Prepared by Dr Della Lee Sue, Marist College MICROECONOMICS: Theory & Applications Chapter 11: Monopoly By Edgar K Browning & Mark A Zupan John Wiley & Sons, Inc 12th Edition, Copyright 2013 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives   Define monopoly and show what a monopolist’s demand and marginal revenue curves look like Explain why a monopolist’s profit-maximizing output is where marginal revenue equals marginal cost Describe why the extent to which a monopolist’s price exceeds marginal cost is larger the more inelastic the demand faced by the monopolist (continued) Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives   (continued) Explain several important implications of monopoly analysis such as that the shutdown condition applies to monopolies as well as to firms operating in perfectly competitive environments Outline the potential sources of monopoly power: absolute cost advantages, economies of scale, product differentiation, and regulatory barriers Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives    (continued) Explore the efficiency effects of monopoly from static and dynamic perspectives Provide an overview of public policy toward monopoly Explain the mathematics behind monopoly Copyright © 2015 John Wiley & Sons, Inc All rights reserved Define monopoly and show what a monopolist’s demand and marginal revenue curves look like 11.1 THE MONOPOLIST’S DEMAND AND MARGINAL REVENUE CURVES Copyright © 2015 John Wiley & Sons, Inc All rights reserved Terminology    Monopoly – a market with a single seller Monopoly power – some ability to set price above marginal cost Price maker – a monopoly that supplies the total market and can choose any price along the market demand curve that it wants Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Monopolist’s Demand and Marginal Revenue Curves  Demand curve    market demand average revenue Marginal revenue:    effect on total revenue due to change in output decreases as output increases less than price when demand curve slopes downward Copyright © 2015 John Wiley & Sons, Inc All rights reserved Figure 11.1 - The Monopolist’s (Mad Men co-stars) Demand Curve Copyright © 2015 John Wiley & Sons, Inc All rights reserved Table 11.1 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Explain why a monopolist’s profit-maximizing output is where marginal revenue equals marginal cost Describe why the extent to which a monopolist’s price exceeds marginal cost is larger the more inelastic the demand faced by the monopolist 11.2 PROFIT-MAXIMIZING OUTPUT OF A MONOPOLY Copyright © 2015 John Wiley & Sons, Inc All rights reserved 10 Barriers to Entry (continued) Categories (continued):  Product differentiation   A means by which consumers may perceive the product sold by an incumbent firm to be superior to that offered by prospective rivals Regulatory barriers    Barriers to entry created by the government through vehicles such as patents, copyrights, franchises, and licenses Government purchases from particular firms Limits on nonprice competition, e.g., advertising Copyright © 2015 John Wiley & Sons, Inc All rights reserved 27 Strategic Behavior by Firms: Incumbents and Potential Entrants Factors affecting market power:        Elasticity of demand Number of other firms in industry Elasticity of market demand Elasticity of supply of other firms Product homogeneity Nature of the competition between firms Possibility of entry by new firms Copyright © 2015 John Wiley & Sons, Inc All rights reserved 28 Figure 11.8 - Potential Entry and Monopoly Copyright © 2015 John Wiley & Sons, Inc All rights reserved 29 Explore the efficiency effects of monopoly from static and dynamic perspectives 11.5 THE EFFICIENCY EFFECTS OF MONOPOLY Copyright © 2015 John Wiley & Sons, Inc All rights reserved 30 The Efficiency Effects of Monopoly  Comparison between perfectly competitive industry and monopoly:      Perfectly competitive firm - horizontal MR Monopoly – downward-sloping MR Marginal cost curve is horizontal for both industry structures For the same demand and cost conditions, price will be higher and output lower under monopoly than under competition Deadweight loss – measure of inefficiency due to the monopoly restriction of output Copyright © 2015 John Wiley & Sons, Inc All rights reserved 31 Figure 11.9 - The Deadweight Loss of Monopoly Copyright © 2015 John Wiley & Sons, Inc All rights reserved 32 A Dynamic View of Monopoly and Its Efficiency Implications Static analysis – a form of economic analysis that looks at the efficiency of a market at any one point in time  Monopoly: less efficient than a perfectly competitive industry  Dynamic analysis – a form of economic analysis that looks, over time, at the efficiency of a market  Monopoly: enhances social welfare in the creation of better products   Which approach is more appropriate? It depends:  Pricing power provides incentive to innovate  Competition increases total surplus  Pricing power forestalls benefits of competition Copyright © 2015 John Wiley & Sons, Inc All rights reserved 33 Figure 11.10 - A Dynamic View of Monopoly Copyright © 2015 John Wiley & Sons, Inc All rights reserved 34 Provide an overview of public policy toward monopoly 11.6 PUBLIC POLICY TOWARD MONOPOLY Copyright © 2015 John Wiley & Sons, Inc All rights reserved 35 Public Policy Toward Monopoly  Antitrust laws – a series of codes and amendments intended to promote a competitive market environment  major statutes:    Sherman Act (1890) Clayton Act (1914) Federal Trade Commission Act (1914) Copyright © 2015 John Wiley & Sons, Inc All rights reserved 36 Regulation of Price  Price ceiling:       government-imposed maximum limit on price => restriction on output cannot result n higher price eliminates the monopolist’s reason for restraining output reduces monopoly profit benefits consumers by lowering price increases output to the efficient level, eliminating the deadweight loss from monopoly Limitations:    outcome depend upon where price ceiling is set Price should be high enough for profit>=0 Monopoly firm may decrease quality as a result Copyright © 2015 John Wiley & Sons, Inc All rights reserved 37 Figure 11.11 - Regulation of Price Copyright © 2015 John Wiley & Sons, Inc All rights reserved 38 Explain the mathematics behind monopoly 11.7 THE MATH BEHIND MONOPOLY* *Denotes digital-only content Copyright © 2015 John Wiley & Sons, Inc All rights reserved 39 The Monopolist’s Demand and Marginal Revenue Curves Copyright © 2015 John Wiley & Sons, Inc All rights reserved 40 The Monopolist’s Profit-Maximizing Output Choice Copyright © 2015 John Wiley & Sons, Inc All rights reserved 41 ... market and can choose any price along the market demand curve that it wants Copyright © 2015 John Wiley & Sons, Inc All rights reserved The Monopolist’s Demand and Marginal Revenue Curves  Demand... Sons, Inc All rights reserved Define monopoly and show what a monopolist’s demand and marginal revenue curves look like 11. 1 THE MONOPOLIST’S DEMAND AND MARGINAL REVENUE CURVES Copyright © 2015... reserved 19 Figure 11. 5 - Monopoly and the Shutdown Condition Copyright © 2015 John Wiley & Sons, Inc All rights reserved 20 Figure 11. 6 - Monopoly Demand, Marginal Revenue, and Total Revenue