Chapter+15+(Monopoly)

CHAPTER 15 : MONOPOLY
 * by Rachel Y. **




 * Monopoly **: a firm that is the sole seller of a product without close substitutes.

The cause of monopoly: //barriers to entry//. This has three main sources:  - A key resource owned by a single firm. - The government gives a single firm the exclusive right to produce some good or service. - The costs of production make a single producer more efficient than a large number of producers.


 * Monopoly Production**

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Part 2 media type="youtube" key="gyQlOBKSSh8" height="344" width="425"


 * 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.

 Example of a natural monopoly: distribution of water. The average total cost of water is lowest if the market if served by one firm because if there were more than one firm each firm would have to pay the fixed cost of building a network.

 The graph above shows that when a firm's average-total-cost curve continues to decline, the firm has 'natural monopoly'. When production is divided among more firms, each firm's production decreases, and ave.total cost increases. So, a single firm is able to produce any given amount at the least cost.

__Whether an industry is a natural monopoly depends on the size of the market.__ For example, if there was a bridge across a river. When the population is small, the bridge could be a natural monopoly. One bridge could satifsy all the demands for trips across that river at the lowest cost. However, as the size of population grows, the congested bridge would not be enough. So, more than one bridge would be needed to satisfy the demands. So, __as a market expands, a natural monopoly can evolve into a competitive market.__

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 * Monopoly VS Competition

**Difference between a competitive and monopoly: monopoly's ability to influence the price of its output.

A competitive market is smaller compared to the market that it operates, so it does not have influence over the price of its output. It is a //price taker// because it takes the price that market conditions give to it. However, a monopoly is a //price maker// and can change the price of its good by altering the quantity it provides to the market.  Look at the demand curves below.

The competitive firm has a demand curve that any one firm faces is perfectly elastic because the competitive firm sells a product with many perfect substitutes.

The Monopoly is the 'sole producer' of its market. So, the monopolist's demand curve slopes downward. If monopolist increase price, less consumers would demand it. So, in order for a monopoly to sell more output, it must accept a lower P.

Monopolist's goal is to MAXIMIZE PROFIT.



  A monopolist's marginal revenue is always LESS than the price of its good.
 * <span style="font-family: 바탕; color: black;">A Monopoly’s Revenue **

Marginal revenue for monopolies is different from marginal revenue for competitive firms. When a monopoly increases the amount it sells, it has two effects on the total revenue (P x Q).

1) Output effect: More output is sold, so Q is higher. 2) Price effect: the P falls, so P is lower.

A competitive firm can sell any amount at the market price. So it has no Price effect. __* The competitive firm's MR = P of the good because it is a //price taker//.__

However, with __a monopoly, its MR < P__ because if it were to increase production by a unit, it would have to decrease the price it charges for each unit it sells, which would reduce revenue on the units it was already selling.

__MR = Negative__ when __price effect on the revenue > output effect.__

<span style="font-family: 바탕; color: black;"> **Demand and Marginal-Revenue Curves for a Monopoly**



The Demand curve above shows how Q affect P of the good. MR curve shows changes to the firm's revenue as quantity increases by a unit. P on all units sold must fall if monopoly produces more, making __MR < P__.

<span style="font-family: 바탕; color: black;"> **Profit Maximization**

<span style="font-family: 바탕; color: black;"> Looking at graph above, it's important to note: <span style="font-family: 바탕; color: black;"> <span style="font-family: 바탕; color: black;">Similarity between competitive firm and monopoly: both choose the Q of output where MR = MC. Difference between competitive firms and monopolies: //MR of competitive firm = P//, but //MR of monopoly < P//
 * <span style="font-family: 바탕; color: black;">__A monopoly maximizes its profit by choosing Q where MR = MC__.
 * <span style="font-family: 바탕; color: black;">__Monopoly also uses the D curve to find the P that would make consumers buy that Q.__
 * __<span style="font-family: 바탕; color: black;">The monopolists profit-maximizing Q of output is determined by the INTERSECTION of the MR curve and MC curve. __

__For a competitive firm: P = MR = MC For a monopoly firm: P > MR = MC__ <span style="font-family: 바탕; color: black;"> KEY DIFFERENCE: In competitive markets, P = MC. In monopolized markets, P > MC. <span style="font-family: 바탕; color: black;">




 * <span style="font-family: 바탕; color: black;">Monopoly’s Profit

**<span style="font-family: 바탕; color: black;">Profit = TR - TC

Profit = (TR/Q - TC/Q) x Q

TR/Q = Average revenue = P TC/Q = Average total cost = ATC

Profit = (P-ATC) x Q <span style="font-family: 바탕; color: black;">

<span style="font-family: 바탕; color: black;">Looking at the graph above, it is important to notice:
 * <span style="font-family: 바탕; color: black;">The box A equals the profit of the monopoly firm. The hight of the box A is P - ATC, which equals Profit per unit sold.
 * <span style="font-family: 바탕; color: black;">The width of the box A is the # of units sold. The width of the box if the Q sold, Qmax. So, the area of this box = monopoly firm's total profit.

<span style="font-family: 바탕; color: black;">


 * <span style="font-family: 바탕; color: black;">Deadweight Loss:

**<span style="font-family: 바탕; color: black;">The socially efficient Q is found where the D curve INTERSECTS the MC curve. Below this Q, the value of an extra unit to consumers EXCEEDS the cost of producing it. So, __increasing OUTPUT would raise TOTAL SURPLUS.__

The monopolist produces less than the socially efficient quantity of output. <span style="font-family: 바탕; color: black;"> media type="youtube" key="Uyq7srTy7Zg" height="344" width="425" <span style="font-family: 바탕; color: black;">Dead weight loss cause by monopoly is similar to that of a tax.

A tax on a good places a 'wedge' between consumer's demand and producer's cost. A monopoly would also place a similar wedge because it would give off market power by charging a P > MC.

In both cases of taxes and DWL in monopolies, wedges make the Q sold < social optimum.

Government get the revenue from a tax. A private firm obtains the monopoly profit.

<span style="font-family: 바탕; color: black;">Q produced and sold by a monopoly is below the socially efficient level because a monopoly charges a P above MC and not all the consumers, who value the good itself more than how much it is, buy it.

The DWL is shown by the area of the triangle that is between the D curve (which shows the value of good to consumers) and the MC curve ( which shows the costs of the monopoly producer).

**Public Policy Toward Monopolies**

<span style="font-family: 바탕; color: black;">Some problems of Monoplies are: <span style="font-family: 바탕; color: black;"> So, Policy makers in the government try to solve these problems by four different ways:
 * <span style="font-family: 바탕; color: black;">Monopolies fail to allocate resources efficiently.
 * <span style="font-family: 바탕; color: black;">They also produce less than the socially desirable quantity of output.
 * <span style="font-family: 바탕; color: black;">Monopolies charge P > MC.

1) Make monopolized industries more COMPETITIVE 2) Regulate behavior of monopolies 3) Turn some private monopolies into public enterprises 4) Take no action.

**<span style="font-family: 바탕; color: black;">Increasing Competition with Antitrust Laws

**<span style="font-family: 바탕; color: black;">Government have power over private industries by the 'antitrust laws' which are used to 'curb' monopoly power.

For example: - Sherman Antitrust Act: used to reduce the market power of the large 'trusts' that were viewed as dominating the economy. - Clayton Antitrust: strengthened the government's powers.

These 'antitrust laws': > > <span style="font-family: 바탕; color: black;"> However, mergers have benefits called: Synergies, which are used to lower costs through more efficient joint production. <span style="font-family: 바탕; color: black;"> <span style="font-family: 바탕; color: black;"> media type="youtube" key="qdRGUaTHVig" height="344" width="425"
 * <span style="font-family: 바탕; color: black;"> " a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade." according to the U.S. Supreme court.
 * <span style="font-family: 바탕; color: black;">They give government many ways to promote competition.
 * <span style="font-family: 바탕; color: black;">They allow government to stop mergers.
 * <span style="font-family: 바탕; color: black;">They allow government to break up companies.
 * Is Monopoly Good?**<span style="font-family: 바탕; color: black;">

**<span style="font-family: 바탕; color: black;">These are used by governments to regulate the prices of mostly natural monopolies.
 * <span style="font-family: 바탕; color: black;">Regulation

There are two problems to this regulatory system: 1) Logic of cost curves; natural monopolies have declining ave. total cost, and MC < ATC. So if regulators try to make the natural monopoly to charge a P = MC, P would be BELOW the ave. total cost, and the monopoly would LOSE money.

2) It gives the monopolist no incentive to reduce costs. If regulated monopolists know that whenever costs fall, regulators would reduce prices, the monopolists would not gain anything from lower costs.

The government runs the monopoly itself, rather than put regulations on the natural monopoly run by a private firm.
 * Public Ownership**

Some economists argue, government should not take action because each policy has its pros and cons.
 * Take No Action**

<span style="font-family: 바탕; color: black;"> <span style="font-family: 바탕; color: black;"> Examples: Movie Tickets, Airline Prices, Dis <span style="font-family: 바탕; color: black;">count Coupons, Financial Aid, Quantity Discounts
 * <span style="font-family: 바탕; color: black;">Price discrimination **<span style="font-family: 바탕; color: black;">: the business practice of selling the same good at different prices to different customers.

Looking at movie tickets, many movie theatres charge lower prices for children or senior citizens. If the movie theatres have local monopoly power and children have lower willingness to pay for a ticket, price discrimination is possible. Movie theatres increase their profit, whereas in a competitive market, P = MC, and MC of providing seats for children is equal to the MC of providing seats to anyone else.



__* Price discrimination raises the monopoly's profit.__

By Rach Y. media type="custom" key="3025856"
 * The Types of Price Discrimination through imeem**


 * Perfect Price Discrimination**: a situation where the monopolists knows the customer's willingness to pay and can charge each customer a different P. Monopolist would get ENTIRE SURPLUS, while the monopolist charges each customer his/her exact willingness to pay.


 * Questions and Answers**

Questions

Q1. When is Marginal revenue curve negative? Q2. What is the goal of the monopoly? Q3. What is 'price effect' and 'output effect'? Q4. Contrast the Marginal revenues of the competitive firm and the monopolistic firms? Q5. What Quantity does the monopolistic firms look at to maximize profit on a graph? Q6. a) What is Price discrimination? b) What are some examples?

Answers:

A1. When price effect on the revenue is larger than the output effect. A2. To maximize profit. A3. 1) Output effect: More output is sold, so Q is higher. 2) Price effect: the P falls, so P is lower. A4. The competitive firm's MR = P With a monopoly, its MR < P A5. The Q where MR = MC

A6. a) The business practice of selling the same good at different prices to different customers. b) Movie tickets, Airline Prices, Discount coupons, Financial Aid, Quantity Discounts


 * Sources:**

Book __The Principles of Microeconomics__ by: N. Gregory Mankiw of Havard University

Sites: [|http://alpha.fdu.edu/~koppl/note19.htm] http://en.wikipedia.org/wiki/Monopoly [|http://uk.encarta.msn.com/encyclopedia_761567422/Monopoly_(economics).html] http://tutor2u.net/economics/content/topics/monopoly/benefits_of_monopoly.htm http://tutor2u.net/Economics/revision-notes/a2-micro-price-discrimination.html http://ingrimayne.com/econ/Monopoly/PriceDiscrimination.html http://picasaweb.google.com/bisgeier/IndiaMarchApril2007#5050856568853389410 http://www.harpercollege.edu/mhealy/eco211/lectures/monopoly/monopoly.htm http://en.wikipedia.org/wiki/Deadweight_loss