Monopoly Story of NES, Comcast, even Central Parking

Cost and Monopoly Profit Maximization Calculating Monopoly Profit On Making Higher Profits: Price Discrimination The Social Cost of Monopolies

Monopolist A single supplier that comprises its entire industry for a good or service for which there is no close substitute Definition of a Monopolist

Barriers to prevent entry of other make long-run economic profits and legally prevent other firms from entering. How to become a monopoly

The firm owns the resources to make the product without close substitutes: If you owned all the oil reserves, who could enter the refining business? The Aluminum Company of America (ALCOA) at one time owned 90% of the world’s bauxite. Barriers to Entry

Problems in raising adequate capital by other firms Choose a product that requires a substantial capital investment: others cannot get enough to open a business Why not enter the microprocessor market and compete with Intel? Barriers to Entry Other barriers

Economies of scale You have cut your costs so low that it drives rivals out who can not meet you’re your costs per unit and your low price. Natural monopoly other barriers

Legal or governmental restrictions Licenses, franchises, and certificates of convenience patents copyrights Is the postal service still a monopoly? Consider UPS FedX Fax machines The Internet Government created barriers

Firms create their own monopoly $Cartels An association of producers in an industry that agree to set common prices and output quotas to prevent competition MKR calls them producers monopolies

Types of monopolies Geographic Natural: over time develops Technological: you have a patent that allows you to produce a product cheaply or more efficiently Government created Resource monopoly: iron, coal, bauxite etc.

Assumptions of monopoly One firm that is the whole industry Unique product or service Consumers know there is one producer with a unique product that has no close substitutes and the firm knows it has no competition Blocked entry

Results for a monopolist It has market power It can set price It will produce at MR=MC but it will set price directly above on the demand curve. Look down from MR=MC for quantity and above for price

Demand curve Monopolist’s demand = market demand Monopolist is the industry Remember the purely competitive firm has a perfectly elastic horizontal demand curve

Demand Curves Perfect Competitor Monopolist Figure 24-2, Panels (a) and (b)

Monopoly Perfect Competition Single Seller who has market power and is a price setter Is the market demand curve Must lower price to sell more MR < P P>MR=MC Dead weight loss Restricts output One of many sellers with no market power and is price taker Perfectly elastic demand (price takers) Must only produce more to sell more All units sold for same price (P = MR) Consumer and producer surplus equal

Figure 24-3 Marginal Revenue: Always Less Than Price

Elasticity A monopoly is a single seller of a well- defined good or service with no close substitutes. If there are substitutes,the greater the price elasticity of demand of the monopolist’s demand curve

Price Searcher or Price Setter A firm that must determine the price- output combination that maximizes profit because it faces a downward- sloping demand curve

Monopoly Costs, Revenues and Profits

Figure 24-4, Panels (b) and (c) Monopoly Costs,Revenues, and Profits

Why produce where marginal revenue equals marginal cost? Producing past where MR = MC Additional cost > additional revenue Producing less than where MR = MC Additional revenue > additional cost Cost and Monopoly’sProfit Maximization

What is the Profit Maximizing Rule Total costs Total revenue Maximum QUANTITY DOLLARS Slope equals price. Slope equals marginal cost. QUANTITY DOLLARS Slope equals marginal revenue. Slope equals marginal cost.

Maximizing Profit Maximizing Profits Where MR=Mc

10_ DOLLARS QUANTITY Marginal cost ( MC ) Demand Marginal revenue ( MR ) Profit Max is Where MR = MC (fig 10.4)

Calculating Monopoly Profit If price above ATC

TR = P * Q  = TR - TC TC = ATC * Q Quantity MC ATC Price or Cost ($) Monopoly D MR QMQM PMPM Model of a Monopoly Positive Economic Profits

Monopoly not always profitable If price below ATC in short run then Loss min

TR = P * Q  = TR - TC TC = ATC * Q Quantity MC ATC Price or Cost ($) Monopoly D MR QMQM PMPM Model of a Monopoly Positive Economic Profits

On Making Higher Profits: Price Discrimination Necessary conditions for price discrimination –The firm must face a downward-sloping demand curve –The firm must be able to separate its consumers into two different markets

The Social Cost of Monopolies –Start with a perfectly competitive market in long-run equilibrium P e : Q d = Q s MR = MC P e = MC Zero economic profits