Ch.15+Monopoly

Clearly, though, the ideological **perfect competition**, with the equilibrium point that is naturally set by the invisible hand, seems most unlikely to be seen in reality.

But THIS!


 * [|Microsoft]

THIS is everywhere. THIS is **Monopoly**.

Monopoly
Before we start, let's look at how monopoly can occur.
 * Single Firm owns a key resource
 * De Beers
 * [[image:http://www.brandchannel.com/images/home/home_img1_debeers.gif]]*[|DeBeers]
 * When it comes to monopoly, it's impossible not to mention the De Beers. Can you believe that the DeBeers company still controls about 80 percent of the world's production of diamonds? This company, which takes most of the diamonds in South Africa, has taken already captivated many consumers through their advertisements: "a diamond is forever."
 * Goverment's exclusive rights to produce
 * Harry Potter
 * [[image:http://tonymilne.blogs.com/i_see_red/images/2007/03/28/harry_potter.jpg width="266" height="398"]][|*Harry Potter]
 * How does J.K.Rowling get profit if there were no copyright laws to publish this book as her own? Probably, millions of people would be claiming that they were the authors of the novel. To prevent this situation, government creates patent and copyright laws.
 * Single Firm is more efficient than Multi-Firms (Natural Monopoly)
 * A **natural monopoly** is made when a single firm can produce goods at a lower price than more than one firm producing at the same time.
 * Water
 * [[image:http://www.liquidsculpture.com/images/water/water-drop-a.jpg width="466" height="313"]][|*Water]
 * Imagine that you are a business man. One day, you decide to participate in the water pipe industry and make the system to supply water to many buildings because you see only ONE firm in the market. 'Wow,' you think, 'it must make some great profit for me as well.' But what you notice is that you would need to make ALL the pipes leading to buildings that is specifically YOURS. You cannot use the other company's pipes. Well... This makes twice as much as pipes as before and obviously, less efficient. You do not get as much profit as you think because you are just dividing the share but just increasing the average total cost.

Monopoly v. Competition


Now, let's compare the firms of these two markets. The left photo is the competitive firm's demand curve. The right photo is the monopolist's demand curve. The competitive firm is a price taker. It takes the price from the market, so the price is always the same. In contrast, the monopolistic firm IS the market. There is no need to take price. They set price. That is why the demand curve looks the same as the market demand curve.

Marginal Revenue


But if you look carefully, there is still something different from the normal demand and supply curve. An additional negative downward sloping curve beneath the demand curve. What is this? Let's look carefully at the table on the left. Quantity, Price, Total Revenue, Average Revenue ... and MARGINAL REVENUE, the change of the total revenue as quantity changes.

//Marginal Revenue is always, in a monopoly, below the demand curve.// Say that the firm starts off with $10. It only sells one unit, so its total revenue is $10. To increase revenue, it drops the price to $9. Quantity increases to two units, and total revenue increases to $18. The firm's marginal revenue is only $8. Why? When the firm reduces the price to induce Customer 2 to buy, it gains only $9 from Customer 1, even though he is willing to pay $10. In essence, the firm is earning $9 from both the customers, receiving $9 more from Customer 2 but earning $1 less from Customer 1 ($9 - $1 = $8). The firm reduces price to earn more revenue.

*[|Monopoly]

Profit Maximization
(Point A: 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity.../ Point B: 2. ... and then the demand curve shows the price consistent with this quantity)

Straight to the point.


 * MC = MR**

That's right. Point A. Wait, what's MC again? MC is the Marginal Cost curve, which we learned that it was also the supply curve. At the point where these two curves intersect is where profit is maximized. (For further explanation, scroll down)*

So what would the price and quantity be? At Point A? No. Here's why Point B is marked up there. Though the quantity is the same as Point A, the goods would be sold at the price where it meets the demand curve. This is how monopolists earn profit. Recall that Profit = (Price - ATC) * Quantity.


 * Monopoly Profit** **/ *Monopoly Loss**

Profit = (Price - ATC) * Quantity

Differences between profit and loss? Simple.

If Price is greater than ATC, the value is positive, so it would be positive profit (= profit). If Price is lower than ATC, the value is negative, so it would be negative profit (= loss).



*It would not be profit maximizing if Marginal Revenue and Marginal Cost were not equal. At Q1, Marginal Revenue is greater than Marginal Cost. The firm would be earning more profit if they sold more goods. At Q2, Marginal Cost is greater than Marginal Revenue. Here, the firm would be earning more profit if they sold less goods. Thus, we can conclude that at Quantity M the profit is maximized.

Dead Weight Loss
[|*Dead Weight Loss]

Normally, the price and quantity would be at the equilibrium point, where the supply(MC) and demand curve intersects. The price and quantity for a monopoly, however, are different. The price is higher, quantity is lower. Also, the actual price in the market is much higher than the price where MC=MR. Thus, economists would say that this kind of market is inefficient.

Public Policy Toward Monopolies
**+**
 * Increasing Competition with Antitrust Laws**
 * [|Coke] / *[|Pepsi]

Will the government leave Coke and Pepsi merge? Probably... Not. They have the Clayton Antitrust Act to prevent mergers from preventing free and unfettered competition.

For natural monopolies, government regulate the prices to prevent the companies from charging any price they want, especially for those resources that are considered as necessities.
 * Regulation**

Rather than making private firms being monopolies, the government might take charge of the role of being a monopoly.
 * Public Ownership**

These other policies to control monopoly has negative sides as well, so some economists say that we should leave the monopoly alone.
 * Doing Nothing**

Price Discrimination
Price Discrimination is the business practice of charging different prices to different classes of people. Here are several cases of Price Discrimination.
 * Movie Tickets
 * Airline Prices
 * Discount Coupons
 * Financial Aid
 * Quantity Discounts

monopoly**: market with only a single firm
 * __Key Concepts__
 * natural monoply**: monoply that arises because a single firm can produce with a smaller cost than more than one firms
 * price discrimination**: firms selling a same good with several different price categories

Questions 1. What is the monopoly that arises because a single firm can produce with a smaller cost than more than one firms? 2. List at least two price discriminations.

Answers 1. natural Monopoly 2. Movie tickets, airline prices, discount coupons, financial aid, quantity discounts

__Helpful Clips__** [|Monopoly Production Part 1] [|Monopoly Production Part 2] [|Monopoly Profits and Taxation] [|Natural Monopoly]