垄断讲义.docx

1、垄断讲义Week 9: MonopolyRequired Reading: Parkin CH 12.Lecture PlanWhy monopolies AriseA MonopolYs production and pricing decisionsWelfare Cost of Monopolies 1. Why monopolies arise? A monopoly is a firm that produces a good or service for which no close substitute exists and which is protected by a bar

2、rier that prevents other firms from selling that good or service. A monopoly has three key features:I) No Close Substitutes: II) Obtain enough information to identify the demand and supply curves. III) Barriers to Entry:Monopolies are protected by barriers to entry. i) Natural barriers to entry crea

3、te a natural monopoly, which is an industry in which economies of scale enable one firm to supply the entire market at the lowest possible cost. ATC 10 6 50 100 Qii) An ownership barrier to entry occurs if one firm owns a significant portion of a key resource.iii) Legal barriers to entry create a le

4、gal monopoly, which is a market in which competition and entry are restricted by the granting of a public franchise, a government license, a patent or a copyright.Two Monopoly Price-Setting Strategies:I) Single-Pricing: A monopoly sells each unit of its output for the same price to all its customers

5、.II) Price discrimination: The monopoly sells different units of a good or service for different prices. Many firms price discriminate, but not all of them are monopoly firms. 2. Monopolys Output and Price Decisions2.1 A Monopolys Marginal RevenueThe key difference between a competitive firm and a m

6、onopoly is that a monopolys ability to change the price Since monopoly is the sole producer and seller in the market, it can change the price by changing the quantity supplied to the market. The demand curve facing a monopoly firm is the market demand curve. Total revenue Marginal revenue (MR = TR/Q

7、) is the change in total revenue resulting from a one-unit increase in the quantity sold. Consider a town with single producer of water. The table shows the calculation of TR and MR.Quantity of Water (Q)PTR = PQAR=TR/Q=PMR=TR/QMC011011010429184382444728456304653047428483244Columns 1 and 2 are the de

8、mand schedule the demand curve is downward sloping. The last column calculates the firms MR. This table shows a result that MR Why is MR P? Recall that we are assuming that the monopoly charges the same price to all consumers. As in the table above, when P = 10, every consumer is paying $10 for outp

9、ut and 1 unit is demanded and total revenue is $10. If the monopoly decides it wants to sell 2 units, it must lower the price to do so. The monopoly has to lower the price on all units it will sell. As a result, unit 1 the customer used to pay $10 for will now be sold for only $9.TR = 9 (2nd unit) 1

10、 (loss of revenue when the 1st unit price to $9) = 8 MR Suppose that the MC = 4. Then, the monopoly will produce at MC = MR Recall that the monopoly is the price maker and could identify the market demand curve. From the demand schedule, the monopoly realizes that when P = 7, Q is just equal to 4. T

11、o maximize its profit, a monopoly produces the level of output where MR = MC. The monopoly then uses its demand curve to set the price at the highest price for which it will be able to sell the quantity it produces. An ExampleThe Whatsa Widget Company has a monopoly in the sale of widgets. The deman

12、d the firm faces can be shown by the following schedule:QuantityPriceTRMRTCMC0 $ 15$ 8-1141121316312264113751050Monopoly: Set MC = MR Competitive firms: 2.3 The Monopolys Profit and Supply CurvesThe firm makes an economic profit if P ATC, which is the case for the firm in the figure. The monopoly ca

13、n make an economic profit even in the long run because the barriers to entry protect the firm from competition. m = TR TC = 36 - 26 = 10c = TR TC = 44 - 37 = 7 (unsustainable in the long run) Is the monopolists marginal cost curve its supply curve? A monopolist actually has no “supply curve” because

14、 there is no single curve that provides information both on the quantity supplied and the price. If the firm produces 20 units of output when it is maximizing profit, that output level is determined by the point where MC = MR. There is no relationship between the quantity supplied and price that is

15、defined by the marginal cost curve.3. the welfare cost of monopoly3.1 Comparing Monopoly and Competitive FirmsCompetitive firms: Set P = MC Monopoly: Set MR = MC Is monopoly a good way to organize a market? Pm Perfect competition and Qc Qm On the one hand, P MC Is it possible that the benefits to th

16、e monopoly costs to the consumers? Recall that: Consumer Surplus (CS) = market price (P) - willingness to pay Producer surplus (PS) = Market price (P) - Cost of production Welfare of the economy = PS + CSThen, we calculate the change in welfare moving from a competitive market to a monopolized marke

17、t. Monopoly redistributes a portion of consumer surplus by changing it to producer surplus. Because price exceeds marginal social cost, marginal social benefit exceeds marginal social cost, and a deadweight loss arises.3.2 Rent SeekingAny surplusconsumer surplus, producer surplus, and economic profi

18、tis called economic rent. Rent seeking is the pursuit of wealth by capturing economic rent. Rent seeking occurs when someone uses resources lobbying the government to create a monopoly. Because of rent seeking, the social cost of monopoly exceeds the deadweight loss (DWL) it creates. 3.3 Efficient R

19、egulation of a MonopolyWe have seen that a monopoly produces less than the social desirable quantities of output create DWL.Government could respond to the problem of monopoly by regulating the behavior of monopoly in three ways: I) Marginal cost pricing rule: Sets price equal to marginal cost. This

20、 regulation results in an efficient use of resources but the firms price is less than its average cost, so the monopoly incurs an economic loss II) Average cost pricing rule: Sets price equal to average total cost. III) If the regulators cannot determine a firms exact costs, rate of return regulatio

21、n is often used. Rate of return regulation requires a firm to justify its price by showing that the price enables it to earn a specified target percent return on its capital. When this policy is used, the managers of the regulated firm have the incentive to inflate its costs for beneficial amenities that do not promote efficiency.