Chapter 10 Monopoly

1
Chapter 10Monopoly

• Interpretation of monopoly definition
• Use monopoly or market power
• Downward sloping demand curve
• Setting prices and quantities
• Welfare consequences
• Sources of monopoly power
• Profitable pricing strategies

2
Price and Output

• Monopoly pricing
• Operate where MR MC
• MR curves lies everywhere below demand curve
• Lower price to increase output
• Monopolist operates on elastic portion of demand
  curve
• Ex. Prices of gasoline, oranges, and music CDs
• No supply curve
• No going market price

3
(No Transcript)
4
Welfare

• Assume same industrywide MC curve for competitive
  and monopolistic industries
• Social welfare loss under monopoly
• Marginal value exceeds marginal cost
• Monopolist could produce additional good

5
EXHIBIT 10.2 Monopoly versus Competition
6
Public Policy

• Dealing with efficiency loss
• Tax monopolist
• Lowers production even further
• Increases deadweight loss
• Subsidize monopolist
• Induce monopolist to provide competitive quantity
• Arises from ideal subsidy
• Could encourage inefficient production
• Price ceilings
• Rate-of-return regulation

7
(No Transcript)
8
Sources of Monopoly Power

• Natural monopoly
• Industry where AC curve decreasing at point where
  crosses market demand
• Industry survive only if monopolized
• Welfare economics
• Monopoly outcome best for some
• Imperfect competition
• Downward pressure on prices
• Innovation

9
EXHIBIT 10.6 Natural Monopoly
10
Other Sources of Monopoly Power

• Patents
• Ex. photography
• Resource monopolies
• Single firm controls productive input
• Legal barriers to entry

11
Price Discrimination

• Charging different prices for identical items
• Able to prevent resell of low-price units

12
First and Second Degree

• First-degree
• Charging each customer most willing to pay
• Welfare gains
• Second-degree
• Charging same customer different prices for
  identical items
• No deadweight loss

13
(No Transcript)
14
Third-Degree

• Charging different prices in different markets
• Groups of consumers identifiable
• Different downward sloping demand curve
• Producer gains profit
• Produce where MR same in both markets and equal
  to MC
• More elastic demand group receives lower price

15
EXHIBIT 10.9 Third-Degree Price Discrimination
with Monopoly in One Market and Competition in
Another
16
EXHIBIT 10.10 Third-Degree Price Discrimination
by a Monopolist in Two Markets
17
Two-Part Tariffs

• Entry fee allows purchase of goods or services
• Meaning of tariff
• Charge customers maximum willing to pay
• Measure consumers surplus
• Charge competitive price as long as no difference
  in consumers
• Low initial fee and high usage fee

18
EXHIBIT 10.11 Pricing Strategy with a Two-Part
Tariff