Comcast – Time Warner Cable Merger 1.What are two major concerns that consumers have regarding this merger? 2.Comcast provides two arguments why the consumer should not worry. What are they? 3.What has caused the decline in Comcast’s cable TV viewership? 4.What is the major reason why Comcast and Time Warner want to merge? 5.What government agencies are usually involved in antitrust review? 6.Even though this merger could be bad for consumers, why do some believe it will be approved anyway?

Types of Market Structure Are Products Differentiated? How Many Producers Are There? Oligopoly Perfect competition No One Few Many Yes Monopolistic competition Not applicable Monopoly This system of market structures is based on two dimensions:  The number of producers in the market (one, few, or many)  Whether the goods offered are identical or differentiated Differentiated goods are goods that are different but considered somewhat substitutable by consumers (think Coke versus Pepsi).

The Meaning of Monopoly (3/31/16) Our First Departure from Perfect Competition…  A monopolist is a firm that is the only producer of a good that has no close substitutes.  The ability of a monopolist to raise its price above the competitive level by reducing output is known as market power.  Very few true monopolies – why?  Barriers to entry:

Types of monopolies 1. Natural – costs of production minimized by having one provider – economies of scale (inc returns) a. Example:

Increasing returns create natural monopoly This gives the firm economies of scale over the entire range of output at which the firm would at least break even in the long run. As a result, a given quantity of output is produced more cheaply by one large firm than by two or more smaller firms. Fixed costs required to operate are very high  the firm’s ATC curve declines over the range of output at which price is greater than or equal to average total cost. D ATC Quantity Price, cost Relevant output range Natural monopoly. Average total cost is falling over the relevant output range Natural monopolist’s break-even price

2. Geographic – simple absence of other sellers a. Example:

3. Technological – ownership/control of manufacturing method/process/scientific advance a. Patents: b. Example:

4. Government – products and services that the public cannot adequately provide

Texas Tea Oil Co. is the only supplier of home heating oil. In each situation, prices doubled. Evaluate: Are the people victims of Texas Tea’s market power? 1.National shortage of heating oil  Texas Tea could procure only a limited amount. 2.Last year, Texas Tea and several other competing local oil-supply firms merged into a single firm. 3.The cost to Texas Tea of purchasing oil from refineries has gone up significantly. 4.Texas Tea has acquired an exclusive government license to draw oil from the only heating oil pipeline in the state.

What a Monopolist Does M C S D Q C Q M Quantity Price P M P C 2. … and raises price. 1. Compared to perfect competition, a monopolist reduces output… Equilibrium is at C, where the price is P C and the quantity is Q C. A monopolist reduces the quantity supplied to Q M, and moves up the demand curve from C to M, raising the price to P M.

Comparing the Demand Curves of a Perfectly Competitive Producer and a Monopolist (a)Demand Curve of an Individual Perfectly Competitive Producer D C Price (b)Demand Curve of a Monopolist D M Market price Quantity An individual perfectly competitive firm cannot affect the market price of the good  it faces a horizontal demand curve DC, as shown in panel (a). A monopolist, on the other hand, can affect the price (sole supplier in the industry)  its demand curve is the market demand curve, DM, as shown in panel (b). To sell more output it must lower the price; by reducing output it raises the price. Price

Marginal revenue of a monopolist: change in total revenue divided by change in quantity Monopolies: MR does NOT equal price!!!!

Monopoly homework due tomorrow END OF PERIOD The good: you have some class time The bad: not going over it Quiz Wednesday 1 st thing Reviews: today 7 th at Hub, Wednesday 7:15

Marginal revenue always falls: In order to sell one more, you need to lower the price of that one AS WELL AS the price of all the previous ones Example: I can’t sell 1 diamond for $950, the 2 nd for $900, and the 3 rd for $850 – if I want to sell 3 diamonds, they ALL must be priced at $850

 An increase in production by a monopolist has two opposing effects on revenue:  A quantity effect. One more unit is sold, increasing total revenue by the price at which the unit is sold.  A price effect. In order to sell the last unit, the monopolist must cut the market price on all units sold. This decreases total revenue.

a.Come up with demand schedule for emeralds. b.Fill in marginal revenue column. c.The quantity effect component of marginal revenue per output level (how much TR increases because of selling one more) d.The price effect component of marginal revenue per output level (how much TR decreases by having to decrease the price of all sold to sell one more) Hint: MR = QE + PE e.What additional info is needed to determine the profit maximizing quantity of output? Quantity Demanded PriceTotal Revenue Marginal Revenue Quantity Effect Component Price Effect Component 1$

How a monopolist maximizes profit Profit-maximizing quantity of output: where MC = MR Assumption for De Beers: no fixed cost, marginal cost is constant at $200

The price De Beers can charge per diamond is found by going to the point on the demand curve directly above point A, (point B here)—a price of $600 per diamond. It makes a profit of $400 × 8 = $3,200. The optimal output rule: the profit maximizing level of output for the monopolist is at MR = MC, shown by point A, where the MC and MR curves cross at an output of 8 diamonds. B C MR Monopoly profit MC  ATC D $1, –200 –400 0 Quantity of diamonds A P C P M Q M Q C Price, cost, marginal revenue of demand Monopolist’s optimal point Perfectly competitive industry’s optimal point

To summarize – monopolies… produce less and charge higher prices than perfectly competitive firms earn profits in the short-run AND long-run – why?

The average total cost of QM is shown by point C. Profit is given by the area of the shaded rectangle. The Monopolist’s Profit – the general picture Profit = TR − TC = (P M × Q M ) − (ATC M × Q M ) = (P M − ATC M ) × Q M In this case, the MC curve is upward sloping and the ATC curve is U- shaped. The monopolist maximizes profit by producing the level of output at which MR = MC, given by point A, generating quantity QM. It finds its monopoly price, PM, from the point on the demand curve directly above point A, point B here. Q M Quantity P M ATC M C D MR A B MC ATC Price, cost, marginal revenue Monopoly profit

Price per download Quantity demanded Total Revenue Marginal Revenue $ b. Bob is proud of the film and wants as many people as possible to download it. What price would he choose? How many downloads will he sell? c. Bill wants as much total revenue as possible. Which price would he choose? How many downloads would be sold? d. Ben wants to maximize profit. Which price would he choose? How many downloads would be sold? e. Brad wants to charge the efficient price. What price would he choose? How many downloads would he sell? Bob, Bill, Ben, and Brad are thinking about making their movie available for download on the internet. Each time the movie is downloaded, the ISP charges them a fee of $4.

Skyscraper City has a subway system, for which a one-way fare is $1.50. There is pressure on the mayor to reduce the far by one-third, to $1.00. The mayor is dismayed, thinking that this will mean Skyscraper City is losing one-third of its revenue from sales of subway tickets. Is the mayor correct in his prediction? Explain.

Monopoly and Public Policy  By reducing output and raising price above marginal cost, a monopolist captures some of the consumer surplus as profit and causes deadweight loss. To avoid deadweight loss, government policy attempts to prevent monopoly behavior.  When monopolies are “created” rather than natural, governments should act to prevent them from forming and break up existing ones.  The government policies used to prevent or eliminate monopolies are known as antitrust policy.

Monopoly Causes Inefficiency Panel (b) depicts the industry under monopoly: the monopolist decreases output to QM and charges PM. Consumer surplus (blue triangle) has shrunk because a portion of it has been captured as profit (light blue area). Total surplus falls: the deadweight loss (orange area) represents the value of mutually beneficial transactions that do not occur because of monopoly behavior. (a) Total Surplus with Perfect Competition (b) Total Surplus with Monopoly D MC =ATC ATC Quantity Q C P C Q M P M D MR Quantity Price, cost Profit Deadweight loss Consumer surplus with perfect competition Consumer surplus with monopoly Price, cost, marginal revenue

Preventing Monopoly  Breaking up a monopoly that isn’t natural is clearly a good idea, but breaking up natural monopolies might lead to higher costs.  Yet even in the case of a natural monopoly, a profit- maximizing monopolist acts in a way that causes inefficiency—it charges consumers a price that is higher than marginal cost, and therefore prevents some potentially beneficial transactions.

Dealing with Natural Monopoly  What can public policy do about this? There are two common answers (aside from doing nothing)… 1.One answer is public ownership, but publicly owned companies are often poorly run. 1.A common response in the United States is price regulation. A price ceiling imposed on a monopolist does not create shortages as long as it is not set too low.

Unregulated and Regulated Natural Monopoly Panel (b) shows what happens when the monopolist must charge a price equal to average total cost, the price P R *. Output expands to Q R *, and consumer surplus is now the entire blue area. The monopolist makes zero profit. This is the greatest consumer surplus possible when the monopolist is allowed to at least break even, making P R * the best regulated price. (a)Total Surplus with an Unregulated Natural Monopolist (b)Total Surplus with a Regulated Natural Monopolist Q M Q R P M D MC MR ATC Quantity P R Consumer surplus Q M Q * R P M D MC MR ATC Quantity P * R Price, cost, marginal revenue Profit Consumer surplus

Partner practice: Use the total revenue schedule of Emerald, Inc., a monopoly producer of emeralds, to calculate the answers to parts a and b. Price Quantity Demand ed Total Revenue Marginal Revenue 1$ a.Price schedule b.Marginal revenue schedule Now plot the demand curve, the marginal revenue curve, the marginal cost curve at a constant $47. What is the profit- maximizing quantity of output? What price will the firm charge at this level of output? How much profit will they make?

PriceQuantity of Diamonds Demanded $ DeBeers is a single-price monopolist. DeBeers has 5 potential customers: Raquel (willing to pay $400), Jackie (willing to pay $300), Joan (willing to pay $200), Mia (willing to pay $100), and Sophia (willing to pay $0). a.Add columns for and calculate total revenue and marginal revenue. b.The marginal cost of production is a constant $100. What is the profit maximizing quantity and price? c.How much is each person’s individual consumer surplus? How much is total consumer surplus? How much is producer surplus (profit)? Suppose that Russian and Asian producers enter the diamond market, and the industry becomes perfectly competitive. d.What is the perfectly competitive price? What quantity will be sold? e.At this new price, what is the new total consumer surplus? How large is producer surplus?

Price Discrimination  Up to this point we have considered only the case of a single-price monopolist, one who charges all consumers the same price. As the term suggests, not all monopolists do this.  In fact, many if not most monopolists find that they can increase their profits by charging different customers different prices for the same good: they engage in price discrimination.

Two Types of Airline Customers Quantity of tickets Price, cost of ticket D MC 2,0004,000 $ B S 125 Profit from sales to business travelers Profit from sales to student travelers

Price Discrimination Quantity Price, cost (a) Price Discrimination with Two Different Prices(b) Price Discrimination with Three Different Prices P high MC D P low Sales to consumer s with a high willingnes s to pay Quantity P high MC D P low Sales to consumers with a medium willingness to pay Sales to consumers with a low willingness to pay P medium Profit with two prices Profit with three prices Sales to consumers with a low willingness to pay Sales to consumers with a high willingness to pay Price, cost

Perfect Price Discrimination Perfect price discrimination takes place when a monopolist charges each consumer his or her willingness to pay—the maximum that the consumer is willing to pay.

Price Discrimination Quantity MC D Profit with perfect price discrimination Perfect Price Discrimination Price, cost