Copyright 2008 The McGraw-Hill Companies 22-1 Characteristics Barriers to Entry Monopoly Demand...
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Copyright 2008 The McGraw-Hill Companies 22-1 Characteristi cs Barriers to E ntry Monopoly Dema nd Price and Mar ginal Revenue Marginal Reve nue and Costs Profit Maximi zation Misconception s Loss Minimiza tion Economic Effe cts of Monopo ly Price Discrim ination Regulated Mon opoly Last Word Key Terms End Show 22 Pure Monopoly
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Transcript of Copyright 2008 The McGraw-Hill Companies 22-1 Characteristics Barriers to Entry Monopoly Demand...
Copyright 2008 The McGraw-Hill Companies22-1
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
22Pure Monopoly
Copyright 2008 The McGraw-Hill Companies22-2
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Chapter Objectives• Characteristics of Pure
Monopoly• How Pure Monopoly Sets
Profit Maximizing Output and Price
• The Economic Effects of Monopoly
• Why A Monopolist May Wish to Charge Different Prices in Different Markets
Copyright 2008 The McGraw-Hill Companies22-3
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Characteristics• Single Seller• No Close Substitutes• “Price Maker”• Blocked Entry• Nonprice Competition• Examples
–Regulated Monopolies–Near-Monopolies–Western Union-Frisbee-
De Beers• Dual Objectives of Study
O 22.1
Copyright 2008 The McGraw-Hill Companies22-4
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Barriers to Entry• Economies of Scale• Legal Barriers to Entry
–Patents–Licenses
• Ownership or Control of Essential Resources
• Pricing and Other Strategic Barriers to Entry
O 22.2
Copyright 2008 The McGraw-Hill Companies22-5
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Monopoly Demand
• Monopoly Status is Secure
• No Governmental Regulation
• Firm is a Single-Price Monopolist (No Price Discrimination)
Copyright 2008 The McGraw-Hill Companies22-6
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal RevenueMarginal Revenue is Less Than Price
D
• A Monopolist isSelling 3 Units at$142
• To Sell More (4), Price Must BeLowered to $132
• All Customers Must Pay the SamePrice
• TR Increases $132 Minus $30 (3x$10)
Gain = $132
Loss = $30
Copyright 2008 The McGraw-Hill Companies22-7
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
0 1 2 3 4 5 6
$142
132
122
112
102
92
82
Price and Marginal RevenueMarginal Revenue is Less Than Price
D
• A Monopolist isSelling 3 Units at$142
• To Sell More (4), Price Must BeLowered to $132
• All Customers Must Pay the SamePrice
• TR Increases $132 Minus $30 (3x$10)
• $102 Becomes a Point on the MR Curve
• Try Other Prices toDetermine Other MR Points
Gain = $132
Loss = $30
The Constructed Marginal Revenue CurveMust Always Be Less Than the Price
MR
Copyright 2008 The McGraw-Hill Companies22-8
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Monopoly Revenue and CostsRevenue and Cost Data of a Pure
Monopolist
(1)Quantity
Of Output
(2)Price
(AverageRevenue)
(3)Total
Revenue(1) X (2)
(4)MarginalRevenue
(5)Average
Total Cost
(6)Total Cost
(1) X (5)
(7)Marginal
Cost
(8)Profit (+)
or Loss (-)
0123456789
10
$172162152142132122112102928272
$0162304426528610672714736738720
$16214212210282624222
2-18
$190.00135.00113.33100.00
94.0091.6791.4393.7597.78
103.00
$100190270340400470550640750880
1030
$90807060708090
110130150
$-100-28+34+86
+128+140+122
+74-14
-142-310
Revenue Data Cost Data
]]]]]]]]]]
]]]]]]]]]]
Can you See Profit Maximization?
Copyright 2008 The McGraw-Hill Companies22-9
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
$200
150
100
50
0
$750
500
250
0
2 4 6 8 10 12 14 16 18
2 4 6 8 10 12 14 16 18
Pri
ceT
ota
l Rev
enu
e
Monopoly Revenue and CostsDemand, Marginal Revenue, and Total Revenue for a
Pure Monopolist
Elastic InelasticDemand and Marginal Revenue Curves
Total-Revenue Curve
DMR
TR
Copyright 2008 The McGraw-Hill Companies22-10
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Monopoly Revenue and Costs
• Monopolist is a Price Maker
• Sets Price in the Elastic Region
• Output and Price Determination–Cost Data–MR = MC Rule
• No Supply CurveG 22.1
W 22.1
Copyright 2008 The McGraw-Hill Companies22-11
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Profit Maximization
0
$200
175
150
125
25
100
75
50Pri
ce, C
ost
s, a
nd
Rev
enu
e
1 2 3 4 5 6 7 8 9 10
Quantity
By A Pure Monopolist
D
MR
ATC
MC
MR=MC
Pm=$122
A=$94
EconomicProfit
Copyright 2008 The McGraw-Hill Companies22-12
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Misconceptions
• Not the Highest Price
• Total, Not Unit, Profit
• Possibility of Losses
Concerning Monopoly Pricing
Copyright 2008 The McGraw-Hill Companies22-13
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Loss Minimization
0
Pri
ce, C
ost
s, a
nd
Rev
enu
e
Quantity
By A Pure Monopolist
D
MR
ATC
MC
MR=MC
Loss
AVCPm
Qm
V
A
Copyright 2008 The McGraw-Hill Companies22-14
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Economic Effects of Monopoly
Price, Output, and EfficiencyPurely
CompetitiveMarket
PureMonopoly
D D
S=MC MC
P=MC=Minimum
ATC
MR
Pc
Qc
Pc
Pm
QcQm
Pure Competition is EfficientMonopoly Price is Greater Than MC
And Is Therefore Inefficient
a
b
c
Copyright 2008 The McGraw-Hill Companies22-15
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Economic Effects of Monopoly
Price, Output, and Efficiency• Income Transfer• Cost Complications• Economies of Scale
– Simultaneous Consumption– Network Effects
Copyright 2008 The McGraw-Hill Companies22-16
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
• X-Inefficiency
• Rent-Seeking Expenditures–Rent-Seeking Behavior
• Technological Advance• Assessment and Policy
Options
X
X’
Ave
rag
e T
ota
l C
ost
s
ATCX
ATC1
ATCX’
ATC2
QuantityQ1 Q2
AverageTotal Cost
Economic Effects of Monopoly
O 22.3
Copyright 2008 The McGraw-Hill Companies22-17
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Representative Highly Competitive Foreign Multinational Corporations
GLOBAL PERSPECTIVE
Economic Effects of Monopoly
Company (Country) Main ProductsBayer (Germany)BP Amoco (United KingdomMichelin (France)NEC (Japan)Nestlé (Switzerland)Nokia (Finland)Royal Dutch/Shell (Netherlands)Royal Philips (Netherlands)Sony (Japan)Toyota (Japan)Unilever (Netherlands)
ChemicalsGasoline
TiresComputers
Food ProductsWireless Phones
GasolineElectronicsElectronics
AutomobilesFood Products
Source: Fortune.com
Copyright 2008 The McGraw-Hill Companies22-18
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Price Discrimination• Three Forms
– Charging Each Customer the Maximum They Are Willing to Pay
– Charging Each Customer One Price For The First Set of Units Purchased and a Lower Price for Subsequent Units
– Charging Some Customers One Price and a Different Price for Other Customers
O 22.4
Copyright 2008 The McGraw-Hill Companies22-19
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Price Discrimination• Conditions
– Monopoly Power– Market Segregation– No Resale
• Examples of Price Discrimination
– Airfares– Electric Utilities– Theaters & Golf
CoursesW 22.1
Copyright 2008 The McGraw-Hill Companies22-20
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Regulated Monopoly
• Natural Monopolies
• Rate Regulation
• Socially Optimum Price
P = MC
• Fair Return Price
P = ATC
Copyright 2008 The McGraw-Hill Companies22-21
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
0
Pri
ce a
nd
Co
sts
(Do
llars
)
Quantity
Regulated MonopolyDilemma of Regulation
MonopolyPrice
Fair-ReturnPrice
SociallyOptimal
Price
Pr
D
r
f
b
aPf
Pm
Qm Qf Qr
MR
MC
ATC
Copyright 2008 The McGraw-Hill Companies22-22
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
De Beers Diamonds
• 66 Year Policy of Monopolizing the Diamond Trade
• Mid-2000 Abandoned Monopoly Efforts
• Decline in Number of Select Dealers and Cutters
• Classic Monopoly Behavior– Pricing– Single-Channel Marketing
Last
Word Are Monopolies Forever?
Copyright 2008 The McGraw-Hill Companies22-23
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
De Beers Diamonds
• End of an Era• New Diamond Discoveries-
Angola, Canada• Australian Producer Withdrew• Bad Press and Public
Perception Over Civil Strife Financing Role
• Becoming Cartel of Specialized High-End Diamonds
• Monopoly Didn’t Last Forever!
Last
Word Are Monopolies Forever?
Copyright 2008 The McGraw-Hill Companies22-24
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
Key Terms• pure monopoly
• barriers to entry
• simultaneous consumption
• network effects
• X-inefficiency
• rent-seeking behavior
• price discrimination
• socially optimal price
• fair-return price
Copyright 2008 The McGraw-Hill Companies22-25
CharacteristicsBarriers to EntryMonopoly DemandPrice and Marginal RevenueMarginal Revenue and CostsProfit MaximizationMisconceptionsLoss MinimizationEconomic Effects of MonopolyPrice DiscriminationRegulated MonopolyLast Word
Key Terms
End Show
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Monopolistic Competitionand Oligopoly
