Chapter 15: Monopoly Why Monopolies Arise: ! Monopoly- firm that is the sole seller of a product without close substitutes ! Barriers to entry: o Monopoly resources: A key resource required for production is owned by a single firm o Government regulation: The government gives a single firm the exclusive right to produce some good or service o The production process: A single firm can produce output at a lower cost than can a larger number of producers ! Natural monopoly- arises b/c 1 firm can supply an entire market at a smaller cost than could 2+ firms How Monopolies Make Production and Pricing Decisions: ! A monopolist's marginal revenue is always less than the price of its good ! Average revenue always equals the price of the good ! Marginal revenue for monopolies is very different from marginal revenue for competitive firms. When a monopoly increases the amount it sells, this action has two effects on total revenue (P × Q): o The output effect: More output is sold, so Q is higher, which tends to increase total revenue. o The price effect: The price falls, so P is lower, which tends to decrease total revenue. ! Total Revenue = Q x P (profit + total cost) ! In competitive markets, price equals marginal cost. In monopolized markets, price exceeds marginal costThe Deadweight Loss: ! Socially efficient quantity is found where the demand curve and the marginal-cost curve intersect Price Discrimination: ! Single price monopoly- firm sells each unit for the same price to all customers ! Price discrimination- selling the same good at different prices to different customers ! Moral #1: o Price discrimination is a rational strategy for a profit-maximizing monopolist o By charging different prices to different customers, a monopolist can increase its profit o Price-discriminating monopolist charges each customer a price closer to his or her willingness to pay, therefore selling more than is possible with a single price ! Moral #2: o Price discrimination requires the ability to separate customers according to their willingness to pay o Monopolists choose differences, such as age or income, to distinguish among customers ! Moral #3: o Price discrimination can raise economic welfare by avoiding deadweight loss Analytics of Price Discrimination: ! Perfect price discrimination- monopolist knows exactly the willingness to pay of each customer and can charge each customer a different
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