CHAP 12 – Monopoly

CHAP 12 – Monopoly - CHAP 12 – Monopoly...

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CHAP 12 – CHAP 12 – Monopoly Monopoly Olivier Giovannoni 304K – Introduction to Microeconomics Oct 24, 2007
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Outline Outline 2. Market power 3. Single-price monopoly: Output and price decision Comparison with perfect competition Price discrimination Monopoly policy issues CHAP 12 – Monopoly 2
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1- Market power 1- Market power Market power is the ability to influence the market, especially the market price, in order to influence the quantities sold and the revenue. Monopolies are price makers . A monopoly is a firm that produces a good or service for which there is no close substitute that is protected by entry/exit barriers . A monopoly can have two price strategies: Single-price monopolies , who are selling their products at a unique price (DeBeers, most of this chapter) Price-discriminating monopolies , who charge different prices for different units sold. CHAP 12 – Monopoly 3
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1- Market power (cont.) 1- Market power (cont.) Monopolies include a lot of utility and high- tech companies. A monopoly arises… when a company has acquired the majority of the resource (DeBeers) by law : there are copyrights, patents, licenses so that some products can only be produced by certain companies (pharmaceuticals, chemistry, some professions such as doctors or lawyers). Those are legal monopolies. naturally : a natural monopoly is a situation in which one firm is able to supply the whole market because of economies of scale (ex: electricity and water). CHAP 12 – Monopoly 4
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2.1- Q and P decisions 2.1- Q and P decisions We start with single-price monopolies : firms who are price makers but charge the same price for different units. In such a situation the monopolist captures (almost) the whole market and price competition does not exist. As a result the firm’s individual demand is the same as the total market demand . (≠perfect competition) In order to sell more, a monopolist still has to decrease the price (the law of demand still applies to monopolies) First we have to see the relationship between price and marginal revenue. Recall that in prefect competition p=MR We are going to see that in a monopoly situation p>MR . Let’s see why following the textbook example of a hair salon who is the only one in town (thus, a local monopoly). CHAP 12 – Monopoly 5
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Let’s start from the traditional demand curve and move our way to derive the MR curve. Suppose the monopoly sets a price of $16 for a haircut and sells 2 units at that price (point C).
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Now suppose the firm cuts the price to $14 to sell 3 units. It loses $4 of total revenue on the 2 units it was selling at $16 each. And it gains $14 of total revenue on the 3rd unit. So total revenue increases by $10 (-$4 + $14), which is also the marginal revenue here.
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The marginal revenue curve, MR , passes through the red dot midway between 2 and 3 units and at a level of $10.
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This note was uploaded on 04/27/2008 for the course ECON 304K taught by Professor Ledyard during the Fall '08 term at University of Texas at Austin.

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CHAP 12 – Monopoly - CHAP 12 – Monopoly...

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