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Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
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Managing a Monopoly Firm (or Price-Making Business)
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Monopoly Environment Single firm serves the “relevant market.” Most monopolies are “local” monopolies. The demand for the firm’s product is the market demand curve. Firm has control over price. n But the price charged affects the quantity demanded of the monopolist’s product.
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“Natural” Sources of Monopoly Power Economies of scale n ATC falls as Q increases Economies of scope n Producing two good together is more cost effective than producing them separately Cost complementarities n Increases in the Q of one good decreases the MC of the other good
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“Created” Sources of Monopoly Power Patents and other legal barriers (like licenses) Tying contracts Exclusive contracts Collusion Contract... I. II. III.
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Managing a Monopoly Market power permits you to price above MC Is the sky the limit? No. How much you sell depends on the price you set! n Still restricted by the Law of Demand
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A Monopolist’s Marginal Revenue QQ P TR 100 001020 304050 1020 304050 800 60 1200 40 20 Inelastic Elastic Inelastic Unit elastic MR
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Three cases (graphically) with Monopoly Profit n Price > ATC Break-even (Zero Economic Profit, Normal Profit) n Price = ATC Loss and continue to operate n ATC > Price Where is the shutdown case? n Won’t shutdown…just increase prices
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Monopoly Profit Maximization $ Q ATC MC D MR QMQM PMPM Profit ATC Produce where MR = MC. Charge the price on the demand curve that corresponds to that quantity.
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Useful Formula What’s the MR if a firm faces a linear demand curve for its product? **Don’t forget to change the demand to TR** Alternatively MR can be expressed with elasticities,
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A Numerical Example Given estimates of P = 10 - Q C(Q) = 6 + 2Q Optimal output? MR = 10 - 2Q MC = 2 10 - 2Q = 2 Q = 4 units Optimal price? P = 10 - (4) = $6 Maximum profits? PQ - C(Q) = (6)(4) - (6 + 8) = $10
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