Monopoly

Public government ownership

- a unit or agency of government owns and operates an organization. Parking structures, water systems, turnpike authority. *they are poorly run however -less eager than private to keep costs down or offer high quality products -end up serving political interests

Common techniques for price discrimination

1) Advance purchase restrictions 2) Volume Discounts 3) Two-part tariffs

How can you maximize profit for monopolists?

1) Choose quantity where marginal revenue = marginal cost 2) Choose the HIGHEST price you can get away with - aka the highest price consumers will pay *Pick quantity and follow graph of demand curve to get price

5 Barriers to Entry

1) Control of natural resources or inputs 2) Increasing returns to scale 3) Technological superiority 4) Network externality 5) Government-made barriers

Solutions for natural monopolies

1) Public government ownership 2) Price Regulation

A monopolist sells cable subscriptions in a small town and finds that it can sell 100 subscriptions when the price is $15 a week and 175 subscriptions when the price is $10 a week. The MC for the provision of the cable is $5 a week. There are no fixed costs. If this monopolist must choose between selling 100 or 175 subscriptions, it will choose to sell _____ units at a price of _____ and earn economic profits equal to _____.

100, $15, $1000

Technological superiority

A firm that maintains a consistent technological advantage over potential competitors can establish itself as a monopolist. Usually doesn't last in long term because competitors will upgrade

Monopoly

A market in which there are many buyers but only one seller.

Monopoly vs. perfect competition

A monopoly produces a smaller quantity, charges a higher price, and earns profits in long-run equilibrium, unlike firms in perfect competition.

How can we avoid monopoly behavior?

Antitrust policies

Why do monopolies have market power?

Because their demand curve is downward sloping whereas in perfect competition, the demand curve is horizontal.

T/F: Competitive firms can choose price, as well as monopolists.

FALSE; only monopolists can!

Finding the Monopoly price

Find Q where MR=MC but monopolist will charge the higher price for that Q on the Demand curve ex) charge at point B

What is the purpose of barriers to entry?

Generate profit for monopolist in short and long run *essential

What's the compromise in government-created barriers?

Higher price for good during legal protection compensates inventors Once patent is over, this benefits consumers and increases economic efficiency

What does the graph look like for monopolists maximizing profit?

Marginal revenue curve BELOW the demand curve because of PRICE EFFECT

Monopsony

Market with only one buyer more rare than monopoly

Maximizing profit in monopoly vs. perfect competition

Monopoly, MR=MC and P>MR, so where P > MC Perfect competition, P=MR so where P=MC

Is there consumer surplus in perfect price discrimination?

NO - zero. Entire surplus is captured by monopolist as profit

Is there deadweight loss in perfect price discrimination?

NO; it's efficient so all mutually beneficial transactions are exploited

Price effect for monopoly

Negative; To sell last unit, monopolist must cut market price on all units sold, decreasing total revenue

Do monopolists have a supply curve?

No - they control the prices so there is no set relationship between price and Qs

Perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

Price and quantity effect

Price Effect: an increase in revenue that results from a higher price of unit sold Quantity Effect: a decrease in revenue resulting from fewer units sold

When total revenue is decreasing...

Price effect dominates quantity effect

Equation for monopoly profit

Profit = TR - TC (Pm x Qm) - (ATCm x Qm) (Pm-ATCm) x Qm

When total revenue is increasing....

Quantity effect dominates price effect the increase in quantity is greater than the decrease in price

After Beth does the research for her new app, she learns that she will have 100 power users who would be willing to pay $5 and 400 casual users who would only be willing to pay $2. The marginal cost to provide the app to any one user is constant at $1 and there are no fixed costs. Suppose Beth cannot use price discrimination and she charges a price of $2 to all consumers. Her profit would be _____.

TR-TC (100x2+400x2)-(500x1)= $500

T/F: Price discrimination increases sales and profits.

TRUE

When monopolies charge at prices above the marginal cost... what happens?

There is a loss in consumer surplus which exceeds the monopolist's profit --> deadweight loss

Monopoly inefficiency

They charge more and produce less than what would be in a perfect competition

Unregulated vs Regulated natural monopoly

When you regulate, you lower the price to where P=ATC and monopolist makes ZERO profit. Any lower, monopolist will lose money and they won't produce if there's loss. now you generate more consumer surplus

Natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

Monopsonist

captures surplus from sellers by reducing how much it purchases, thereby lowering price. creates deadweight loss by reducing level of good transacted

If consumer has higher price elasticity...

charge them less, because students will be more affected to the change in price. they're not in a hurry to get anywhere, and can wait for a cheaper flight

If consumer has lower price elasticity ...

charge them more! business travelers will not be affected by a higher price because they need to get somewhere urgently

Control of natural resources or inputs

controls a resource or input CRUCIAL to industry which prevents other firms from entering market

Two-part tariffs

customer pays a flat fee upfront and then a per-unit fee on each item purchased ex) Costco card

Result of LARGE barriers of entry?

economic profit in LONG RUN

Copyright

gives creator of literary or artistic work sole rights to profit from that work equal to creator's lifetime

Patent

gives inventor a temporary monopoly in the use or sale of an invention

Why do government-created barriers work?

incentive to invent and create! if inventors weren't protected, they wouldn't gain anything from hard work and other people would just copy it and sell it.

A monopoly is producing output so that average total cost is $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, to maximize profits, this firm should:

increase output

The demand curve for a monopoly is also the....

industry demand curve

Government-created barriers

licensing patents and copyright law

Suppose that a monopoly firm is required to pay a new annual license fee to do business in its city and that the fee is somewhat less than the economic profit the firm is now earning. In response to the increase in fees, the firm will:

not change its price

Price regulation

price ceiling imposed on a monopolist that does not create shortages if it is not set too low ex) electricity, natural gas - limited on the prices they can charge

Volume discounts

price is lower if you buy a large quantity MC to consumer is less than average price

If a monopoly has a linear demand curve and is producing at the profit-maximizing level of output, at that level of output, demand is:

price-elastic

Advance purchase restrictions

prices are lower for those who purchase well in advance

A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the firm does not shut down. Compared with the condition before the increase in marginal costs, the monopolist will _____ its price and _____ its level of production.

raise, decrease

Suppose a perfectly competitive market is suddenly transformed into one that operates as a monopoly market. We would expect price to _____, output to _____, consumer surplus to _____, producer surplus to _____, and deadweight loss to _____.

rise; fall; fall;rise;rise

Business travelers vs. students

students - higher elasticity business travelers - lower elasticity

Market power

the ability of a firm to raise prices by reducing output on graph: reduces quantity by move left up the demand curve which raises price why? to increase profit

Price discrimination

the business practice of selling the same good at different prices to different customers - based on the willingness to pay ex) airline tickets

Marginal revenue

the change in total revenue from an additional unit sold/change in Q

Marginal cost

the cost of producing one more unit of a good

Network externality

the value of a good or service to an individual increases as more individuals use the same good or service ex) Facebook - more people use Facebook - attract new customers

Increasing Returns to scale

when long-run average total cost declines as output increases Why natural monopolies exist

Quantity effect for monopoly

when one more unit is sold, it increases total revenue by price at which unit is sold

Natural monopolist's break even price

where demand curve = ATC curve