Title: Monopoly
1Monopoly
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3Monopolies
- Pure Monopolies (rare)
- Public Utilities
- Cable TV (in some locations)
- Sports Teams?
- Near Monopolies
- Intel (81)
- Wham-O (90)
- De Beers (55)
4Barriers To Entry
- Economies of Scale
- ATC continues to decrease at high levels of
output - Natural Monopoly
- Demand intersects LRATC where LRATC is still
declining
5Barriers To Entry
- Legal
- Patents (20 years)
- Licenses
- FCC
- Taxis
- Liquor Licenses
- Marijuana Dispensary
6Barriers To Entry
- Ownership/Control of Resources
- Natural Resources
- Inco (90 of known nickel)
- Local Control
7Barriers to Entry
- Pricing
- Predatory
- Package discounts
- Advertising and Other Practices
8Monopoly
- Monopolists do not face a supply curve
- It is the Price Maker
9Competitive Price and Output
10Competitive Consumer/Producer Surplus
11Monopolist Consumer/Producer Surplus/DWL
12Productive Efficiency?
13Allocative Efficiency?
14Conclusions About Monopolists P and Q
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18Monopolists Costs- Higher or Lower
19Monopolists 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
20Monopolists Costs- Higher or Lower
- X-inefficiency Reality that lack of competition
may lead to costs higher than those assumed by
economic theory
21Monopolists Costs- Higher or Lower
- X-inefficiency Reality that lack of competition
may lead to costs higher than those assumed by
economic theory
22Monopolists Costs- Higher or Lower
- Rent Seeking
- Money spent on lobbying and other activities to
maintain monopoly through government
legislation/licensing
23Monopolists Costs- Higher or Lower
- Advertising
- De Beers Commercials
24Monopolists Costs- Higher or Lower
- Research and Development (LRATC)
- Historic View Think X-Inefficiency
- Caveat Think Google
25Price Discrimination Conditions
- Monopoly/Market Power
- Market Segregation
- No Resale
26Price 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
-
32PER UNIT TAX
33LUMP SUM TAX
34PER UNIT SUBSIDY
35LUMP SUM SUBSIDY
36PER 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
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38Monopolistic Competition
39Product Differentiation
- Physical Differences
- Perceived Differences
- Support Services
40Monopoly 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)
41Which go together?
- Allocatively Efficient
- Productively Efficient
- Profit-Max.
- Fair Return
- Socially Optimal
- Min. ATC
- MR MC
- P ATC
- P MC
42Fair Return and Socially Optimal?
43Excess Capacity
- Q Gap between profit max. and min. ATC
444 Firm Concentration Ratio
- Sum of 4 largest firms market share
- gt 40 Oligopoly
- lt 40 Monopolistic Competition
45Herfindahl-Hirschman Index
- Sum of squared market shares of all firms
- s12 s22
- Range of 0 - 10,000
46Herfindahl-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
47Natural Oligopoly
LRATCTypical Firm
H
F
E
DMarket
48Oligopoly- Kinked Demand
49Horizontal Merger
- Two companies in same industry
- Red Flag HHI increase of 100 or more
50Vertical Merger
- Two companies in complimentary industries
51Potential Competition Merger
52FTC
53Denied
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55Antitrust 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
56Homework ListLegibly Applied to Our Simulation
- Players, Strategies, Payoffs
- Dominate Strategy
- Nash Equilibrium
- Explicit Collusion
- Tacit Collusion
- Tit for Tat
- Cheating
- Cartel
57Game 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
58Circle 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