What Is A Monopoly?The Sources of MonopolyEconomies of ScaleFigure 1: A Natural MonopolyLegal BarriersProtection of Intellectual PropertyGovernment FranchiseNetwork ExternalitiesMonopoly Goals And ConstraintsMonopoly Price or Output DecisionFigure 2: Demand and Marginal RevenueThe Profit-Maximizing Output LevelFigure 3: Monopoly Price and Output DeterminationProfit And LossFigure 4: Monopoly Profit and LossShort-Run EquilibriumLong-Run EquilibriumComparing Monopoly to Perfect CompetitionFigure 5a/a: Comparing Monopoly and Perfect CompetitionFigure 5c: Comparing Monopoly and Perfect CompetitionSlide 21What Happens When Things Change?An Increase in Demand and a Cost-Saving Technological AdvanceFigure 6: A Change in DemandFigure 7: Monopoly Profit and LossPrice DiscriminationRequirements for Price DiscriminationPrice Discrimination That Harms ConsumersFigure 8a: Price DiscriminationFigure 8b: Price DiscriminationFigure 8c: Price DiscriminationPrice Discrimination That Benefits ConsumersPerfect Price DiscriminationFigure 9: Perfect Price DiscriminationHall & Leiberman; Economics: Principles And Applications, 2004 1What Is A Monopoly?•A monopoly firm is the only seller of a good or service with no close substitutes•Key concept is notion of substitutabilityHall & Leiberman; Economics: Principles And Applications, 2004 2The Sources of Monopoly•Existence of a monopoly means that something is causing other firms to stay out of the market •What barrier prevents additional firms from entering the market?–Several possible answers•Economies of scale•Legal barriers•Network externalitiesHall & Leiberman; Economics: Principles And Applications, 2004 3Economies of Scale•If economies of scale persist to the point where a single firm is producing for entire market, the market is a natural monopoly•Unless government intervenes, only one seller would survive—market would naturally become a monopolyHall & Leiberman; Economics: Principles And Applications, 2004 4Figure 1: A Natural MonopolyBA300C51215Pieces of Clothing per WeekDollars350LRATCDMarketHall & Leiberman; Economics: Principles And Applications, 2004 5Legal Barriers•Many monopolies arise because of legal barriers including–Protection of intellectual property–Government franchiseHall & Leiberman; Economics: Principles And Applications, 2004 6Protection of Intellectual Property•Most important kinds of legal protection for intellectual property are–Patents–Copyrights•Copyrights and patents are often sold to another person or firm, but this does not change monopoly status of the market, since there is still just one sellerHall & Leiberman; Economics: Principles And Applications, 2004 7Government Franchise•Large firms we usually think of as monopolies have their monopoly status guaranteed through government franchise•Governments usually grant franchises when they think market is a natural monopolyHall & Leiberman; Economics: Principles And Applications, 2004 8Network Externalities•Exist when an increase in network’s membership increases its value to current and potential members•When network externalities are present, joining a large network is more beneficial than joining a small networkHall & Leiberman; Economics: Principles And Applications, 2004 9Monopoly Goals And Constraints•Goal of a monopoly—like that of any firm—is to earn highest profit possible•However, a monopolist faces constraints–Constraint on monopoly’s cost–Technology of production–Price it must pay for its inputs–Demand constraintHall & Leiberman; Economics: Principles And Applications, 2004 10Monopoly Price or Output Decision•When any firm—including a monopoly—faces a downward sloping demand curve, marginal revenue is less than price of output•Monopoly will always produce at an output level where marginal revenue is positiveHall & Leiberman; Economics: Principles And Applications, 2004 11Figure 2: Demand and Marginal Revenue5,000BA18MR6,00020,00021,00030,0002030384850$60DemandFGCNumber of SubscribersMonthly Price per Subscriber15,000Hall & Leiberman; Economics: Principles And Applications, 2004 12The Profit-Maximizing Output Level•To maximize profit, the firm should produce level of output where MC = MR and MC curve crosses MR curve from below•For a monopoly, price and output are not independent decisionsHall & Leiberman; Economics: Principles And Applications, 2004 13Figure 3: Monopoly Price and Output DeterminationEMR10,000MCD30,000Number of SubscribersMonthly Price per Subscriber40$60Hall & Leiberman; Economics: Principles And Applications, 2004 14Profit And Loss•A monopoly earns a profit whenever P > ATC•A monopoly suffers a loss whenever P < ATCHall & Leiberman; Economics: Principles And Applications, 2004 15Figure 4: Monopoly Profit and LossEMR10,000$40MC32Total ProfitATCDETotal LossAVCATCMR10,00040MCD$50Dollars(a)Number of SubscribersDollars(b)Number of SubscribersHall & Leiberman; Economics: Principles And Applications, 2004 16Short-Run Equilibrium•Monopoly may earn an economic profit or suffer an economic loss•What if a monopoly suffers a loss in short-run?•If monopoly suddenly finds that P < AVC, government will usually not allow it to shut downHall & Leiberman; Economics: Principles And Applications, 2004 17Long-Run Equilibrium•Perfectly competitive firms cannot earn a profit in long-run equilibrium•Monopolies may earn economic profit in long-run•A privately owned monopoly suffering an economic loss in long-run will exit the industryHall & Leiberman; Economics: Principles And Applications, 2004 18Comparing Monopoly to Perfect Competition•In perfect competition, economic profit is relentlessly reduced to zero by entry of other firms–In monopoly, economic profit can continue indefinitely•But monopoly differs from perfect competition in another way–Can expect a monopoly market to have a higher price and lower output than an otherwise similar perfectly competitive market•By raising price and restricting output, new monopoly earns economic profit•Consumers lose in two ways–Pay more for output they buy–Due to higher prices they buy less outputHall & Leiberman; Economics: Principles And Applications, 2004 19Figure 5a/a: Comparing Monopoly and Perfect Competition100,000E$10DS1,000ATCMCd$10Quantity of OutputPrice per Unit(a) Competitive Market(b) Competitive FirmDollars per UnitQuantity of Output2. and each firm produces
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