Chapter+15+Monopoly+JBS

=Chapter 15 Monopoly JBS =



==**Key Terms : **==


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


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


 * price discrimination**: the business practice of selling the same good at different prices to different customers

**Why Monopoly Arises? **

 * SINGLE FIRM = no competitors =monopoly = sole seller of its product and if its product does not have close substitutes.


 * The EXCLUSIVE RIGHT from the government =barriers to entry → other firms can't enter..
 * patent and copyright to serve public interest


 * SINGLE PRODUCER's costs of production


 * monopoly firm = price maker


 * - monopolies charge high prices for their products.

**Monopoly **

 * although monopolies can control the prices of their goods, their profits are not unlimited.


 * aim to maximize profit.

**<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">Natural Monopoly **
<span style="font-family: Tahoma,Geneva,sans-serif;">Regulating Natural Monopoly

1. Most Natural monopolies are regulated 2. For example, utility companies should be prepared for peak usage times; they incur heavy fixed equipment costs 3. Socially optimal price is below ATC - ATC increases as more firms enter → natural monopoly is unattractive. - size of the market determines whether an industry is a natural monopoly. 4. To compromise, most regulating agencies establish a fair return price, which is "Regulated price" in the above graph, where P=ATC 5. Example:
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Subsidy by government
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Fair return price

<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">Welfare Cost of Monopoly
<span style="font-family: Tahoma,Geneva,sans-serif;">
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Price charged is above marginal cost.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">High price makes monopoly undesirable
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Earning profit for charging this high price

How can it be desirable for both? → its allocation of resources is different from that in a competitive market.. outcome must fail to maximize profit. <span style="font-family: Tahoma,Geneva,sans-serif;">
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Allocation of resources, done by invisible hand, doesn't happen here.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Social planner tries to maximize the total surplus to benefit both sides.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Socially efficient quantity is found where the demand curve and marginal cost curve intersect ( MAXIMIZED TOTAL SURPLUS)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Below this quantity, value of extra unit to consumers exceeds the cost of providing it
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Increasing output would raise total surplus
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Above the quantity, cost of producing extra unit exceeds the value to consumers

Decreasing output would raise total surplus. <span style="font-family: Tahoma,Geneva,sans-serif;"> In a monopoly, price is where marginal revenue and marginal cost intersect. → creation of deadweight loss! Problem becomes when firm produces and sells a quantity of output below the maximized total surplus.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">At optimal quantity, the value of an extra unit to consumers = marginal cost!
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Just like competitive firms, price = marginal cost!

**<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">Monopoly's Revenue **
<span style="font-family: Tahoma,Geneva,sans-serif;"> //Profit Maximization//
 * <span style="font-family: Tahoma,Geneva,sans-serif;">the average revenue of the firms go down but equals the price of the good
 * <span style="font-family: Tahoma,Geneva,sans-serif;">marginal revenue is always less than the price of its good
 * <span style="font-family: Tahoma,Geneva,sans-serif;">monopoly faces a downward-sloping demand curve
 * <span style="font-family: Tahoma,Geneva,sans-serif;">to increase the amount sold, must lower price of its good
 * <span style="font-family: Tahoma,Geneva,sans-serif;">when amounts of sells increase → Q goes up, and P goes down
 * <span style="font-family: Tahoma,Geneva,sans-serif;">when a monopoly increases production, MUST REDUCE PRICE
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Profit-maxmizing quantity of output is determined by the intersection of the marginal revenue curve and marginal-cost revenue in a monopoly.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Monopoly firm chooses the quantity of output that equates marginal revenue and marginal cost.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Profit of monopoly → (P-ATC) x Q

<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">**<span style="font-family: Tahoma,Geneva,sans-serif;">Monopoly vs. Competition **

 * <span style="font-family: Tahoma,Geneva,sans-serif;">monopoly's ability to influence the price of its output.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">competitive firm has no power to influence the price of its output. ( price takers)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">profit maximization demand curve ( competitive) → horizontal line market price, as much or as little as wanted in such price ( perfectly elastic)
 * <span style="font-family: Tahoma,Geneva,sans-serif;">monopoly: sole producer in their market, it is the market demand curve.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">constraint on a monopoly's ability to profit from its market power.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">because, they want to change a high price and sell a large quantity at that high price.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">but they can choose any point on the demand curve, but NOT OFF.

<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">The Dead Weight Loss
<span style="font-family: Tahoma,Geneva,sans-serif;">There IS a DWL in monopoly!

<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">**<span style="font-family: Tahoma,Geneva,sans-serif;">Public Policy **

 * <span style="font-family: Tahoma,Geneva,sans-serif;">Trying to make monopolized industries MORE COMPETITIVE
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Example: Coca-Cola and PepsiCo
 * <span style="font-family: Tahoma,Geneva,sans-serif;">REGULATING the behavior of the monopolies
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Antitrust laws "comprehensive charter of economic liberty"
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Turning some private monopolies into PUBLIC ENTERPRISES
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Government will run monopoly themselves!
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Public Ownership such as Postal Service in the United States
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Private owners have incentive to minimize costs, when higher profit!
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Doing NOTHING

**<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">Price Discrimination **
<span style="font-family: Tahoma,Geneva,sans-serif;">1. Charging different prices to different customers for the same product when the price differences are not due to differences in cost <span style="font-family: Tahoma,Geneva,sans-serif;">2. Price discrimination can't happen in a competitive market, because no one would lower the prize. 3. The requirements for successful price discrimination <span style="font-family: Tahoma,Geneva,sans-serif;">4. Examples:
 * <span style="font-family: Tahoma,Geneva,sans-serif;">More profit
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Skill to separate customers
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Price discrimination can raise economic welfare
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Arbitrage can prevent
 * <span style="font-family: Tahoma,Geneva,sans-serif;">DWL is created when one doesn't discriminate, but it is efficient when discrimination happens.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">A firm must possess market power
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Separate markets for consumers based on different price elasticity of demand
 * <span style="font-family: Tahoma,Geneva,sans-serif;">No opportunities for the resale of the product
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Movie Tickets
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Airline Prices
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Discount Coupons
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Financial Aid
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Quantity Discounts

<span style="color: #404040; font-family: Tahoma,Geneva,sans-serif;">**Conclusion<span style="font-family: Tahoma,Geneva,sans-serif;">: **

 * <span style="font-family: Tahoma,Geneva,sans-serif;"> || <span style="font-family: Tahoma,Geneva,sans-serif;">Competition || <span style="font-family: Tahoma,Geneva,sans-serif;">Monopoly ||
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Similarities |||| * <span style="font-family: Tahoma,Geneva,sans-serif;">Both goal of firms is to maximize profit.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">MR=MC for maximizing
 * <span style="font-family: Tahoma,Geneva,sans-serif;">They have economic profits in the short run. ||
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Differences || * <span style="font-family: Tahoma,Geneva,sans-serif;">Many Firms
 * <span style="font-family: Tahoma,Geneva,sans-serif;">MR = P
 * <span style="font-family: Tahoma,Geneva,sans-serif;">P = MC
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Long run entry
 * <span style="font-family: Tahoma,Geneva,sans-serif;">No economic profits in long run
 * <span style="font-family: Tahoma,Geneva,sans-serif;">NO Price discrimination || * <span style="font-family: Tahoma,Geneva,sans-serif;">One Firm
 * <span style="font-family: Tahoma,Geneva,sans-serif;">MR < P
 * <span style="font-family: Tahoma,Geneva,sans-serif;">P > MC
 * <span style="font-family: Tahoma,Geneva,sans-serif;">NO long run entry
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Have profit in long run
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Price discrimination is possible ||