Chapter 8 Monopoly

1. Chapter 8 Monopoly

2. Monopoly • exists when a single firm is the sole producer of a product for which there are no close substitutes.

3. Characteristics • Single seller • No close substitutes • “Price maker” • Blocked entry

4. Barriers to entry • Economies of scale • Legal barriers • Ownership or control of resources • Strategic barriers

5. Economies of scale • Occurs when lowest unit costs depend on the existence of a small number of larger firms or one firm. • New firms cannot afford to enter the market • Public utilities

6. Legal barriers • Patents provide the exclusive right to produce a product for a fixed number of years. • licenses

7. Ownership or control of resources • International Nickel Co. of Canada controlled 90% of world’s nickel reserves. • Professional sports leagues control player contract and leases on major city stadiums.

8. Strategic barriers • Monopoly firms use price & other strategic barriers to keep competition out of the industry.

9. Monopoly demand • 3 assumptions • Monopoly is secured by patents, economies of scale, or resource ownership. • firm is not regulated by government. • a single‑price monopolist

10. Price > MR Why? • monopolist must lower the price to sell an additional unit. • Added revenue will be price of last unit sold

11. ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Table 8-1 Revenues and Costs Cost Data Revenue Data (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (1) Quantity Of Output (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) 0 1 2 3 4 5 6 7 8 9 10 $172 162 152 142 132 122 112 102 92 82 72 $0 162 304 426 528 610 672 714 736 738 720 $100 190 270 340 400 470 550 640 750 880 1030 $-100 -28 +34 +86 +128 +140 +122 +74 -14 -142 -310 $90 80 70 60 70 80 90 110 130 150 $162 142 122 102 82 62 42 22 2 -18 $190.00 135.00 113.33 100.00 94.00 91.67 91.43 93.75 97.78 103.00 Can you See Profit Maximization? 11

12. 132 Gain = $132 Price and Marginal Revenue in Monopoly P When price decreases from $142 to $132, one more unit is sold… Figure 8-2 $142 D Revenue will increase by $132 with the extra unit sold Q 1 2 3 4 5 6 LO 8.1

13. Price and Marginal Revenue in Monopoly When price decreases from $142 to $132, one more unit is sold… P $142 Loss = $30 132 but revenue loss = $10 X 3 units D Marginal revenue = $132-30 = $102 < $132 (price) Gain = $132 Q 1 2 3 4 5 6 LO 8.1

14. Price maker • firm controls output and price • but is not free of market forces, since the combination of output and price that can be sold depends on demand.

15. Role of price elasticity • Total revenue test

16. Demand, MR, and TR for a Monopolist 200 150 200 50 Elastic Inelastic Price per unit MR D Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 750 500 250 TR Total revenue TR Figure 8-3 Q 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 LO 8.1

17. Output and Price Determination • MR = MC rule • No supply curve

18. Misconceptions about monopoly prices • Cannot charge the highest price it can get • Profits are max where MR = MC • Total profit is the goal • Not unit profit • Monopolists can receive economic profits greater than zero in the long run. • Losses can also occur → shut down in LR

19. Compare to perfect competition • Monopolist produces less • Monopolist charges higher price • P > MC

20. How efficient is a monopoly • Productive efficiency? • Allocative efficiency?

21. Income distribution • More unequal • Transfer of income from consumers to business owners

22. Regulated monopoly • Regulatory commission • socially optimal price • Fair-return price