Monopoly A Single Seller

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Monopoly - A Single Seller

• Microeconomics - Dr. D. Foster

2
Monopoly Characteristics

• A single seller with no close substitutes . .
  .-- means that the market demand is the firms
  demand.
• Barriers to entry . . .-- means that they can
  earn LR econ. profit.

• legal restrictions
• patents
• control of resources
• economies of scale

3
Monopoly - Finding Profit Max.

• Find where MRMC . . .

MR Gain - Loss
If P110, P29.95, Q1100, Q2101, what is MR?
Gain 9.95Loss 5.00MR 4.95
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Monopoly - Finding Profit Max.

• Find where MRMC . . .

Set output at MRMC.
Find the price to charge from the Demand.
Will the firm earn an economic profit?How can we
tell?
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Monopoly - Finding Profit Max.

• Economic profit TR - TC . . .

TR PQ
TC ATCQ
Can a monopoly firm earn negative economic
profit and stay in business in the short run?
6
Monopoly

• Can a firm can earn negative profit in the SR?

Yes! As long as P AVC, the firm will sustain
losses in the short run.
Can a monopoly earn just a zero economic profit?
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Monopoly - Earning zero profit
P ATC Under what circumstances might we expect
this to happen?

• Zero Economic profit if TR TC

ATC
When owners of a monopoly sell it to a new owner
they should attempt to extract this econ. profit.
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Monopoly and Inefficiency

• Allocative efficiency occurs when PMC.

Monopolies are allocatively inefficient, as they
price above the MC.
They produce too little. Our loss is call the
social loss (or, deadweight cost) and measured
as shown.
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Monopoly and Inefficiency

• Productive efficiency occurs when at min ATC.--
  Monopolies are likely to be inefficient.

• Social waste of resources - up to the value of
  the firms economic profit if spent in rent
  seeking activities.

• X-inefficiency - arises from a cost structure
  that is higher than would be true for perfectly
  competitive firms.

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Regulating Monopoly

• Using price controls can promote efficiency!

By instituting a price ceiling, the demand is
altered, insofar as the firms actions are
concerned.
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Regulating Monopoly

• Using price controls can promote efficiency!

The monopolist can be induced to produce more
(Q) at a lower price!! The firm is still
inefficient, but we could set prices to achieve
either allocative or productive efficiency.
Pc
Q
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Monopoly Example
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Monopoly Fundamentals

• A single seller with no close substitutes.
• Barriers to entry.
• Sets output at MRMC.
• Prices output based on demand.
• Will be allocatively inefficient as PMC.
• Will likely be productively inefficient.
• Also suffers from social waste and
  X-inefficiency.
• Price controls can promote efficient outcomes.

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Regulating Monopoly

• Do regulations work?
• Inflating the cost structure (X-inefficiency).
• The capture hypothesis.
• Antitrust legislation may promote inefficiency.
• Regulating a natural monopoly . . .

15
Natural Monopoly

• Experiences economies of scale

--Profit max. rule is still the same. --Price
off of demand.--May earn positive economic
profit in LR.
How do you regulate?At PMC, firm has negative
econ. profit.
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Natural Monopoly
and give the monopoly a subsidy equal to its
losses!
and the firm can earn zero econ profits, but is
alloc. inefficient.
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Monopoly - Price Discrimination

• When different people/customers are charged
  different prices when costs are equal.
• When different people/customers are charged the
  same price when costs are different.

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Monopoly - Price Discrimination

• 1st degree price discrimination (perfect p.d.)
• when a firm can charge each individual the max.
  they are willing to pay.

• 2nd degree price discrimination (method 1)
• when a firm uses volume discounts to vary the
  price.

• 3rd degree price discrimination (method 2)
• when a firm segments the market by elasticity.
• more elastic lower price less elastic higher
  price

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Monopoly - Price Discrimination
If the firm is collecting different prices from
each customer, to sell one more unit, it need
only lower the price for that unit, not for all.

• Perfect price discrimination

This only works if --you prevent resale.
--you can easily separate customers.
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Monopoly - Segmented markets

• Day/night billing . . . phone/electric
• Matinee/evening . . . theater
• Senior menu . . . restaurant
• Ladies night . . . bar
• Student price . . . restaurant/other
• Coupons club cards . . . grocery

Is it easy to separate customers? Can resale be
prevented?
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Monopoly - A Single Seller

• Microeconomics - Dr. D. Foster