Monopoly

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CHAPTER 8 Monopoly
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CHAPTER 8Topics

• 8.1 Characteristics of a Monopoly
• 8.2 Maximizing Profits
• 8.3 Economic Effects
• 8.4 Price Discrimination
• 8.5 Government Control
• 8.6 Deadweight Loss

X
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Market Structure
COMPETITIVE
CONCENTRATED
PERFECT COMPETITION many firms no barriers
same products
MONOPOLISTIC COMPETITION many firms some
barriers different products
OLIGOPOLY few large firms barriers to entry same
or different products
MONOPOLY one firm blocked entry
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• Perfect Competition
• Price taker no control over price
• Can ? Q without ? P
• Imperfect Competition
• Price maker some control over market price
• Must ? P to ? Q

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• Market Power
• A firms ability to raise price without losing
  all of its sales

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• Monopoly
• Single Seller
• Blocked Entry
• No Close Substitutes
• Price-Maker

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• Barriers
• Economies of Scale
• Control of Resources
• Legal Patents, Licenses
• Pricing / Strategic Barriers
• Network Effects

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Figure 8-2Price and MR
P
142
D
Price ? leads to - Gain of 132
Q
1 2 3 4 5 6
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Figure 8-2Price and MR
P
Price 132 MR 102
142
Loss 30
132
D
Price ? leads to- Gain of 132 - Loss of
10/unit
Price ? leads to - Gain of 132
Gain 132
Q
1 2 3 4 5 6
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Section 8.2MaximizingProfits
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• Maximizing Profit (SR)
• At the point where

MC MR
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Figure 8-4Monopoly Profit Maximization
Find Q atMR MC
MC
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Figure 8-4Monopoly Profit Maximization
P
200 175 150 120 100 75 50 25
MC
Find P (Demand)
122
D
MR
Q
0 1 2 3 4
5 6 7 8 9 10
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Figure 8-4Monopoly Profit Maximization
P
200 175 150 120 100 75 50 25
Find Profit (P - ATC) x Q (122-94) x 5 140
Find Profit
MC
122
ATC
Profit
94
D
MR
Q
0 1 2 3 4
5 6 7 8 9 10
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• Misconceptions
• NOT highest price
• Maximize profit, not price
• Maximize total, not per unit

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• Misconceptions
• NOT highest price
• Possibility of losses

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Figure 8-4Monopoly Loss
P
200 175 150 120 100 75 50 25
MC
152
Loss
122
ATC
D
MR
Q
0 1 2 3 4
5 6 7 8 9 10
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Section 8.3EconomicEffects
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• Economic Effects
• Less efficient than perfect competition
• Higher price
• Lower output

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Figure 8-6 Inefficiency of Monopoly
P
S MC
Price and output if the industry were competitive
Pc
X
D
Q
Qc
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Figure 8-6 Inefficiency of Monopoly
P
S MC
Monopolist will sell fewer units at a higher price
Pm
D
MR
Q
Qm
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Figure 8-6 Inefficiency of Monopoly
P
S MC
Pm
Pc
Deadweight Loss
D
MR
Q
Qc
Qm
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Section 8.4Price Discrimination
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• Price Discrimination
• Selling same product at different prices
• Not justified by cost differences
• Based on willingness to pay

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• Conditions
• Monopoly power
• Market segregation - based on elasticity of
  demand
• No resale

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Figure 8-8Price Discrimination - Software
P
Business people
Pb
MC ATC
Price and Costs
D
MR
Q
Qb
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Figure 8-8Price Discrimination - Software
P
Students
Ps
Price and Costs
MC ATC
D
MR
Q
Qs
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Section 8.5Government Control
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• Policy Options
• Regulate prices operations
• Anticompetition legislation
• Ignore if unsustainable in LR

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• REGULATE
• Natural monopolies
• EXAMPLES
• Local phone
• Electricity

• DEREGULATE
• Where potential for competition exists
• EXAMPLES
• Long distance phone
• Cable television

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• Price Regulation
• Socially optimal price P MC
• Simulate pure competition
• Results in most efficient allocation of resources
  to this product

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• Price Regulation
• Fair-return price P ATC
• Enables firm to cover costs,including normal
  profit
• Wont fully correct underallocation of resources

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Figure 8-9, p.220
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• Homework
• Read Sections 8.1, 8.2, 8.3, 8.4, and 8.5