chapter15.pdf

1 ©2009 South-Western, a part of CengageLearning, all rights reserved C H A P T E R Monopoly MicroeonomicsP R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 15 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? 1 MONOPOLY 2 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 2 MONOPOLY 3 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 MONOPOLY 4 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 MONOPOLY 5 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, P Q A competitive firm?s demand curve 3 MONOPOLY 6 Monopoly vs. Competition: Demand Curves A monopolist is the only seller, so To sell a larger Q, 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 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. Common Grounds 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? MONOPOLY 9 Common Grounds? 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) 4 MONOPOLY 10 Understanding the Monopolist?s MR §Increasing Q has two effects on revenue: §Output effect: §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 Common Grounds increases Q from 5 to 6). MONOPOLY 11 Profit-Maximization § Like a competitive firm, a monopolist maximizes profit by § Once the monopolist identifies this quantity, MONOPOLY 12 Profit-Maximization Quantity Costs and Revenue MR D MC 5 MONOPOLY 13 The Monopolist?s Profit As with a competitive firm, the monopolist?s profit equals Quantity Costs and Revenue ATC D MR MC P MONOPOLY 14 A Monopoly Does Not Have an S Curve A competitive firm A monopoly firm So there is no supply curve for monopoly. MONOPOLY 15 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 6 MONOPOLY 16 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 MONOPOLY 17 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 MONOPOLY 18 Price Discrimination §Discrimination: treating people differently based on some characteristic, e.g. race or gender. § Price discrimination: § The characteristic used in price discrimination is 7 MONOPOLY 19 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 MONOPOLY 20 Perfect Price Discrimination vs. Single Price Monopoly Here, the monopolist This is called perfect price discrimination. MC Quantity Price D MR MONOPOLY 21 Price Discrimination in the Real World § In the real world, perfect price discrimination is not possible: § § § So, firms divide customers into groups based on 8 MONOPOLY 22 Examples of Price Discrimination Movie tickets Airline prices MONOPOLY 23 Examples of Price Discrimination Discount coupons Need-based financial aid MONOPOLY 24 Examples of Price Discrimination Quantity discounts 9 MONOPOLY 25 Public Policy Toward Monopolies § Increasing competition with antitrust laws §Ban some anticompetitive practices, allow govtto break up monopolies. §E.g., § Regulation §Govtagencies set the monopolist?s price. §For natural monopolies, §If so, regulators might subsidize the monopolist or set P = ATC for zero economic profit. MONOPOLY 26 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. MONOPOLY 27 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: roncron micro-ch15-studenthandout.ppt