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UB ECO 182 - Chapter 13

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Slide 1After studying this chapter, you will be able to:Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12A Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionA Single-Price Monopoly’s Output and Price DecisionSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedSingle-Price Monopoly and Competition ComparedPrice DiscriminationPrice DiscriminationPrice DiscriminationSlide 44Price DiscriminationPrice DiscriminationPrice DiscriminationPrice DiscriminationPrice DiscriminationPrice DiscriminationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly RegulationMonopoly Regulation13MONOPOLY© 2014 Pearson Addison-WesleyAfter studying this chapter, you will be able to:¨Explain how monopoly arises¨Explain how a single-price monopoly determines its output and price¨Compare the performance and efficiency of single-price monopoly and competition¨Explain how price discrimination increases profit¨Explain how monopoly regulation influences output, price, economic profit, and efficiency© 2014 Pearson Addison-WesleyGoogle and Microsoft are dominant players in the markets for Web search and advertising and for computer operating systems.These firms are not like the firms in perfect competition.How do firms that dominate their markets behave?Do they charge prices that are too high and that damage the interest of consumers?Students get lots of price breaks—at the movie theater and the hairdresser and on busses and trains.Why?How can it be profit maximizing to offer lower prices to some customers?© 2014 Pearson Addison-WesleyA monopoly is a market: That produces a good or service for which no close substitute existsIn which there is one supplier that is protected from competition by a barrier preventing the entry of new firms. Monopoly and How It Arises© 2014 Pearson Addison-WesleyHow Monopoly ArisesA monopoly has two key features: No close substitute  Barriers to entryNo Close SubstitutesIf a good has a close substitute, even if it is produced by only one firm, that firm effectively faces competition from the producers of the substitute.A monopoly sells a good that has no close substitutes.Monopoly and How It Arises© 2014 Pearson Addison-WesleyBarriers to EntryA constraint that protects a firm from potential competitors is called a barrier to entry.Three types of barriers to entry are Natural Ownership LegalMonopoly and How It Arises© 2014 Pearson Addison-WesleyNatural Barriers to EntryNatural barriers to entry create natural monopoly.A natural monopoly is a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost.Figure 13.1 illustrates a natural monopoly.Monopoly and How It Arises© 2014 Pearson Addison-WesleyOne firm can produce 4 million units of output at 5 cents per unit.Two firms can produce 4 million units—2 units each—at 10 cents per unit.Monopoly and How It Arises© 2014 Pearson Addison-WesleyIn a natural monopoly, economies of scale are so powerful that they are still being achieved even when the entire market demand is met.The LRAC curve is still sloping downward when it meets the demand curve.Monopoly and How It Arises© 2014 Pearson Addison-WesleyOwnership Barriers to EntryAn ownership barrier to entry occurs if one firm owns a significant portion of a key resource.During the last century, De Beers owned 90 percent of the world’s diamonds.Monopoly and How It Arises© 2014 Pearson Addison-WesleyLegal Barriers to EntryLegal barriers to entry create a legal monopoly.A legal monopoly is a market in which competition and entry are restricted by the granting of aPublic franchise (like the U.S. Postal Service, a public franchise to deliver first-class mail)Government license (like a license to practice law or medicine)Patent or copyrightMonopoly and How It Arises© 2014 Pearson Addison-WesleyMonopoly Price-Setting StrategiesFor a monopoly firm to determine the quantity it sells, it must choose the appropriate price. There are two types of monopoly price-setting strategies:A single-price monopoly is a firm that must sell each unit of its output for the same price to all its customers.Price discrimination (((((( is the practice of selling different units of a good or service for different prices. Many firms price discriminate, but not all of them are monopoly firms.Monopoly and How It Arises© 2014 Pearson Addison-WesleyA Single-Price Monopoly’s Output and Price DecisionPrice and Marginal RevenueA monopoly is a price setter, not a price taker like a firm in perfect competition.The reason is that the demand for the monopoly’s output is the market demand. To sell a larger output, a monopoly must set a lower price.© 2014 Pearson Addison-WesleyA Single-Price Monopoly’s Output and Price DecisionTotal revenue, TR, is the price, P, multiplied by the quantity sold, Q.Marginal revenue, MR, is the change in total revenue that results from a one-unit increase in the quantity sold.For a single-price monopoly, marginal revenue is less than price at each level of output. That is,MR < P.© 2014 Pearson Addison-WesleyA Single-Price Monopoly’s Output and Price


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