MONOPOLYBARRIERS TO ENTRYPowerPoint PresentationREVENUE CURVES FOR A MONOPOLISTSlide 5Slide 6Slide 7Plot the remaining points on the TR curve.Slide 11Slide 12Slide 13Slide 15Slide 16Slide 17Slide 19Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Producer SurplusSlide 30Consumer SurplusSlide 32Slide 33Slide 34Slide 35GENERAL RULE:Slide 40Slide 41Slide 42DEFINITIONS:OPERATING PRINCIPLE:Slide 45Slide 46Slide 47How could this work in practice?Slide 49Monopoly summaryPrice DiscriminationPrice discrimination exampleSlide 53Slide 54Slide 55slide 1MonopolyMONOPOLYMONOPOLYA monopoly is a firm which is the sole producer of a good or service for which there are no close substitutes.The monopolist’s demand curve is the same as the market demand curve.The firm must have some way to keep prospective entrants out of the industry, i.e., there must be barriers to entry.slide 2MonopolyBARRIERS TO ENTRYBARRIERS TO ENTRYBarriers to entry prevent other firms from entering an industry in which a monopolist may be earning profit.Government franchisesPatents and copyrightsEconomies of scaleOwnership of a scarce inputslide 3MonopolyBecause the demand curve the monopolist sees is negatively sloped, the monopolist can choose price as well as the quantity of output. (Price and quantity sold are linked by the demand curve. The demand curve sets the limit that can be charged for each quantity produced.)slide 4MonopolyREVENUE CURVES FOR A REVENUE CURVES FOR A MONOPOLISTMONOPOLISTThe market demand curve for a good is the firm’s average revenue curve.slide 5MonopolyThe demand curve shown here is the market demand curve for cable TV hookups in East Lansing. Because the Ripoff Cable TV Co. has an exclusive franchise, the market demand curve is also the firm’s average revenue curve. (AR = price)$/QQdemandp = $52/mo.7Thousand hookupsTo sell 7,000 hookups permonth, they can charge$52. per hookup per monthslide 6MonopolyFrom the demand curve we can find the firm’s total revenue curve (TR as a function of Q).Total revenue is price times quantity.We can then compare total revenue with total costs at each output to find the output and price where profits are maximized.$/QQAR = demandp = $68/mo.When 3,000 hookups are sold, they can charge $68and the total revenue from sales is $204 thousand.Thousand hookups3slide 7MonopolyHere are other points on the demand curve andsome corresponding amounts of total revenue.Fill in the remaining values for TR.Q P (=AR) TR0 80 01 76 762 72 1443 68 2044 64 2565 60 3006 56 3367 528 489 4410 4011 36slide 9MonopolyTRQ0501001502002503003504004500 2 4 6 8 10 12 14Plot the remaining points on the TR curve.Plot the remaining points on the TR curve.Hidden slideslide 11MonopolyHere’s the demandcurve with the correspondingtotal revenuecurve.Notice that the TRcurve is not a straight line!0204060801000 2 4 6 8 10 12 14Q$/QD=AR01002003004005006007000 2 4 6 8 10 12 14Thous. HookupsThous. $TRslide 12MonopolyHere is the total cost curveof the RipoffCable TV Co.Q TC0 101 302 543 824 1145 1546 2047 2668 3429 43410 54611 68201002003004005006007000 2 4 6 8 10 12 14Thous. HookupsThous. $TCQslide 13MonopolyWe can put the total revenue and total cost curves together to find total profit. Compute the remaining values for profit.Profit = TR - TCQ TR TC Profit0 0 10 -101 76 30 462 144 543 204 824 256 1145 300 1546 336 204 1327 364 266 988 384 342 429 396 434 -3810 400 546 -14611 396 682 -286Hidden slideslide 15MonopolyProfit is maximized hereat 5,000 units of output. The same problem can besolved by the marginal/average approach.01002003004005006007000 2 4 6 8 10 12 14Thous. HookupsThous. $TRTCQ-300-200-10001002003004005006007000 2 4 6 8 10 12 14Thous. HookupsThous. $PROFITQslide 16MonopolyFor a monopolist, average revenue is declining as output increases so marginal revenue must be less than average revenue.It is important to understand why MR is less than AR in this case.slide 17MonopolyCompute the missing values of Marginal Revenue.Q P (=AR) TR MR0 80 01 76 76 762 72 144 683 68 204 604 64 256 525 60 3006 56 336 367 52 3648 48 3849 44 39610 40 40011 36 396Hidden slide44MR = (300-256)/(5-4)slide 19Monopoly$/QQD=ARMR-10010203040506070800 2 4 6 8 10 12 14Hidden slideslide 21MonopolyMarginal revenue is always less than price for a monopolist because the firm must reduce price in order to sell more.Demand or ARQ$/Qpp’q q+1To sell an extra unit of output,the monopolist must lower price, thus losing the shaded area on all of the previous units sold at a price of p.slide 22MonopolyDemand or ARQ$/Qpp’q q+1These rectangles havethe same area.So this area is MR, which is less than p’.An increase in sales of one unit requires a reduction in price.slide 23Monopoly-51025405570851001151300 2 4 6 8 10 12$/QQMCACAR=demandMRThousand hookupsHere are the average and marginal cost and revenue curves for the same problem.What values of output and price maximize profit for the Ripoff Cable TV Co.?slide 24Monopoly-51025405570851001151300 2 4 6 8 10 12QMCACAR=demandMRThousand hookupsIn this case the best output is 5,000 hookups,and the best price is $60 per month.Choose output where MC = MRThen choose price by going to the demand curve.slide 25Monopoly-51025405570851001151300 2 4 6 8 10 12$/QQMCACAR=demandMRThousand hookupsTo compute the amount of profits in monopoly, find average profit (AR-AC) at the profit maximizing output, and multiply by Q.The shaded area is total profits.slide 26MonopolySummary of monopoly pricing:To maximize profit a monopolist should choose output where MC = MR.Price is determined from the demand curve.slide 27MonopolyDo monopolists choose the best output and price from society’s point of view?Another way to ask the question is whether the monopolist operates in society’s interest, and if not, what can be done to remedy the evils of monopoly.slide 28MonopolyThis requires us to formulate some rule for determining when social welfare is improved by some change, and when social welfare is maximized.The rule we'll use is that social welfare is measured by the sum of producer and consumer surplus. So society ought to produce where the sum of producer and and consumer surplus is as large as possible.slide 29MonopolyProducer SurplusPS is the difference between what producers take in (TR) at a given level of production and the minimum amount they would accept for producing that level of output.slide 30MonopolyMCP’$/QQQ’AT P’ AND Q’, THE PS IS THE SHADED AREA.slide