1、 2009 South-Western,a part of Cengage Learning,all rights reservedC H A P T E REconomicsPremium PowerPoint Slides by Ron Cronovich15Why do monopolies arise?Why is MR P for a monopolist?How do monopolies choose their P and Q?How do monopolies affect societys well-being?What can the government do abou
2、t monopolies?What is price discrimination?1MONOPOLY2IntroductionA monopoly is a firm that is the sole seller of a product without close substitutes.In this chapter,we study monopoly and contrast it with perfect competition.The key difference:A monopoly firm has market power,the ability to influence
3、the market price of the product it sells.A competitive firm has no market power.MONOPOLY3Why Monopolies AriseThe main cause of monopolies is barriers to entry other firms cannot enter the market.Three sources of barriers to entry:1.A single firm owns a key resource.E.g.,DeBeers owns most of the worl
4、ds diamond mines2.The govt gives a single firm the exclusive right to produce the good.E.g.,patents,copyright lawsMONOPOLY4Why Monopolies Arise3.Natural monopoly:a single firm can produce the entire market Q at lower cost than could several firms.QCostATC1000$50Example:1000 homes need electricity El
5、ectricityATC slopes downward due to huge FC and small MCATC is lower if one firm services all 1000 homes than if two firms each service 500 homes.500$80MONOPOLY5Monopoly vs.Competition:Demand CurvesIn a competitive market,the market demand curve slopes downward.But the demand curve for any individua
6、l firms product is horizontal at the market price.The firm can increase Q without lowering P,so MR=P for the competitive firm.DPQA competitive firms demand curveMONOPOLY6Monopoly vs.Competition:Demand CurvesA monopolist is the only seller,so it faces the market demand curve.To sell a larger Q,the fi
7、rm must reduce P.Thus,MR P.DPQA monopolists demand curve7QPTRARMR0$4.5014.0023.5033.0042.5052.0061.50n.a.Common Grounds is the only seller of cappuccinos in town.The table shows the market demand for cappuccinos.Fill in the missing spaces of the table.What is the relation between P and AR?Between P
8、and MR?8Here,P=AR,same as for a competitive firm.Here,MR P,whereas MR=P for a competitive firm.1.5062.0052.5043.0033.5021.502.002.503.003.50$4.004.001n.a.91010974$0$4.500MRARTRPQ10123$4MONOPOLY9Common Grounds D and MR Curves-3-2-101234501234567QP,MRMR$Demand curve(P)1.5062.0052.5043.0033.5024.001$4.
9、500MRPQ10123$4MONOPOLY10Understanding the Monopolists MRIncreasing Q has two effects on revenue:Output effect:higher output raises revenuePrice effect:lower price reduces revenueTo sell a larger Q,the monopolist must reduce the price on all the units it sells.Hence,MR MR=MCThe value to buyers of an
10、additional unit(P)exceeds the cost of the resources needed to produce that unit(MC).The monopoly Q is too low could increase total surplus with a larger Q.Thus,monopoly results in a deadweight loss.MONOPOLY17P=MCDeadweight lossPMCThe Welfare Cost of MonopolyCompetitive eqm:quantity=QCP=MCtotal surpl
11、us is maximizedMonopoly eqm:quantity=QMP MCdeadweight lossQuantityPriceDMRMCQMQCMONOPOLY18Price DiscriminationDiscrimination:treating people differently based on some characteristic,e.g.race or gender.Price discrimination:selling the same good at different prices to different buyers.The characterist
12、ic used in price discrimination is willingness to pay(WTP):A firm can increase profit by charging a higher price to buyers with higher WTP.MONOPOLY19Consumer surplusDeadweight lossMonopoly profitPerfect Price Discrimination vs.Single Price MonopolyHere,the monopolist charges the same price(PM)to all
13、 buyers.A deadweight loss results.MCQuantityPriceDMRPMQMMONOPOLY20Monopoly profitPerfect Price Discrimination vs.Single Price MonopolyHere,the monopolist produces the competitive quantity,but charges each buyer his or her WTP.This is called perfect price discrimination.The monopolist captures all CS
14、 as profit.But theres no DWL.MCQuantityPriceDMRQMONOPOLY21Price Discrimination in the Real WorldIn the real world,perfect price discrimination is not possible:No firm knows every buyers WTPBuyers do not announce it to sellersSo,firms divide customers into groups based on some observable trait that i
15、s likely related to WTP,such as age.MONOPOLY22Examples of Price DiscriminationMovie ticketsDiscounts for seniors,students,and people who can attend during weekday afternoons.They are all more likely to have lower WTP than people who pay full price on Friday night.Airline pricesDiscounts for Saturday
16、-night stayovers help distinguish business travelers,who usually have higher WTP,from more price-sensitive leisure travelers.MONOPOLY23Examples of Price DiscriminationDiscount couponsPeople who have time to clip and organize coupons are more likely to have lower income and lower WTP than others.Need
17、-based financial aid Low income families have lower WTP for their childrens college education.Schools price-discriminate by offering need-based aid to low income families.MONOPOLY24Examples of Price DiscriminationQuantity discountsA buyers WTP often declines with additional units,so firms charge les
18、s per unit for large quantities than small ones.Example:A movie theater charges$4 for a small popcorn and$5 for a large one thats twice as big.MONOPOLY25Public Policy Toward MonopoliesIncreasing competition with antitrust lawsBan some anticompetitive practices,allow govt to break up monopolies.E.g.,
19、Sherman Antitrust Act(1890),Clayton Act(1914)RegulationGovt agencies set the monopolists price.For natural monopolies,MC ATC at all Q,so marginal cost pricing would result in losses.If so,regulators might subsidize the monopolist or set P=ATC for zero economic profit.MONOPOLY26Public Policy Toward M
20、onopoliesPublic ownershipExample:U.S.Postal ServiceProblem:Public ownership is usually less efficient since no profit motive to minimize costsDoing nothingThe foregoing policies all have drawbacks,so the best policy may be no policy.MONOPOLY27CONCLUSION:The Prevalence of MonopolyIn the real world,pu
21、re monopoly is rare.Yet,many firms have market power,due to:selling a unique variety of a producthaving a large market share and few significant competitorsIn many such cases,most of the results from this chapter apply,including:markup of price over marginal costdeadweight lossA monopoly firm is the
22、 sole seller in its market.Monopolies arise due to barriers to entry,including:government-granted monopolies,the control of a key resource,or economies of scale over the entire range of output.A monopoly firm faces a downward-sloping demand curve for its product.As a result,it must reduce price to s
23、ell a larger quantity,which causes marginal revenue to fall below price.28Monopoly firms maximize profits by producing the quantity where marginal revenue equals marginal cost.But since marginal revenue is less than price,the monopoly price will be greater than marginal cost,leading to a deadweight
24、loss.Monopoly firms(and others with market power)try to raise their profits by charging higher prices to consumers with higher willingness to pay.This practice is called price discrimination.29Policymakers may respond by regulating monopolies,using antitrust laws to promote competition,or by taking
25、over the monopoly and running it.Due to problems with each of these options,the best option may be to take no action.30MONOPOLY31Problems and Applications:2.Suppose that a natural monopolist was required by law to charge average total cost.On a diagram,label the price charged and the deadweight loss to society relative to marginal-cost pricing.31
