Kinh tế học vĩ mô - Chapter 12: Monopoly

MonopolyChapter 12IntroductionMonopoly is a market structure in which a single firm makes up the entire supply side of the market.Monopoly is the polar opposite of perfect competition.IntroductionMonopolies exist because of barriers to entry into a market that prevent entry by new firms.Barriers to entry include legal barriers such as a patent, and natural barriers such as the size of the market that can support only one firm.The Key Difference Between a Monopolist and a Perfect CompetitorA competitive firm is too small to affect the price.It does not have to take into account the effect of its output decision on the price it receives.The Key Difference Between a Monopolist and a Perfect CompetitorA competitive firm's marginal revenue is the market price.A monopolistic firm’s marginal revenue is not equal to its price – it takes into account that in order to sell more it has to decrease the price of its product.The Key Difference Between a Monopolist and a Perfect CompetitorMonopolist as the only supplier faces the entire market demand curve.Therefore, monopoly demand is downward sloping, and to increase output the firm must decrease its price.A Model of MonopolyHow much should a monopoly produce to maximize its profit?The monopolist employs a two-step profit maximizing process; it chooses quantity and price.The Monopolist’s Price and Output As in perfect competition, profit for the monopolist is maximized at a point where MC = MR.What is different for a monopolist – marginal revenue does not equal price; marginal revenue is below price.The Monopolist’s Price and OutputIf a monopolist deviates from the output level at which marginal cost equals marginal revenue, profits will fall.Profit Maximization for a Monopolist, Table 12-1, p 257The Monopolist’s Price and Output GraphicallyThe marginal revenue curve tells us the additional revenue the firm will get from an additional unit of output.The marginal cost curve is a graph of the change in firm’s total cost as it changes output.The Monopolist’s Price and Output GraphicallyTo determine the profit-maximizing price and quantity: one first finds output (where MC = MR), and then extends a vertical line for that output, up to the demand curve to find the price.The Monopolist’s Price and Output GraphicallyIf MR > MC, the monopolist gains profit by increasing output.If MR < MC, the monopolist gains profit by decreasing output.If MC = MR, the monopolist is maximizing profit.The Monopolist’s Price and Output GraphicallyThe MR = MC condition determines the quantity a monopolist produces.That quantity determines the price the monopolist will charge.Comparing Monopoly and Perfect CompetitionProfit-maximizing output for the monopolist, like profit maximizing output for the competitor in a perfectly competitive market is where MC = MR.Comparing Monopoly and Perfect CompetitionBecause the monopolist’s marginal revenue is below its price, its equilibrium output is less than, and price is higher than that of a perfectly competitive market.The Monopolist’s Price and Output Graphically, Fig.12-1, p 259$363024181260612PriceMC12345678910DMRMonopolist price and output20.505.17Perfectly competitive price and outputFinding the monopolist’s price and outputDraw the firm's marginal revenue curve.Determine the output the monopolist will produce by the intersection of the MC and MR curves.Finding the monopolist’s price and outputDetermine the price the monopolist will charge for that output by finding where the quantity line intersects the demand curve.Finding the monopolist’s price and output, Fig. 12-2a and b, p 260MRDMCQuantityPriceFinding the monopolist’s price and output, Fig. 12-2 c and d, p 260MRDMCQuantityPriceQMPMFinding the Monopolist’s ProfitDetermine the average cost at the profit-maximizing level of output.Determine the monopolist's profit (loss) by subtracting average total cost from average revenue (P) at that level of output and multiply by the chosen output.MonopolyA monopolist can make a profit, it can break even, or it can incur a loss.A Monopolist Making a Profit, Fig. 12-3, p 261PriceATCMCQuantityPM0MRDQMProfitCMABA Monopolist Breaking Even, Fig. 12-4a, p 262PriceMCQuantityPM0MRDQMATCA Monopolist Making a Loss Fig. 12-4b, p 262PriceATCMCQuantity0MRDQMLossPMCMBAThe Welfare Loss from MonopolyA single price monopoly creates welfare losses.Welfare losses can be illustrated by the area of consumer and producer surplus that is lost due to smaller output produced, compared to output produced in perfect competition.The Welfare Loss from MonopolyCompare the normal monopolist's equilibrium to the equilibrium of a perfect competitor.Equilibrium in both market structures is determined by the MC = MR condition.The Welfare Loss from MonopolyBut the monopolist's MR is below its price, thus its equilibrium output is different from a competitive market.The welfare loss of a monopolist is represented by the triangles B and D.PriceACPM0DBMCMRDQMPCQCQuantityThe Welfare Loss from Monopoly, Fig. 12-5, p 262The Welfare Loss from MonopolyWelfare loss is often called the deadweight loss or welfare loss triangle.It is the geometric representation of the welfare cost in terms of misallocated resources that are caused by monopoly.The Price-Discriminating MonopolistPrice discrimination is the ability to charge different prices to different customers.The Price-Discriminating MonopolistIn order to price discriminate, a monopolist must be able to:Identify groups of customers who have different elasticities of demand;Separate them in some way; andLimit their ability to resell its product between groups.The Price-Discriminating MonopolistA price-discriminating monopolist can charge customers with more inelastic demands a higher price.It can charge customers with more elastic demands a lower price.The Price-Discriminating MonopolistA perfect price discriminating monopoly can extract the most consumers are willing to pay for each unit of the product it sells.All consumer surplus is transferred to the monopolist.The Price-Discriminating MonopolistA perfect price discriminating monopoly will stop expanding its output when MR = MC, which corresponds to the perfectly competitive output.The deadweight loss is therefore eliminated under perfect price discrimination.Perfect Price Discrimination, Fig. 12-6, p 26510987654321 1 2 3 4 5 6 7 8 9 10 11D=MRMCMRQuantity (number of consumers)PriceBarriers to Entry and MonopolyWhat prevents other firms from entering the monopolist’s market in response to profits the monopolist earns?Monopolies exist because of barriers to entry.Barriers to Entry and MonopolyIn the absence of barriers to entry, the monopoly would face competition from other firms, which would erode its monopoly position .Barriers to Entry and MonopolySome important barriers to entry are:Economies of scale, Set-up costs, Legislation.Barriers to Entry and MonopolyEconomies of scale:When production is characterized by increasing returns to scale, the larger the firm becomes, the lower its per unit costs become.Barriers to Entry and MonopolyEconomies of scale:If significant economies of scale are possible, it is inefficient to have two producers because if each produced half of the output, neither could take advantage of economies of scale.Barriers to Entry and MonopolyEconomies of scale:A natural monopoly is an industry in which one firm can produce at a lower cost than can two or more firms.Barriers to Entry and MonopolyEconomies of scale:In cases of natural monopoly, technology is such that minimum efficient scale is so large that average total costs fall within the range of potential output.A Natural Monopoly, Fig. 12-7b, p 267Price, CostQuantityDATCMCMRCMPMQMPCQCCCBarriers to Entry and MonopolySet-up costs:In many industries high set-up costs characterize production.The industry may be highly capital-intensive, requiring a large investment in expensive but highly specialized capital.Examples are an oil refinery or a diamond mine.Barriers to Entry and MonopolySet-up costs:In some industries a lot of money may be spent on advertising.Heavy advertising creates a barrier to entry in those cases, such as in the perfume industry or the automobile industry.Barriers to Entry and MonopolyLegislation:Monopolies can also exist as a result of government charter.Patents are another way in which government can grant a company a monopoly.Barriers to Entry and MonopolyLegislation:A patent is a legal protection of technical innovation that gives the inventor a monopoly on using the invention.To encourage research and development of new products, government gives out patents for a wide variety of innovations.Barriers to Entry and MonopolyOther barriers to entry:Sometimes one company can gain ownership of some essential aspect of the production process – a unique input, or control over a resource.An example is DeBeers. By controlling the world-wide distribution network for diamonds, the company enjoys monopoly in the diamond industry.Normative Views of MonopolySome normative arguments against monopoly include:Income distributional effects associated with monopolyRent-seeking activities in which people spend resources to lobby government for the monopoly power.Government Policy and Monopoly: AIDS DrugsThe patents for AIDS drugs are owned by a small group of pharmaceutical companies.They are in a position to charge a very high price for a drug whose marginal cost is very low.Government Policy and Monopoly: AIDS DrugsWhat, if anything, should the government do?Government could force the producer to charge a price equal to its marginal cost.Society would be better off but this would create a significant disincentive for drug companies to do further research on other life-threatening diseases.Government Policy and Monopoly: AIDS DrugsAnother alternative is for the government to buy the patents and allow anyone to produce the drugs.Payment would come from increased taxes and would be quite expensive.The cost of regulation would decrease, but it would raise the question as to which patents the government should buy.MonopolyEnd of Chapter 12