BA_315_LN_7A_MARKET_STRUCTURE_MONOPOLY

BA_315_LN_7A_MARKET_STRUCTURE_MONOPOLY - FIRMS WITH MARKET...

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1 FIRMS WITH MARKET POWER: MONOPOLY Lecture Notes #7 BA 315: Economy, Industry, and Competitive Analysis Source: Schiller Chapter 7 Edited by: Ali Emami Department of Finance Charles H. Lundquist College of Business University of Oregon
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2 Introduction This lecture explains the profit-maximization motive for all types of firms in general, and then specifically focuses on profit maximization decisions made by the monopoly firm- the single producer- in a market. The lecture describes how and why a monopoly firm can avoid the competitive firm’s constant pressure to lower cost, improve quality, and respond to customer demand. The lectures emphasizes the fact that the monopoly firm acts as a price makerrather than being a price taker in market due to its market power. This lecture attempts to answer the following questions: 1. What price will a monopolist charge for his output compared to a competitive firm? 2. How a monopolist creates barrier for entry into its markets for potential competitors? 3. Are consumers better or worse off under monopoly compared to perfect competition? Concepts you will learn Market power Marginal revenue (MR) Marginal cost pricing Market demand Profit-maximization rule Economies of scale Patent Production decision Natural monopoly Monopoly Barriers to entry Contestable market Predatory pricing
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3 LECTURE OUTLINE f Definition: Market Power - The ability to alter the market price of a good or service. I. Monopoly Structure A. Market Demand f Definition: Market Demand - The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands. B. Monopoly = Industry - Since a monopoly industry consists of only one firm, the firm is the industry. 1. Patent f Definition: Patent - Government grant of exclusive ownership of an innovation. 2. Monopoly f Definition: A firm that produces the entire market supply of a particular good or service. 3. In monopoly situations the demand curve facing the firm is identical to the market demand curve for the product since there is only one firm in the industry. C. Price vs. Marginal Revenue (Figure 7.1) 1. Marginal revenue (MR) f Definition: Marginal Revenue - The change in total revenue that results from a one-unit increase in quantity sold. a. For only the perfectly competitive firm does price equal marginal revenue. b. Marginal revenue is always less than price for a monopolist charging a single price for its output. c. The MR curve lies below the demand (price) curve at every point but the first. d. Note : When drawing the MR curve, the curve intersects the horizontal axis half way between the origin and where the demand curve intersects.
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4 Quantity Price Total Revenue Marginal Revenue 1 $13 $13 2 12 24 $11 3 11 33 9 4 10 40 7 5 9 45 5 6 8 48 3 7 7 49 1 II. Monopoly Behavior A. Profit Maximization f Definition: Profit maximization rule : Produce at that rate of output where marginal revenue equals marginal cost.
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