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Monopoly 12-1
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Drawing on Chapter 12 Graphics copyright © The McGraw-Hill Companies, Inc. All rights reserved.
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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 12-3
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What is a Monopoly? Single seller Product with no close substitutes
Monopolist has significant control over the price(s) it charges 12-4
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Five Sources Of Monopoly
Exclusive control over important inputs Economies of scale (natural monopoly) Patents & copyrights Network economies Government licenses or franchises 12-5
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Input Control Minerals Expertise: nuclear reactor vessels
Diamonds: DeBeers cartel and beyond Rare earths China: before and after cutoff of exports Beryllium & Brush Wellman/Materion Expertise: nuclear reactor vessels 12-6
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Figure 12.1: Natural Monopoly
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Other Sources Patents & copyrights Network economies
Pharmaceuticals Publishing Movies Network economies Windows & Android? Government licenses India’s “License Raj” 12-8
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Profit-Maximization by Monopolists
Economic profit, = TR - TC Maintain the assumption that the firm’s goal is to maximize economic profit With barriers to entry, evolutionary justification is weaker, but still exists 12-9
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Figure 12.2: The Total Revenue Curve for a Perfect Competitor
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Monopoly Pricing Monopolist faces market demand Monopolist may charge
P varies inversely with Q Monopolist may charge One price to all buyers (single price) Different prices to different buyers (price discriminate) – if possible Start analysis with single price 12-11
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Figure 12.3: Demand, Total Revenue, and Elasticity
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Figure 12.4: Total Cost, Revenue, and Profit Curves for a Monopolist
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Marginal Analysis Profit is maximized at Q where MR = MC
For a perfectly competitive firm, MR = P (given) For a monopolist, MR depends on Q (chosen) Knowing the total economic profit for every Q is a demanding information problem. It is mathematically equivalent to find the Q where MR = MC, and more realistic to have enough information to consider small changes. 12-14
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Figure 12.5: Changes in Total Revenue Resulting from a Price Cut
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Figure 12.6: Marginal Revenue and Position on the Demand Curve
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Figure 12.7: The Demand Curve and Corresponding Marginal Revenue Curve
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Figure 12.8: A Specific Linear Demand Curve and the Corresponding Marginal Revenue Curve
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Figure 12.9: The Profit-Maximizing Price and Quantity for a Monopolist
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Figure 12.10: The Profit-Maximizing Price and Quantity for Specific Cost and Demand Functions
For the specific simplified case with D of P=100-2Q, FC = 640, and MC = 20, here is the single-price profit-maximizing choice. Let’s work through another example: D of P=60-4Q, FC = 120, MC = 2Q. (See spreadsheet for table and graph) 12-20
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Profit-maximizing Monopoly Pricing
The profit-maximizing level of output must lie on the elastic portion of the demand curve. 12-21
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Profit-maximizing Monopoly Pricing
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Profit-maximizing Monopoly Pricing
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