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垄断讲义
Week9:
Monopoly
RequiredReading:
ParkinCH12.
LecturePlan
WhymonopoliesArise
AMonopolY’sproductionandpricingdecisions
WelfareCostofMonopolies
1.
Whymonopoliesarise?
Amonopolyisafirmthatproducesagoodorserviceforwhichnoclosesubstituteexistsandwhichisprotectedbyabarrierthatpreventsotherfirmsfromsellingthatgoodorservice.
Amonopolyhasthreekeyfeatures:
I)NoCloseSubstitutes:
II)Obtainenoughinformationtoidentifythedemandandsupplycurves.
III)BarrierstoEntry:
Monopoliesareprotectedbybarrierstoentry.
i)Naturalbarrierstoentrycreateanaturalmonopoly,whichisanindustryinwhicheconomiesofscaleenableonefirmtosupplytheentiremarketatthelowestpossiblecost.
ATC
10
6
50100Q
ii)Anownershipbarriertoentryoccursifonefirmownsasignificantportionofakeyresource.
iii)Legalbarrierstoentrycreatealegalmonopoly,whichisamarketinwhichcompetitionandentryarerestrictedbythegrantingofapublicfranchise,agovernmentlicense,apatentoracopyright.
TwoMonopolyPrice-SettingStrategies:
I)Single-Pricing:
Amonopolysellseachunitofitsoutputforthesamepricetoallitscustomers.
II)Pricediscrimination:
Themonopolysellsdifferentunitsofagoodorservicefordifferentprices.Manyfirmspricediscriminate,butnotallofthemaremonopolyfirms.
2.Monopoly’sOutputandPriceDecisions
2.1AMonopoly’sMarginalRevenue
Thekeydifferencebetweenacompetitivefirmandamonopolyisthatamonopoly’sabilitytochangetheprice
Sincemonopolyisthesoleproducerandsellerinthemarket,itcanchangethepricebychangingthequantitysuppliedtothemarket.
Thedemandcurvefacingamonopolyfirmisthemarketdemandcurve.
Totalrevenue
Marginalrevenue(MR=TR/Q)isthechangeintotalrevenueresultingfromaone-unitincreaseinthequantitysold.
Consideratownwithsingleproducerofwater.ThetableshowsthecalculationofTRandMR.
QuantityofWater(Q)
P
TR=PQ
AR=TR/Q=P
MR
=TR/Q
MC
0
11
0
1
10
10
4
2
9
18
4
3
8
24
4
4
7
28
4
5
6
30
4
6
5
30
4
7
4
28
4
8
3
24
4
Columns1and2arethedemandschedulethedemandcurveisdownwardsloping.
Thelastcolumncalculatesthefirm’sMR.ThistableshowsaresultthatMR<
WhyisMR
Recallthatweareassumingthatthemonopolychargesthesamepricetoallconsumers.Asinthetableabove,whenP=10,everyconsumerispaying$10foroutputand1unitisdemandedandtotalrevenueis$10.
Ifthemonopolydecidesitwantstosell2units,itmustlowerthepricetodoso.
Themonopolyhastolowerthepriceonallunitsitwillsell.Asaresult,unit1thecustomerusedtopay$10forwillnowbesoldforonly$9.
TR=9(2ndunit)–1(lossofrevenuewhenthe1stunitpriceto$9)=8
2.2ProfitMaximizationandMonopolies’SupplyDecision
Tomaximizeitsprofit,afirm(monopolyorcompetitivefirm)producesthelevelofoutputwhereMR=MC.Ifthemarketiscompetitive,P=MR
Conversely,ifwehaveonlyoneseller,P>MR
SupposethattheMC=4.
Then,themonopolywillproduceatMC=MR
Recallthatthemonopolyisthepricemakerandcouldidentifythemarketdemandcurve.
Fromthedemandschedule,themonopolyrealizesthatwhenP=7,Qisjustequalto4.
Tomaximizeitsprofit,amonopolyproducesthelevelofoutputwhereMR=MC.Themonopolythenusesitsdemandcurvetosetthepriceatthehighestpriceforwhichitwillbeabletosellthequantityitproduces.
AnExample
TheWhatsaWidgetCompanyhasamonopolyinthesaleofwidgets.Thedemandthefirmfacescanbeshownbythefollowingschedule:
Quantity
Price
TR
MR
TC
MC
0
$15
$8
----
1
14
11
2
13
16
3
12
26
4
11
37
5
10
50
Monopoly:
SetMC=MR
Competitivefirms:
2.3TheMonopoly’sProfitandSupplyCurves
ThefirmmakesaneconomicprofitifP>ATC,whichisthecaseforthefirminthefigure.
Themonopolycanmakeaneconomicprofiteveninthelongrunbecausethebarrierstoentryprotectthefirmfromcompetition.
m=TR–TC=36-26=10
c=TR–TC=44-37=7(unsustainableinthelongrun)
Isthemonopolist’smarginalcostcurveitssupplycurve?
Amonopolistactuallyhasno“supplycurve”becausethereisnosinglecurvethatprovidesinformationbothonthequantitysuppliedandtheprice.Ifthefirmproduces20unitsofoutputwhenitismaximizingprofit,thatoutputlevelisdeterminedbythepointwhereMC=MR.
Thereisnorelationshipbetweenthequantitysuppliedandpricethatisdefinedbythemarginalcostcurve.
3.
thewelfarecostofmonopoly
3.1ComparingMonopolyandCompetitiveFirms
Competitivefirms:
SetP=MC
Monopoly:
SetMR=MC
Ismonopolyagoodwaytoorganizeamarket?
Pm>PerfectcompetitionandQc>Qm
Ontheonehand,P>MC
Isitpossiblethatthebenefitstothemonopoly>coststotheconsumers?
Recallthat:
ConsumerSurplus(CS)=marketprice(P)-willingnesstopay
Producersurplus(PS)=Marketprice(P)-Costofproduction
Welfareoftheeconomy=PS+CS
Then,wecalculatethechangeinwelfaremovingfromacompetitivemarkettoamonopolizedmarket.
Monopolyredistributesaportionofconsumersurplusbychangingittoproducersurplus.Becausepriceexceedsmarginalsocialcost,marginalsocialbenefitexceedsmarginalsocialcost,andadeadweightlossarises.
3.2RentSeeking
Anysurplus—consumersurplus,producersurplus,andeconomicprofit—iscalledeconomicrent.
Rentseekingisthepursuitofwealthbycapturingeconomicrent.
Rentseekingoccurswhensomeoneusesresourceslobbyingthegovernmenttocreateamonopoly.Becauseofrentseeking,thesocialcostofmonopolyexceedsthedeadweightloss(DWL)itcreates.
3.3EfficientRegulationofaMonopoly
WehaveseenthatamonopolyproduceslessthanthesocialdesirablequantitiesofoutputcreateDWL.
Governmentcouldrespondtotheproblemofmonopolybyregulatingthebehaviorofmonopolyinthreeways:
I)Marginalcostpricingrule:
Setspriceequaltomarginalcost.
Thisregulationresultsinanefficientuseofresourcesbutthefirm’spriceislessthanitsaveragecost,sothemonopolyincursaneconomicloss
II)Averagecostpricingrule:
Setspriceequaltoaveragetotalcost.
III)Iftheregulatorscannotdetermineafirm’sexactcosts,rateofreturnregulationisoftenused.Rateofreturnregulationrequiresafirmtojustifyitspricebyshowingthatthepriceenablesittoearnaspecifiedtargetpercentreturnonitscapital.Whenthispolicyisused,themanagersoftheregulatedfirmhavetheincentivetoinflateitscostsforbeneficialamenitiesthatdonotpromoteefficiency.