Chapter 25 Monopoly. Slide 25-2 You are familiar with the type of patent protection that applies to mechanical inventions, giving the owner exclusive

Chapter 25

Monopoly

Slide 25-2

You are familiar with the type of patent protection that applies to mechanical inventions, giving the

owner exclusive rights to use an innovative technology. A similar type of protection can also

apply to innovations in business methods.

Introduction

In either case, a patent bestows the rights of a monopoly and prohibits competition.

Slide 25-3

Identify situations that can give rise to monopoly

Describe the demand and marginal revenue conditions a monopolist faces

Discuss how a monopolist determines how much output to produce and what price to charge

Learning Objectives

Slide 25-4

Learning Objectives

Evaluate the profits earned by a monopolist

Understand price discrimination

Explain the social cost of monopolies

Slide 25-5

Chapter Outline

Definition of a Monopolist

Barriers to Entry

The Demand Curve a Monopolist Faces

Elasticity and Monopoly

Slide 25-6

Cost and Monopoly Profit Maximization

Calculating Monopoly Profit

On Making Higher Profits: Price Discrimination

The Social Cost of Monopolies

Chapter Outline

Slide 25-7

A monopoly can arise whenever a seller is given exclusive rights to distribute a good?

In the case of hearing aids, a legally-protected distribution system through state-certified audiologists has increased hearing-aid prices to the monopoly level?

Did You Know That...

Slide 25-8

Definition of a Monopolist

Monopolist

– A single supplier of a good or service for which there is no close substitute

Slide 25-9

The source of monopoly

– A barrier to entry that allows the firm to make long-run economic profits

Barriers to Entry

Slide 25-10

Ownership of resources without close substitutes

– If you owned all the oil reserves, who could enter the refining business?

– The Aluminum Company of America (ALCOA) at one time owned 90 percent of the world’s bauxite.

Barriers to Entry

Slide 25-11

Problems in raising adequate capital

– Choose a product that requires a substantial capital investment

– Why not enter the microprocessor market and compete with Intel?

Barriers to Entry

Slide 25-12

Economies of scale

– Low unit costs and prices drive out rivals

– The largest firm can produce at the lowest average total cost

Barriers to Entry

Slide 25-13

Natural Monopoly

– A monopoly that arises from the peculiar production characteristics in an industry

– It usually arises when there are large economies of scale

Barriers to Entry

Slide 25-14Figure 25-1

LAC

LMC

Kilowatts of Electricity per Time Period

Pric

e pe

r K

ilow

att

The Cost Curves that Might Lead to a Natural Monopoly: The Case of Electricity

Slide 25-15

Legal or governmental restrictions– Licenses, franchises, and certificates of

convenience

– Is the postal service still a monopoly?• Consider

– UPS– FedEx– Fax machines– The Internet

Barriers to Entry

Slide 25-16

In order to sell any arranged flowers in Louisiana, one must first become a licensed florist.

This involves paying a $150 fee to take an exam in which other florists judge the skills of those seeking the license. Nearly half of the applicants receive failing grades.

This serves as a barrier to entry, although the floral industry is not a monopoly.

Example:Barriers to Entry in Selling Flowers

Slide 25-17

Legal or governmental restrictions– Patents

• Intellectual property

– Tariffs• Taxes on imported goods

– Regulation

Barriers to Entry

Slide 25-18

Cartels

– An association of producers in an industry that agree to set common prices and output quotas to prevent competition

Barriers to Entry

Slide 25-19

Monopolist’s demand = market demand

– Monopolist is the industry

The Demand Curvea Monopolist Faces

Slide 25-20

Recall

– In perfectly competitive markets:• All firms combined create the industry supply• Industry supply relative to market demand (D)

determines equilibrium price and quantity• The industry faces the market demand


Slide 25-21

Demand Curves for the Perfect Competitor and the Monopolist

Figure 25-3, Panels (a) and (b)

d = D

Q

Panel (b)

Demand If Individual SupplierIs the Only Supplier in a

Pure Monopoly

d

q

Panel (a)

Demand If Individual Supplier Is inPerfect Competition

Pric

e pe

r U

nit

Pric

e pe

r U

nit

Slide 25-22

Monopoly Perfect Competition

Single Seller

Faces market demand

Must lower price to sell more

MR < P

One of many sellers

Perfectly elastic demand (price takers)

Must only produce moreto sell more

All units sold for same price (P = MR)



P1

MR = area A – area B

Quantity of Electricity perTime Period

Q + 1Q

P2

Area A (+)Gain

Area B (–)

Loss

Demand curve = AR curve

D

Pric

e of

Ele

ctri

city

Marginal Revenue: Always Less Than Price

Slide 25-24

A monopoly is a single seller of a well-defined good or service with no close substitutes.

The more imperfect substitutes there are, and the better these substitutes are, the greater the price elasticity of demand of the monopolist’s demand curve


Slide 25-25


Question

– If a monopoly raises price, what will happen to quantity demanded?

Hint

– Remember how consumers respond to a change in price.

Slide 25-26

Price Searcher

– A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve

Cost and MonopolyProfit Maximization

Slide 25-27

E-Commerce Example:Online Journal Subscriptions

JSTOR is a organization providing back issues of journals to researchers in academic fields.

To determine the fees it will charge for a subscription, JSTOR analyzes the frequency with which each journal is accessed.

Slide 25-28

E-Commerce Example:Online Journal Subscriptions

The goal is to charge relatively higher fees for those articles characterized by a somewhat inelastic demand.

As a result, a higher price is assigned to those journals which are accessed less frequently.

Slide 25-29Figure 25-5, Panel (a)

Monopoly Costs,Revenues, and Profits

Slide 25-30Figure 25-5, Panels (b) and (c)

Monopoly Costs,Revenues, and Profits

Profit-maximizingrate of output

MC = MR

MR

D

MC

1514131211109876543210

1

2

3

4

5

6

Panel (c)

10

9

8

7

Output per Time Period

Losses

Maximumprofit

TR

Losses

1514131211109876543210

10

20

30

40

50

60

Panel (b)

100

90

80

70


Pric

e,

Ma

rgin

al C

ost

s, a

nd

Ma

rgin

al R

eve

nu

e p

er

Un

it ($

)

To

tal C

ost

s a

nd

To

tal R

eve

nu

e (

$)

TC

Slide 25-31

Example: Stifling Competition for Replacement Ink and Toner Cartridges

There are many manufacturers of computer printers, fax machines, and copiers.

But each manufacturer designs the equipment so that the ink and toner cartridges are a unique fit.

Slide 25-32

Example: Stifling Competition for Replacement Ink and Toner Cartridges

In this way, each manufacturer can operate as a monopolist in the market for replacement cartridges.

Some firms have entered the market of collecting and refilling empty cartridges which then can sell at a much lower price than the manufacturer’s replacements.

Slide 25-33

Why produce where marginal revenue equals marginal cost?

– Producing past where MR = MC• Incremental cost > Incremental revenue

– Producing less than where MR = MC• Incremental revenue > Incremental cost

Cost and MonopolyProfit Maximization


Maximizing Profits

MC

Quantity per Time Period

D

Pric

e, M

argi

nal C

ost,

and

Mar

gina

l Rev

enue

per

Uni

t

MRQ1

B

A

Qm

Pm

Q2

FC


Calculating Monopoly Profit

131211109876543210

1

2

3

4

5

6

18

17

16

15

14

13

12

11

10

9

8

7


MC

D

MR

ATC

Qm

Pm

Pric

e,

Ma

rgin

al R

eve

nu

e,

an

d C

ost

pe

r u

nit

($)

Monopolyprofit


Monopolies: Not Always Profitable

Losses

MR

Pm

C 1

Qm

D

ATC

MC


Pric

e, M

arg

inal

Rev

enu

e, a

nd C

ost

per

unit

A

Slide 25-37

Price Discrimination

– Selling a given product at more than one price, with the difference being unrelated to differences in cost


Slide 25-38

Price Differentiation

– Establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers


Slide 25-39

Necessary conditions for price discrimination

– The firm must face a downward-sloping demand curve

– The firm must be able to separate markets at a reasonable cost


Slide 25-40

Necessary conditions for price discrimination

– The buyers in the various markets must have different price elasticities of demand

– The firm must be able to prevent resale of the product or service


Slide 25-41

The amount of out-of-pocket tuition you pay for your college courses may differ greatly from the amount paid by your classmates.

Colleges tailor tuition charges to suit the financial resources of each student.

This is a form of price discrimination.

Example:Price Differentiation in College Tuition


Example:Price Differentiation in College Tuition

College Students Enrolled

D

P7

Q1

P6

Q 2

P5

Q3

P4

Q 4

P3

Q 5

P2

Q 6

P1

Q7

Tu

ition

Pric

e

Slide 25-43

Scenario

– Start with a perfectly competitive market in long-run equilibrium• Pe: Qd = Qs

• MR = MC

• Pe = MC

• Zero economic profits


Slide 25-44

Scenario

– Now, assume the industry is acquired by one firm with no impact on cost.


Slide 25-45

The Effects of Monopolizing an Industry

Figure 25-10, Panels (a) and (b)

MCm

Pm

Qm

D

S = MC

Panel (b)

MR


D

S = ΣMC

Panel (a)


Pric

e, M

arg

inal

Rev

enu

e, a

ndM

argi

nal C

ost

per

Uni

t

Pric

e pe

r U

nit

Pe

Qe

E

Slide 25-46

Issues and Applications: Business Method Patents

Business method patents are granted for innovations combining computer software with business policies and procedures.

It is not always clear which types of innovations really need patent protection.

Each time a patent is granted, there is some part of a market that loses the efficiency that would arise from competition.

Slide 25-47

Summary Discussion of Learning Objectives

Why a monopoly can occur

– Barriers to entry

Demand and marginal revenue conditions faced by a monopolist

– The monopolist’s demand curve is the industry demand curve

– Marginal revenue is less than price

Slide 25-48


How a monopolist determines how much output to produce and what price to charge

– Produce where marginal cost equals marginal revenue

– Set price for that output on the demand curve

Slide 25-49


A monopolist’s profits

– Price minus average total cost times output equals profits (losses)

Slide 25-50


Price discrimination

– Selling at more than one price with the price differences being unrelated to differences in production costs

– Buyers with the more elastic demand pay a lower price

Slide 25-51


Social cost of monopolies

– Price exceeds marginal cost

– The price is higher and output is lower for a monopolist as compared to a perfectly competitive industry

End of Chapter 25Monopoly

Documents

Chapter 25 Monopoly. Slide 25-2 You are familiar with the type of patent protection that applies to mechanical inventions, giving the owner exclusive