monopoly story of nes, comcast, even central parking

Monopoly

Story of NES, Comcast, even

Central Parking

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Cost and Monopoly Profit Maximization

Calculating Monopoly Profit

On Making Higher Profits: Price Discrimination

The Social Cost of Monopolies

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MonopolistA single supplier that comprises its entire industry for a good or service for which there is no close substitute

Definition of a Monopolist

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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

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Problems in raising adequate capital by other firms

Choose a product that requires a substantial capital investment: others cannot get enough to open a businessWhy not enter the microprocessor market and compete with Intel?

Barriers to Entry

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Other barriers

Economies of scaleYou 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

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Legal or governmental restrictions

Licenses, franchises, and certificates of convenience patents copyrights

Is the postal service still a monopoly?Consider

UPSFedXFax machinesThe Internet

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Government created barriers

Firms create their own monopoly

$CartelsAn association of producers in an industry that agree to set common prices and output quotas to prevent competition

MKR calls them producers monopolies

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Types of monopoliesGeographicNatural: over time developsTechnological: you have a patent that allows you to produce a product cheaply or more efficientlyGovernment createdResource monopoly: iron, coal, bauxite etc.

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Assumptions of monopolyOne 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 competitionBlocked entry

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Results for a monopolistIt 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

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Demand curve

Monopolist’s demand = market demandMonopolist is the industry

Remember the purely competitive firm has a perfectly elastic horizontal demand curve

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Demand Curves Perfect Competitor Monopolist

Figure 24-2, Panels (a) and (b)

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MonopolyPerfect Competition

Single Seller who has market power and is a price setter

Is the market demandcurve

Must lower price to sell more

MR < P

P>MR=MC

Dead weight lossRestricts output

One of many sellers with no market power and is price taker

Perfectly elastic demand (price takers)

Must only produce moreto sell more

All units sold for sameprice (P = MR)

Consumer and producer surplus equal

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Figure 24-3

Marginal Revenue: Always Less Than Price

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ElasticityA 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

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

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Monopoly Costs, Revenues and Profits

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Figure 24-4, Panels (b) and (c)

Monopoly Costs,Revenues, and Profits

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Why produce where marginal revenue equals marginal cost?

Producing past where MR = MCAdditional cost > additional revenue

Producing less than where MR = MCAdditional revenue > additional cost

Cost and Monopoly’sProfit Maximization

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• What is the Profit Maximizing RuleTotal costs

Total costs

Total revenue

Total revenue

Maximum

Maximum

QUANTITY

DOLLARS

Slope equals price.

Slope equals marginal cost.

QUANTITY

DOLLARSSlope equals marginal revenue.

Slope equals marginal cost.

Maximizing Profit

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Maximizing ProfitsWhere MR=Mc

10_04

1 92 83 74 5 6 10

200

150

100

50

0

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

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TR = P * Q

= TR - TC

TC = ATC * QQuantity

MC

ATC

Pri

ce o

r C

ost (

$)

Monopoly

DMR

QM

PM

Model of a MonopolyPositive Economic Profits

Monopoly not always profitable

If price belowATC in short runthen Loss min

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TR = P * Q

= TR - TC

TC = ATC * QQuantity

MC

ATC

Pri

ce o

r C

ost (

$)

Monopoly

DMR

QM

PM

Model of a MonopolyPositive Economic Profits

• On Making Higher Profits: Price DiscriminationNecessary 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• Pe: Qd = Qs

• MR = MC

• Pe = MC

• Zero economic profits