Monopoly - PowerPoint PPT Presentation

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Monopoly

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Monopoly PER UNIT SUBSIDY ... Nash Equilibrium AND both players are playing a dominate strategy Circle Method Dominate ... Microsoft Windows ... – PowerPoint PPT presentation

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Title: Monopoly


1
Monopoly
2
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3
Monopolies
  • Pure Monopolies (rare)
  • Public Utilities
  • Cable TV (in some locations)
  • Sports Teams?
  • Near Monopolies
  • Intel (81)
  • Wham-O (90)
  • De Beers (55)

4
Barriers To Entry
  • Economies of Scale
  • ATC continues to decrease at high levels of
    output
  • Natural Monopoly
  • Demand intersects LRATC where LRATC is still
    declining

5
Barriers To Entry
  • Legal
  • Patents (20 years)
  • Licenses
  • FCC
  • Taxis
  • Liquor Licenses
  • Marijuana Dispensary

6
Barriers To Entry
  • Ownership/Control of Resources
  • Natural Resources
  • Inco (90 of known nickel)
  • Local Control

7
Barriers to Entry
  • Pricing
  • Predatory
  • Package discounts
  • Advertising and Other Practices

8
Monopoly
  • Monopolists do not face a supply curve
  • It is the Price Maker

9
Competitive Price and Output
10
Competitive Consumer/Producer Surplus
11
Monopolist Consumer/Producer Surplus/DWL
12
Productive Efficiency?
13
Allocative Efficiency?
14
Conclusions About Monopolists P and Q
15
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17
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18
Monopolists Costs- Higher or Lower
19
Monopolists Costs- Higher or Lower
  • Economies of Scale/Natural Monopoly
  • Multiple firms would lead to increased LRATC
  • Examples
  • Utilities
  • Nonrivalrous Consumption- Microsoft Windows
  • Wireless Service
  • Network Effect- MySpace, Facebook

20
Monopolists Costs- Higher or Lower
  • X-inefficiency Reality that lack of competition
    may lead to costs higher than those assumed by
    economic theory

21
Monopolists Costs- Higher or Lower
  • X-inefficiency Reality that lack of competition
    may lead to costs higher than those assumed by
    economic theory

22
Monopolists Costs- Higher or Lower
  • Rent Seeking
  • Money spent on lobbying and other activities to
    maintain monopoly through government
    legislation/licensing

23
Monopolists Costs- Higher or Lower
  • Advertising
  • De Beers Commercials

24
Monopolists Costs- Higher or Lower
  • Research and Development (LRATC)
  • Historic View Think X-Inefficiency
  • Caveat Think Google

25
Price Discrimination Conditions
  1. Monopoly/Market Power
  2. Market Segregation
  3. No Resale

26
Price Discrimination
  • Senior Discount Challenge
  • Pick a market that employs senior discounts for
    profit maximization
  • Draw two sets of C and R curves
  • Which look the same?
  • Which look different?
  • Indicate Profit on Senior and Regular Diagrams

27
  • Welcome to Market Failure

28
  • Natural Monopoly Regulatory Options

29
  • Natural Monopoly Regulatory Options
  • What happens if the monopoly is broken?

30
  • Natural Monopoly Regulatory Options

31
  • Natural Monopoly Regulatory Options
  • Unregulated-
  • Price on D above MR MC
  • 2. Fair Return- P ATC
  • 3. Social Optimal (Allocatively Efficient)
  • P MC

32
PER UNIT TAX
33
LUMP SUM TAX
34
PER UNIT SUBSIDY
35
LUMP SUM SUBSIDY
36
PER UNIT V. LUMP SUM
  • PER UNIT
  • SHIFTS MC
  • Changes profit-max. Q and P
  • Variable cost
  • LUMP SUM
  • SHIFTS FC/ATC, THEREFORE, NOT Q
  • Fixed cost
  • P and Q same Profit/Loss Changes

37
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38
Monopolistic Competition
39
Product Differentiation
  • Physical Differences
  • Perceived Differences
  • Support Services

40
Monopoly v. Monopolistic Competition
  • Why is it called monopolistic competition?
  • How will the demand curve differ?
  • How will the MR curve differ?
  • Long Run? (remember- no barriers)

41
Which go together?
  • Allocatively Efficient
  • Productively Efficient
  • Profit-Max.
  • Fair Return
  • Socially Optimal
  • Min. ATC
  • MR MC
  • P ATC
  • P MC

42
Fair Return and Socially Optimal?
43
Excess Capacity
  • Q Gap between profit max. and min. ATC

44
4 Firm Concentration Ratio
  • Sum of 4 largest firms market share
  • gt 40 Oligopoly
  • lt 40 Monopolistic Competition

45
Herfindahl-Hirschman Index
  • Sum of squared market shares of all firms
  • s12 s22
  • Range of 0 - 10,000

46
Herfindahl-Hirschman Index
  • Sum of squared market shares of all firms
  • ( Share of Firm 1)2 ( Share of Firm 2)2
  • Range of 0 - 10,000

47
Natural Oligopoly
LRATCTypical Firm
H
F
E
DMarket
48
Oligopoly- Kinked Demand
49
Horizontal Merger
  • Two companies in same industry
  • Red Flag HHI increase of 100 or more

50
Vertical Merger
  • Two companies in complimentary industries

51
Potential Competition Merger
52
FTC
53
Denied
54
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55
Antitrust Laws
  • Sherman Antitrust Act (1890)
  • Banned predatory and unfair business practices
  • Clayton Antitrust Act (1914)
  • Specified unfair practices
  • Interlocking Directories
  • Price Discrimination
  • Exclusive Dealings and Tying
  • Horizontal Mergers that Destroy Competition
  • Federal Trade Commission (FTC)
  • Approves mergers and enforces trade regulations

56
Homework ListLegibly Applied to Our Simulation
  • Players, Strategies, Payoffs
  • Dominate Strategy
  • Nash Equilibrium
  • Explicit Collusion
  • Tacit Collusion
  • Tit for Tat
  • Cheating
  • Cartel

57
Game Theory
  • Players, Strategies, and Payoffs
  • Dominate Strategy
  • A player has a single best strategy regardless of
    opponents strategy decision
  • Nash Equilibrium
  • No player can benefit from a unilateral move
  • Dominate Strategy Equilibrium
  • Nash Equilibrium AND both players are playing a
    dominate strategy

58
Circle Method
  • Dominate Strategy
  • Player on Left
  • Two circles in same row
  • Player on Top
  • Two circles in same column
  • Nash Equilibrium
  • Two circles in same box
  • Dominate Strategy Equilibrium
  • Two Circles in same box and both players have
    dominate strategy
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