Economies of scale. Technological superiority Legal restrictions, (i.e. patents and copyrights). Actions by firms (trade organizations, advertising, threats or coercion. 6 What is the Monopolist’s Marginal Why is Marginal Revenue Less Than Revenue Curve? Price? 7 PQTRMR 8 In order to sell one more unit, the monopolist must 10 0 0 lower the prices on all units that are sold (assuming 9199 they do not price discriminate). 82167 In fact, for a linear demand curve, the marginal revenue P=10-Q curve will be a line with the same y-intercept with twice the 7 3 215 slope. Note: 64243 Earlier in the class we saw that total revenue is maximized MR<P when the elasticity of demand is 1, which is the midpoint of 55251 the demand curve. 4624-1 Marginal revenue is zero at the point at which total revenue is maximized. 3721-3 2816-5 199-7 2 A Monopolist’s Demand, Total Revenue, and Marginal Revenue Curves The Monopolist’s Pricing and Output Decision (MR=MC) 10 1000 Qm=8, PM=600, profit=3200 P QC=16, PC=200, profit=0 600 MC=ATC 200 D 8 10 16 20 Q 9 MR The Monopolist’s Production and Price Monopoly versus Perfect Competition Decision, Again… 11 12 P=MC at the perfectly competitive firm’s profit- MC maximizing quantity of output (and, of course, P=MR). P, MR, MC ATC P>MR=MC at the monopolist’s profit-maximizing quantity of output. PM Compared to a competitive industry, the monopolist Produces a smaller quantity QM<QC Charges a higher price PM>PC Earns economic profits D Q Q M MR 3 A Regulated and an Unregulated Monopoly Results in Inefficiency Natural Monopoly 13 14 Total surplus with perfect Total surplus with monopoly competition Consumer surplus Consumer surplus Consumer surplus Consumer Monopoly profit Profit surplus P PM Deadweight M loss PC MC MC ATC PR ATC MC D D D MR MR D MR QC QM QM QR Do regulators have adequate information, and will quality suffer? Price Discrimination: Two versus Three What Makes Price Discrimination Different Prices Possible? 16 The ability to price discriminate requires at least three conditions. The would-be price discriminator must have market (monopoly) power. There must be no resale market. There must be the ability to segment (or keep track of) buyers. Ways that companies price discriminate Advance purchase restrictions Volume discounts Two-part tariffs (like the Sam’s Club) “Early-bird” specials, outlet malls away from cities By increasing the number of different prices charged, the monopolist captures more of the consumer surplus and makes a larger profit. 15 4 Are Monopolies Evil? 17 It depends. If monopolies arise because of price fixing, predatory pricing, cartels, or other forms of anticompetitive behavior, we shouldn’t be happy with them. If theyyp, exist because of patents, we need to ask what would be there in the absence of the monopoly. If the alternative is that there wouldn’t be a market, we probably don’t mind tolerating the inefficiency of the monopoly. In the natural monopoly case, there is no alternative, so the question of “good or evil” isn’t relevant. 5.
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