1. Monopoly
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2. Drawing on Chapter 12
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3. Overview Monopoly Setting a Single Price and Output
Definition
Sources
Profit Maximization
Setting a Single Price and Output
The Short Run
Adjustments In The Long Run
Price Discrimination
The Social Perspective
Efficiency Losses
Public Policy Toward Natural Monopoly
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4. Figure 12.11: A Monopolist who Should Shut Down in the Short-Run
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5. A Monopolist Has No Supply Curve
The monopolist is a price maker.
When demand shifts, elasticity at a given price may either increase or decrease, and vice-versa.
So there is no unique correspondence between the monopolist’s price and quantity produced.
Monopoly has a supply rule, which is to equate marginal revenue and marginal cost.
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6. Figure 12.12: Long-Run Equilibrium for a Profit-Maximizing Monopolist
In the long run, a profit-maximizing monopolist still sets Q=Q* where MR=MC, but taking into account adjustments in all inputs, not just short run variable inputs, along LMC. At Q* that coincides with SMC for the corresponding level of FC that minimizes ATC (at ATC*Q*= LACQ*) given Q=Q*.
Note that there is still positive economic profit.
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7. Price Discrimination
Charging different prices to different buyers and/or for different units bought.
Examples
Volume discounts
Senior citizen discounts
Coupons ?
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8. Price Discrimination
Third-degree: prices differ only across buyers in separate markets
Second-degree: each buyer chooses from the same structure of multiple prices across different numbers of units
First-degree: different price for every unit bought
Distinction between types in order of degree to which not only prices differ across units, but also to which monopolist captures consumer surplus.
Let’s examine them more closely, starting with third-degree.
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9. Figure 12.13: The Profit-Maximizing Monopolist Who Sells Two Markets
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10. Figure 12.14: A Monopolist with a Perfectly Elastic Foreign Market
Especially a few decades ago, when there were greater government-created barriers to international trade, it was fairly common for small economies to have a monopoly producer of a good with a government license or economies of scale, as well as a strongly protected national market. In a few cases, those monopolists also exported to foreign markets which were large and integrated enough to have a high degree of competition. Even today, with freer international trade, this story applies to a significant degree to producers in relatively protected markets.
Again
Form the horizontal sum of MRs, asking the question: for each additional unit produced, in which market should this be sold, for a higher MR?
Find Q* where combined MR=MC.
Find corresponding Qi* and Pi*
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11. Figure 12.15: Perfect Price Discrimination
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12. Figure 12.16: The Perfectly Discriminating Monopolist
Doesn’t the shaded area plus the ATC curve look like a smiling cartoon face? You’d be happy, too, if you wanted profit and got all the consumer surplus!
It illustrates the idea common to second-degree that the monopolist can charge some buyers with higher willingness to pay more without losing the buyers that aren’t willing to pay that much, and continue to serve the lower willingness-to-pay buyers without “undercharging” the higher willingness-to-pay buyers.
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13. Figure 12.17: Second-Degree Price Discrimination
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14. Figure 12.18: A Perfect Hurdle
A common example of this is creating a “hurdle” over which some, but not all, buyers will be willing to jump in order to get a lower price. The hurdle creates costs for buyers which are either not the same for all buyers or which some buyers are more willing to pay than others. To which of our previous examples does this apply?
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15. The Efficiency Loss From Monopoly
Deadweight loss from monopoly: the loss of efficiency (consumer surplus + producer surplus) due to the presence of a monopoly.
None if price discriminating perfectly.
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16. Figure 12.19: The Welfare Loss from a Single-Price Monopoly
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17. Public Policy Toward Natural Monopoly
State ownership and management
State regulation
Exclusive contracting
Vigorous enforcement of antitrust laws
A laissez-faire policy
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18. Figure 12.20: A Natural Monopoly
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19. State Ownership And Management
Subsidization for greater allocative efficiency?
X-inefficiency? Or less than private?
Better quality assurance, or not?
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20. State Regulation Of Private Monopolies
Public Utilities
Usually rate of return guaranteed
Erring on the high side,
Incentives to overinvest
Possible cross-subsidization
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21. Figure 12.21: Cross-Subsidization to Boost Total Output
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22. Exclusive Contracting for Natural Monopoly
Detailed contracts, competitive bidding?
Theory
Evidence
Hard to specify every detail of quality
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23. Antitrust and Laissez Faire
Sherman (1890) and Clayton (1914) Acts
HHI or other index, specification of market
Economies of scale vs. competition
Innovation and entry
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24. Figure 12.22: The Efficiency Losses from Single-Price and Two-Price Monopoly
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25. Figure 12.23: Does Monopoly Suppress Innovation?
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