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Monopoly A Single Seller

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means that the market demand is the firm's demand. Barriers ... Coupons & club cards . . . grocery. Is it easy to separate customers? Can resale be prevented? ... – PowerPoint PPT presentation

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Title: Monopoly A Single Seller


1
Monopoly - A Single Seller
  • Microeconomics - Dr. D. Foster

2
Monopoly Characteristics
  • A single seller with no close substitutes . .
    . -- means that the market demand is the firms
    demand.
  • Barriers to entry . . . -- means that they can
    earn LR econ. profit.
  • legal restrictions
  • patents
  • control of resources
  • economies of scale

3
Monopoly - Finding Profit Max.
  • Find where MRMC . . .

MR Gain - Loss
If P110, P29.95, Q1100, Q2101, what is MR?
Gain 9.95 Loss 5.00 MR 4.95
4
Monopoly - Finding Profit Max.
  • Find where MRMC . . .

Set output at MRMC.
Find the price to charge from the Demand.
Will the firm earn an economic profit? How can we
tell?
5
Monopoly - Finding Profit Max.
  • Economic profit TR - TC . . .

TR PQ
TC ATCQ
Can a monopoly firm earn negative economic
profit and stay in business in the short run?
6
Monopoly
  • Can a firm can earn negative profit in the SR?

Yes! As long as P AVC, the firm will sustain
losses in the short run.
Can a monopoly earn just a zero economic profit?
7
Monopoly - Earning zero profit
P ATC Under what circumstances might we expect
this to happen?
  • Zero Economic profit if TR TC

ATC
When owners of a monopoly sell it to a new owner
they should attempt to extract this econ. profit.
8
Monopoly and Inefficiency
  • Allocative efficiency occurs when PMC.

Monopolies are allocatively inefficient, as they
price above the MC.
They produce too little. Our loss is call the
social loss (or, deadweight cost) and measured
as shown.
9
Monopoly and Inefficiency
  • Productive efficiency occurs when at min ATC. --
    Monopolies are likely to be inefficient.
  • Social waste of resources - up to the value of
    the firms economic profit if spent in rent
    seeking activities.
  • X-inefficiency - arises from a cost structure
    that is higher than would be true for perfectly
    competitive firms.

10
Regulating Monopoly
  • Using price controls can promote efficiency!

By instituting a price ceiling, the demand is
altered, insofar as the firms actions are
concerned.
11
Regulating Monopoly
  • Using price controls can promote efficiency!

The monopolist can be induced to produce more
(Q) at a lower price!! The firm is still
inefficient, but we could set prices to achieve
either allocative or productive efficiency.
Pc
Q
12
Monopoly Example
13
Monopoly Fundamentals
  • A single seller with no close substitutes.
  • Barriers to entry.
  • Sets output at MRMC.
  • Prices output based on demand.
  • Will be allocatively inefficient as PMC.
  • Will likely be productively inefficient.
  • Also suffers from social waste and
    X-inefficiency.
  • Price controls can promote efficient outcomes.

14
Regulating Monopoly
  • Do regulations work?
  • Inflating the cost structure (X-inefficiency).
  • The capture hypothesis.
  • Antitrust legislation may promote inefficiency.
  • Regulating a natural monopoly . . .

15
Natural Monopoly
  • Experiences economies of scale

--Profit max. rule is still the same. --Price
off of demand. --May earn positive economic
profit in LR.
How do you regulate? At PMC, firm has negative
econ. profit.
16
Natural Monopoly
… and give the monopoly a subsidy equal to its
losses!
… and the firm can earn zero econ profits, but is
alloc. inefficient.
17
Monopoly - Price Discrimination
  • When different people/customers are charged
    different prices when costs are equal.
  • When different people/customers are charged the
    same price when costs are different.

18
Monopoly - Price Discrimination
  • 1st degree price discrimination (perfect p.d.)
  • when a firm can charge each individual the max.
    they are willing to pay.
  • 2nd degree price discrimination (method 1)
  • when a firm uses volume discounts to vary the
    price.
  • 3rd degree price discrimination (method 2)
  • when a firm segments the market by elasticity.
  • more elastic lower price less elastic higher
    price

19
Monopoly - Price Discrimination
If the firm is collecting different prices from
each customer, to sell one more unit, it need
only lower the price for that unit, not for all.
  • Perfect price discrimination

This only works if --you prevent resale.
--you can easily separate customers.
20
Monopoly - Segmented markets
  • Day/night billing . . . phone/electric
  • Matinee/evening . . . theater
  • Senior menu . . . restaurant
  • Ladies night . . . bar
  • Student price . . . restaurant/other
  • Coupons club cards . . . grocery

Is it easy to separate customers? Can resale be
prevented?
21
Monopoly - A Single Seller
  • Microeconomics - Dr. D. Foster
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