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Principles of MicroeconomicsChapter 9 Monopoly
Dr. Yuna Chen
Market Structure: Monopoly
One seller and many buyers
There are no close substitutes for the product
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The firm has market power; can control over price; called price maker; set the price at will.
Barriers to entry – other firms cannot enter into the market for three reasons: legal restrictions, economies of scale, control of an essential resource
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9-1. Barrier to entry
9-1a. Legal restrictionsPatents Exclusive right to sell a product for 20 years from the date the patent application is filedReason: to protect incentive for innovation
Licenses - Government awarding an individual firm the exclusive right to supply a particular good or service
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9-1b. Economies of scale
Downward-sloping long-run average cost curve - one firm can supply market demand at a lower average cost per unit than could two firms
A firm arises as a monopoly
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due to economies of scale is called a natural monopoly, because it is not created artificially by the government.
Economies of scale is a nature of production cost.
Ex
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hibit 19-1c. Control of essential resources
The firm owns the resourceExamples
Alcoa (aluminum) - control the supply of bauxite
Professional sports leagues
Local monopolies – only one utility company; one movie theater…
DeBeers diamonds
China - Giant panda
s
Page 133: “Starbucks over the years has built up a unique “experience” for the customer, …” Disagree:1. there are many close substitutes for coffee.2. Similar “comfortable atmosphere” can be found in other places.
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9-2. Revenue for a monopolist
9-2a. Demand and marginal revenue
demand for a perfect competitive firm: horizontal
For a monopolist, the firm’s demand is the market demand.
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The demand is downward-slopping: if the monopolist wants to sell more, it must lower the price.
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Example1. Monopoly revenue, costs, and profits
(1) (2) (3) (4) (5) (6) (7) (8)Q P TR TC Profit MR MC ATC0 $200 1451 180 1752 160 2003 140 2204 120 2505 100 3006 80 370
P
200
180
160
140
120
100
80
60
40
20
0 1 2 3 4 5 6 7 Q
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9-3. The monopolist’s cost and profit maximization
Golden Rule of profit maximization: MR =MC
Findings:
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1. The demand curve is always above the MR curve in monopoly market.
This implies the monopoly price is always above MR
(P = MR in perfect competition)
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2. How to find the profit max. output and price? a. MR=MC b. Go vertically down and find the profit max output Qm
c. go vertically up to the demand curve, then find Pm
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Example 2. Short-run losses
1. What is Qm?2. What is Pm?3. What is TR?4. What is TC?5. What is the amount of loss?
Example 3. Shutdown decision
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Pm <AVC or FC < Loss a. If stay in production, economic loss =b. If shutdown, fixed cost =Decision:
Summary:1. If Pm > ATC, profitable; if Pm = ATC, breaks even; if Pm < ATC, suffers losses.
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2. A monopoly incurs losses but should stay in production if Pm > AVC
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3. A monopoly should shut down if Pm < AVC or FC < Loss
4. A monopoly can earn long run economic profit because of the barriers of entry that block competition.
5. A monopoly should exit the industry if Pm < ATC in the long run.
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9-6. Price discrimination- Charging different groups of consumers different prices for the same product
- Price discrimination increases profit
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A Monopolist Price Discrimination
InformationTime machine travel ticket FC $100
MC $100Willing and able to pay
A 500B 400C 380D 350E 200F 100
Potential Buyers Q P TR TC MR MC
600
A 500
B 400
C 380
D 350
E 200
F 100
Case 1. Charge a single price (no price discrimination)
Case 2. Charge A and B $400 each, and C and D $350 each.
Case 3. Perfect price discrimination - charge each buyer a different price.