Chapter 15

N. GREGORY MANKIW Premium PowerPoint® Slides by Ron Cronovich 2008 update ©2008 South-Western, a part of Cengage Learning, all rights reserved 15 P R I N C I P L E S O F FOURTH EDITION MICROECONOMICS Monopoly 1CHAPTER 15 MONOPOLY In this chapter, look for the answers to these questions: § Why do monopolies arise? § Why is MR < P for a monopolist? § How do monopolies choose their P and Q? § How do monopolies affect society?s well-being? § What can the government do about monopolies? §What is price discrimination? 2CHAPTER 15 MONOPOLY Introduction § A monopoly is a firm that is the sole seller of § In this chapter, we study monopoly and contrast it with perfect competition. § The key difference: A monopoly firm 3CHAPTER 15 MONOPOLY Why Monopolies Arise The main cause of monopolies is Three sources of barriers to entry: 1. E.g., DeBeers owns most of the world?s diamond mines 2. E.g., patents, copyright laws 4CHAPTER 15 MONOPOLY Why Monopolies Arise 3. Natural monopoly: Q Cost ATC 1000 $50 Example: 1000 homes need electricity. Electricity ATC slopes downward due to huge FC and small MC 500 $80 5CHAPTER 15 MONOPOLY Monopoly vs. Competition: Demand Curves In a competitive market, the market demand curve slopes downward. but the demand curve for any individual firm?s product is The firm can increase Q without lowering P, D P Q A competitive firm?s demand curve 6CHAPTER 15 MONOPOLY Monopoly vs. Competition: Demand Curves A monopolist is the only seller, so To sell a larger Q, D P Q A monopolist?s demand curve A C T I V E L E A R N I N G 1: A monopoly?s revenue Moonbucks is the only seller of cappuccinos in town. The table shows the market demand for cappuccinos. Fill in the missing spaces of the table. What is the relation between P and AR? Between P and MR? 7 Q P TR AR MR 0 $4.50 1 4.00 2 3.50 3 3.00 4 2.50 5 2.00 6 1.50 n.a. 9CHAPTER 15 MONOPOLY Moonbuck?s D and MR Curves -3 -2 -1 0 1 2 3 4 5 0 1 2 3 4 5 6 7 Q P, MR MR $ Demand curve(P) 10CHAPTER 15 MONOPOLY Understanding the Monopolist?s MR § Increasing Q has two effects on revenue: ? The output effect: ? The price effect: § To sell a larger Q, the monopolist must § Hence, § MR could even be negative if the price effect exceeds the output effect (e.g., when Moonbucks increases Q from 5 to 6). 11CHAPTER 15 MONOPOLY Profit-Maximization § Like a competitive firm, a monopolist maximizes profit by § Once the monopolist identifies this quantity, 12CHAPTER 15 MONOPOLY Profit-Maximization Quantity Costs and Revenue MR D MC 13CHAPTER 15 MONOPOLY The Monopolist?s Profit As with a competitive firm, the monopolist?s profit equals Quantity Costs and Revenue ATC D MR MC 14CHAPTER 15 MONOPOLY A Monopoly Does Not Have an S Curve A competitive firm A monopoly firm So there is no supply curve for monopoly. 15CHAPTER 15 MONOPOLY Case Study: Monopoly vs. Generic Drugs Patents on new drugs give a temporary monopoly to the seller. MC Quantity Price D MR The market for a typical drug 16CHAPTER 15 MONOPOLY The Welfare Cost of Monopoly § Recall: In a competitive market equilibrium, § In the monopoly eq?m, P > MR = MC ? ? The monopoly Q is too low ? ? Thus, monopoly results in 17CHAPTER 15 MONOPOLY The Welfare Cost of Monopoly Competitive eq?m: quantity = QC P = MC total surplus is maximized Monopoly eq?m: Quantity Price D MR MC QC 18CHAPTER 15 MONOPOLY Public Policy Toward Monopolies § Increasing competition with antitrust laws ? ban some anticompetitive practices, allow govt to break up monopolies ? e.g., § Regulation ? Govt agencies set the monopolist?s price ? For natural monopolies, ? If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit. 19CHAPTER 15 MONOPOLY Public Policy Toward Monopolies § Public ownership ? Example: U.S. Postal Service ? Problem: § Doing nothing ? The foregoing policies all have drawbacks, so the best policy may be no policy. 20CHAPTER 15 MONOPOLY Price Discrimination § Discrimination: treating people differently based on some characteristic, e.g. race or gender. § Price discrimination: § The characteristic used in price discrimination 21CHAPTER 15 MONOPOLY Perfect Price Discrimination vs. Single Price Monopoly Here, the monopolist charges the same price (PM) to all buyers. MC Quantity Price D MR PM QM 22CHAPTER 15 MONOPOLY Perfect Price Discrimination vs. Single Price Monopoly Here, the monopolist This is called perfect price discrimination. MC Quantity Price D MR 23CHAPTER 15 MONOPOLY Price Discrimination in the Real World § In the real world, perfect price discrimination is not possible: ? ? buyers do not announce it to sellers § So, firms divide customers into groups based on 24CHAPTER 15 MONOPOLY Examples of Price Discrimination Movie tickets Airline prices 25CHAPTER 15 MONOPOLY Examples of Price Discrimination Discount coupons Need-based financial aid 26CHAPTER 15 MONOPOLY Examples of Price Discrimination Quantity discounts 27CHAPTER 15 MONOPOLY CONCLUSION: The Prevalence of Monopoly § In the real world, pure monopoly is rare. § Yet, many firms have market power, due to § In many such cases, most of the results from this chapter apply, including Ron Cronovich micro-ch15-studenthandout.ppt