垄断讲义.docx

垄断讲义.docx

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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.