11-1 copyright 2007 mcgraw-hill australia pty ltd ppts t/a microeconomics 8e, by jackson &...
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11-1Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Chapter 11
Pure monopoly
11-2Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Learning objectives• Review the nature of barriers to entry into an
industry, their form and their likely occurrence• Examine demand from a monopolist’s viewpoint• Understand how monopoly adjusts price and
output in short-run and long-run situations
11-3Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Learning objectives (cont.)• Compare the outcome of a monopoly industry
with that of one that is purely competitive. Is the allocative and productive efficiency observed in pure competition achieved by the monopolist?
• Discuss whether government can play a role in modifying monopoly behaviour
11-4Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Barriers to entry• High barriers to entry explain the existence
of monopolies• Entry barriers block all potential competitors• Economies of scale:
– Defined as the forces that reduce the average cost of producing a product as the firm expands the size of the output in the long run
– In some industries, efficient, low-cost production can only be achieved if producers are large
11-5Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Barriers to entry (cont.)• Ownership of essential raw materials
– BHP controlled all known iron deposits in Australia in the 1940s and 1950s
• Legal barriers: patents and licences• Note:
– Pure monopolies are rare– Monopolies may be desirable or undesirable
depending on what premise is used– Natural monopoly occurs in industries whose
technological and economic realities are out of the possibility of competitive markets
11-6Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Monopoly demandThree assumptions:
1. Monopolist’s position is guaranteed:– Ownership of patent or control of raw materials
2. No prospect of government intervention or regulation of the firm
3. Monopolist does not discriminate between buyers by charging different prices
11-7Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Monopoly demand (cont.)• Monopolist’s demand curve is the industry
demand curve and therefore is down-sloping• Price (P) exceeds marginal revenue (MR)• Monopolist is a ‘price maker’ since it can
influence total supply
11-8Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
MarginalRevenue
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Quantityof
Output
Price(AverageRevenue)
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– $100– 28+ 34+ 86
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Monopoly revenue and cost
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11-9Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Monopoly demandPrice elasticity and total revenue• Marginal revenue is negative beyond the point
of unit elasticity of demand
11-10Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 QQ
Do
llars
Do
llars
200
150
200
50
750
500
250
MRMR
Elastic
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18QQ
DD
TRTR
Inelastic
Unit elasticityUnit elasticity
Demand, MR, TR: imperfectly competitive firm
11-11Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Price and output determination• Profit-seeking monopolist employs same rationale
as in a competitive industry:– MR = MC rule
• No supply curve. Why?– At any given demand and cost conditions, there is
only one profit-maximising price–output combination
11-12Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Misconceptions concerning monopoly pricing• Not highest price
– Monopolists seek to maximise profit, not necessarily price
• Total profits not unit profits– Monopolists seek to maximise total profit, not necessarily
per-unit profit
• Losses are possible– Pure monopoly does not guarantee economic profits– In the short-run, monopolist may experience losses
because of weak demand or high costs
11-13Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Profit
Q0 1 2 3 4 5 6 7 8 9 10
200
175
150
125
100
75
50
25
P
DD
MR
MCMC
ATC
$94
$122
MR = MC
Profitper unit
Competitiveprice
Profit maximisation under a pure monopoly
11-14Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Loss
Q0 1 2 3 4 5 6 7 8 9 10
200
175
150
125
100
75
50
25
P
DD
MR
MCMC
ATC
Lossper unit
AVC
Loss minimisation under monopoly
MR = MC
11-15Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Economic effects of monopoly• Productive inefficiency:
– Minimum ATC is not necessarily chosen
• Allocative inefficiency:– P price does not necessary equal MC– Monopoly will produce a smaller output and charge
a higher price than would a competitive industry
• Income distribution– Substantial economic profits of a monopolist are not
widely distributed and are often concentrated in the hands of upper income groups, contributing to inequality in the distribution of income
11-16Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Q
P
DMR
MC
Pm
Qm
MonopolistMonopolistwill sell lesswill sell less
units at aunits at ahigher pricehigher price
than inthan incompetitioncompetition
Pc
Qc
Profit maximisation under monopoly
11-17Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Economic effects of monopoly (cont.)
Cost complications• Economies of scale
– Demand may not be sufficient to support a large number of competing firms. Only a single firm can produce the output efficiently — natural monopoly
• X-inefficiency– The failure to produce any given output at the lowest
average cost possible
• Very long run may allow for technological progress
11-18Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Technological progress
• Dynamic efficiency:– Ability to develop the most efficient production
techniques over time
• Are purely competitive firms or monopolists more innovative over time?
– The competitive model — has the incentive to be efficient to reap economic profits over time
– The monopolist model — barriers to entry ensure economic profit even in the long run, and the incentive to develop new product and techniques will be weak
11-19Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Price discrimination• A situation where a given product is sold at
more than one price and the price differences are not justified by cost differences
Three required conditions are:• Monopoly power• Market segmentation• No resale
11-20Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Price discrimination (cont.)Consequences• More profits
– Price discrimination can yield additional profits for a monopolist
• More production– The discriminating monopolist will produce a larger
output than a non-discriminating monopolist
11-21Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Regulating monopolies• Historically, in Australia monopolies have been
operated or heavily regulated by the government• Socially optimal price: P = MC
– May result in severe losses
• ‘Fair-return’ price: P = AC– Normal profit is generated– Only partially resolves problem of under-allocation
11-22Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Regulated monopoly
Q
DMR
P
Pric
e an
d co
sts
MC
ATC
Monopoly price:MR = MC
Fair return price:Price = ATC
Socially optimum price:Price = MC
11-23Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIverBy Muni Perumal, University of Canberra, Australia
Next chapter:
Monopolistic competition