MonopolyFour Basic Market StructuresCompetitive MarketSlide 4OligopolyMonopolistic CompetitionQuestionAnswerSlide 9Sources of Monopoly Entry BarriersNatural MonopoliesPatents: Are There “Good” Monopolies?What is a “Good” Monopoly?“Good” Monopolies“Other” Monopolies - Good? Bad?CaveatsClassic Simple MonopolyThe Simple MonopolistThe Simple Monopolist: Rules for Profit MaximizationSimple MonopolyGraphical Display of Monopolist’s SolutionImplications of the Monopolist’s Profit MaximumSimple Monopoly- PerformanceSimple Monopoly- Performance AnswersPrice Discriminating MonopolistsRequirements for Price DiscriminationBelieve It Or NotTwo classic forms of Price DiscriminationSlide 29Two Prices are Better than One for Movie TicketsSummary of Price Discrimination ExampleSlide 32Slide 33First Degree Price DiscriminationShould the Government Regulate Monopolies?1Monopoly2Four Basic Market StructuresPerfectly Competitive: many firms, identical products, free entry and exit, full and symmetric info Monopoly: single firm, no close substitutes, barriers to entry, full and symmetric infoOligopoly: several firms, similar products, degree of product differentiation varies depending upon the market, might be barriers, full and symmetric infoMonopolistic competition: many firms, similar products, slightly differentiated products, free entry and exit, full and symmetric info3Competitive MarketThis is the classic “textbook” market structure.Firms in a competitive market all make a product that is perfectly substitutable: all demanders are equally satisfied with any supplier’s product.4MonopolyThe single seller makes a product that has no “good” substitute.Other firms may be able to produce the good or service but choose not to enter the market or are barred from it.5OligopolyA few sellers make products that are good, but not perfect, substitutes.Consumers can be induced to change suppliers but have only a limited number of choices.6Monopolistic CompetitionThe market has many firms but each supplier’s product is differentiated.Consumers can be induced to change brands but they have brand preferences.7QuestionWhat is the market structure for each of these products or firms: competitive, monopoly, oligopoly, monopolistic competition?–The Campus Store–Kinko’s–Pepperidge Farm’s Whole Wheat Bread–PowerMac computer–Windows computer–NYSEG (electricity utility)–Morton salt–AT&T long distance8AnswerThe Campus Store: most products competitive, textbooks oligopoly, but location is very important.Kinko’s: monopolistic competition (differentiated service)Pepperidge Farm’s Whole Wheat Bread: competition or monopolistic competition (slightly differentiated recipes)PowerMac computer and clones: monopoly, under license.Windows computer: monopolistic competition (differentiated features)NYSEG (electricity utility): monopolyMorton salt: competitiveAT&T long distance: oligopoly9Monopolysingle firmno close substitutesbarriers to entryfull and symmetric information10Sources of Monopoly Entry BarriersNatural monopoly: the most efficient scale of production is so large, relative to market demand, that a single firm dominates the market.Patents, copyrights, licenses, franchises: government protection of a firm’s right to produce a unique product.Economic and/or legal restrictions, strategies or situations that make entry more difficult for new competitors than for the existing monopoly firm.11Natural MonopoliesGoods and services whose delivery requires the construction of a physical network (wires, pipes, etc..)In such industries (local phone service, water, sewage removal, electricity, gas) the physical networks display decreasing marginal cost over essentially all quantities.Thus, average total cost is always declining and the minimum efficient scale is much larger than the size of the market.Natural monopolies are often regulated: they cannot charge a higher price without government approval.12Patents: Are There “Good” Monopolies? Consider the protease inhibitor Crixivan from Merck.A very effective AIDS therapy.Development costs were more than one billion dollars.Annual revenue now from treating around 90,000 patients is $500,000,000.13What is a “Good” Monopoly?Why is Merck given a monopoly?The granting of a patent on the drug Crixivan guarantees that Merck can earn monopoly profits on its sale.These monopoly profits provide the incentive to invest in the research and development required to create the new drug.14“Good” MonopoliesThe granting of patent protection (legal monopoly) gives firms a strong incentive to invest in new product development.Would firms make the R&D investments if they could not protect them through patents and trade secrets?Probably not because competitors could steal the design at a fraction of the cost after the product is brought to market.15“Other” Monopolies - Good? Bad?Input Ownership–DeBeer’s and diamondsIndustry Secret or Know-how–IBM and mainframes?Strategic Behavior–buy ‘em up–blow’ em up–let’s make a deal–Microsoft and operating systems?16Caveatsmonopoly does not => bigbig does not => monopolymonopoly does not => absolute and unlimited control over pricemonopoly does not => must have economic profitshort run profit does not => monopoly powermonopoly does not => badly behaved firm17Classic Simple MonopolyPolar extreme from perfect competition.Monopolist is a “price maker.”Cost curves are pretty much the same (except in the case of natural monopoly).The big change from before is in the demand side of the profit function.18The Simple MonopolistThe simple monopolist abides by the “law of one price.” Everyone pays the same market price for all units purchased.A monopolist faces the declining market demand curve for its product and simultaneously chooses price and quantity.Now P>MR (before P=MR) because the simple monopolist must lower the price on all preceding units to sell an additional unit.A monopolist has no “supply curve.”19The Simple Monopolist: Rules for Profit MaximizationSuppose we are in the short run.Rules for profit maximization are the same as before.If XSM maximizes profit, then–MR(XSM ) = MC(XSM )»very important note: for a simple monopolist P>MR at all positive levels of X. –XSM is
View Full Document