Characteristics of Monopoly

  • Meaning

    • Monopolists is the only producer of a good with no close substitutes

  • Tens to have at least one of these four barriers to entry

    • Control of a scare resource of input

      • Cecil Rhodes made De Beers what it is by controlling most of the world's diamond mines.

    • Economies of scale

      • large firms tend to have cost advantages in markets characterized by economies of scale, or a natural monopoly

    • Technological superiority

      • short-term advantage for companies although network externalities are very crucial as well

    • Government monopolies

      • patent (monopoly of invention)

      • copyright (monopoly of literary or artwork)

Monopoly and Price Discrimination

  • Price discrimination (3rd degree)

    • policy of charging different prices to different consumers for the same good

    • ie. movie tickets, rebates, airline flights

  • Perfect price discrimination (1st degree)

    • takes place when a monopolist charges each consumer his or her willingness to pay the maximum that the consumer is willing to pay

    • No consumer surplus

![Machine generated alternative text: (a) Price Discrimination with Two Different Prices (b) Price Discrimination with Three Different Prices price, cost S 忆 ConsumerS 饷 a high 历 怖 ng 捍 g55 pay 0 pnces 5 Consumers 饷 a 怖 ng 捍 g55 pay D Quantity price, cost Sales [ 0 捍 5u07g 巧 饷 a high Il g55 pay Sa 5 饷 a medium W 0 捍 pay Profit 饷 three prices [ OllSU 捍 JUS 饷 a 亿 “ 伍 ngn 5 pay D Quantity （ 0 Perfect Price Discrimination price, cost e with 咖 pH 酌 5 [ rim 了 na D Quantity Panel (a) shows a monopolist that charges two different prices; its profit is shown by the shaded area. Panel (b) shows a monopolist that charges three different prices; its profit ， too, is shown by the shaded area. It is able capture more 耐 the consumer surplus and increase its profit. That is, by increasing the number 耐 different prices charged, the monopolist captures more 耐 the consumer surplus and makes a larger profit. Panel (c) shows the case 耐 perfect price discrmination ， where a monopolist charges each consumer his or her willingness 10 pay; the monopolist ， s profit is given by the shaded triangle. ](./media/image129.png)

Decreasing Marginal Revenue

  • The increase in production by a monopolist has two opposing effects on revenue

    • Quantity effect

      • One more unit is sold, increasing total revenue by the price at which the unit is sold

    • Price effect

      • In order to sell the last unit, the monopolist must cut market price on all unites sold. This decreases total revenue

  • What is the relationship between Demand curve and MR curve in a monopoly?

    • MR curve is below the Demand curve and steeper than the Demand curve.

    • Because the price on all units sold must fall if the monopoly increases production

  • Example

    Machine generated alternative text: Quantity Of diamonds 000 g50 900 850 750 700 650 550 10 500 450 12 400 13 350 14 300 16 200 17 150 Total 950 1 800 皇 ， 550 3 ， 200 3 ， 750 revenUe MR = BTR/SQ 4200 4 550 4 900 4 950 5 ， 000 4950 4 800 4 550 4 ， 200 3750 3 ， 200 2 550 1 800 $ 950 850 650 550 450 150 50 一 350 一 450 一 550 18 100 19

    Machine generated alternative text: (a) Demand and Marginal Revenue price, marginal reve n u e of diamond $ 1 ， 000 550 500 50 0 一 200 一 400 Total revenue $ 5 ， 000 在 000 3 ， 000 2 ， 000 1 ， 000 0 Price effect 一 5450 a m revenue = 550 一 500 MR D 20 Quantity of diamonds (b) Total Revenue 伽 “ ti e dom a ， e effect. 10 Price effect dom quantity 珩 20 Quantity Of diamonds

Monopoly and Profit

  • Profit = TR - TC = (P * Q) - (ATC * Q)

  • Monopoly Making a Profit

    Machine generated alternative text: price, cost, marginal reve n u e Monopo ， profit 丆 CM MC D Quantity In this case ， the marginal cost curve has a "swoosh" shape and the average total cost curve is U-shaped. The monopolist maximizes profit by producing the level Of ou ut at which MR= MC ， given point generating quantity Q". It finds its monopo price ， PM, from the point on fre demand curve directly above point point B here The æerage total cost Of QM is shown 卸 point C. Profit is given by the area of the shaded rectangle

    C:\\CE5A5F25\\EA5686BB-78FF-4844-9ADF-D3586C9ED368\_files\\image133.png

  • Monopoly Incurring a Loss

    Machine generated alternative text: MC

Monopoly vs. Perfect Competition

  • P = MR = MC at the perfectly competitive firm's profit-maximizing quantity of output

  • P > MR = MC at the monopolist's profit-maximizing quantity of output

  • Monopoly charges a higher price, produces a lower quantity and earns a profit

  • Not Allocatively Efficient

    • profit

    • deadweight loss

    • There does not exist maximum consumer and producer surplus

    Machine generated alternative text: MC h?-=PZAR=D 5 山 枷 巴 e 硭 does 耐 e 巫 u

Reading a Monopoly Graph

  • There is one stadium in Parkville. The stadium's demand and cost curves are shown below. The stadium currently relies on an admission charge for its revenue.

    Machine generated alternative text: PRICE/COST PS P3 P2 - 0 Marginal 0 ， Average Total Cost 01 02 Q3 04 05 06 Marginal RA ， venue ， ATTENDANCE

  • Using the labeling of the graph above, identify the price and quantity that maximize profit

    • Price: P5

    • Quantity: Q2

  • Using the labeling of the graph above, identify the price and quantity that maximized total revenue

    • When MR intersects the x-axis

    • Price: P3

    • Quantity: Q4

  • Using the labeling of the graph above, identify the price and quantity that maximizes attendance while still breaking even

    • When demand curve intersects ATC curve

    • Price: P2

    • Quantity: Q5

  • Assuming the existence of an opportunity cost, at P2, indicate whether stadium's accounting profits would be positive, negative, or zero. Explain why.

    • Economic Profit = Total Revenue - Total Cost = 0

    • Economic Profit = Accounting Profit - Opportunity Cost = 0

    • Accounting Profit = Opportunity Cost

    • Answer: positive

  • When the attendance is Q1, is the demand inelastic, elastic or unitary elastic? Explain

    • Answer: Elastic

    • Explanation: Marginal Cost is positive or the price is on the left side of the demand curve

    • A monopolist will always produce on the elastic portion of the demand curve

    Machine generated alternative text: PRICE/COST 01 Marginal Cost 02 03 Avuage Total Cost 06 ATTENDANCE

6-5 FIGURE Price $10 9 8 7 6 5 4 3 2 1 o Total revenue $25 24 21 16 9 The Price Elasticity of Demand Elastic Unit-elastic Changes Along the Demand Curve Demand Schedule and Total Revenue for a Linear Demand Curve 1 Price $0 1 2 3 4 5 6 7 8 9 10 Quantity demanded 10 9 8 7 6 5 4 3 2 Total revenue $0 9 16 21 24 25 24 21 16 9 2 2 3 3 4 4 5 6 6 7 7 8 8 Inelastic 9 10 Quantity 9 10 Quantity The upper panel shows a demand curve corre- sponding to the demand schedule in the table. The lower panel shows how total revenue changes along that demand curve: at each price and quantity combination, the height of the bar rep- resents the total revenue generated. You can see that at a low price, raising the price increases total revenue. So demand is inelastic at low prices. At a high price, however, a rise in price reduces total revenue. So demand is elastic at high prices. Demand is elastic: a higher price reduces total revenue. Demand is inelastic: a higher phce increases total revenue.

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