Ch11-Slides

# Ch11-Slides - Chapter Eleven Monopoly Monopsony Chapter...

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Monopoly & Monopsony Chapter Eleven Chapter Eleven

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Chapter Eleven Overview 1. Introduction 2. The Monopolist’s Profit Maximization Problem The Profit Maximization Condition Equilibrium The Inverse Pricing Elasticity Rule 3. Multi-plant Monopoly and Cartel Production 4. The Welfare Economics and Monopoly 5. Natural Monopoly 1. Introduction 2. The Monopolist’s Profit Maximization Problem The Profit Maximization Condition Equilibrium The Inverse Pricing Elasticity Rule 3. Multi-plant Monopoly and Cartel Production 4. The Welfare Economics and Monopoly 5. Natural Monopoly Chapter Eleven
AT&T’s Anti-Trust Case Until 1970s, only one telephone company was allowed to operate in each local market. In most areas the company was owned by AT&T. Long- distance service was monopolized by AT&T. Starting in 1960s, other companies (MCI) started to provide long-distance service. But they needed to use the local network of AT&T. And AT&T refused to comply. 1974, the anti-trust case US v. AT&T. In 1982, AT&T lose the case. It was forced to divest its local telephone companies.

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Chapter Eleven A Monopoly Definition: A Monopoly Market consists of a single seller facing many buyers. The monopolist's profit maximization problem: Max π (Q) = TR(Q) - TC(Q) where : TR(Q) = QP(Q) and P(Q) is the (inverse) market demand curve. Definition: A Monopoly Market consists of a single seller facing many buyers. The monopolist's profit maximization problem: Max π (Q) = TR(Q) - TC(Q) where : TR(Q) = QP(Q) and P(Q) is the (inverse) market demand curve.
Chapter Eleven A Monopoly – Profit Maximizing Profit maximizing condition for a monopolist: dTR(Q)/dQ = dTC(Q)/dQ MR(Q) = MC(Q) The monopolist sets output so that marginal profit of additional production is just zero. Recall: A perfect competitor sets P = MC…in other words, marginal revenue equals price. Profit maximizing condition for a monopolist: dTR(Q)/dQ = dTC(Q)/dQ MR(Q) = MC(Q) The monopolist sets output so that marginal profit of additional production is just zero. Recall: A perfect competitor sets P = MC…in other words, marginal revenue equals price.

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Chapter Eleven A Monopoly – Profit Maximizing Why is this not so for the monopolist? Why is this not so for the monopolist? MR = dTR/dQ = P + QdP/dQ • Note that the demand curve is downward sloping. dP/dQ < 0. • Thus, MR(Q) < P. • For a perfect competitor, increasing it own quantity does not affect the market price, thus MR = P. • However, for a monopolist, increasing its quantity decreases the market price. Hence, MR(Q) < P.
P 0 P 0 P 1 C A B Q 0 Q 0 +1 q q+1 Competitive Firm Monopolist Demand facing firm Demand facing firm AB Price Price Firm output Firm output Chapter Eleven Marginal Revenue

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The MR curve lies below the demand curve. Price Quantity P(Q), the (inverse) demand curve MR(Q), the marginal revenue curve Q 0 P(Q 0 ) MR(Q 0 ) Chapter Eleven Marginal Revenue Curve and Demand
Definition: An agent has Market Power if s/he can affect, through his/her own actions, the price that prevails in the market. Sometimes this is thought of as the degree to which a firm can raise price above marginal cost.

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## This note was uploaded on 07/17/2008 for the course ECON 501.02 taught by Professor Yang during the Winter '08 term at Ohio State.

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Ch11-Slides - Chapter Eleven Monopoly Monopsony Chapter...

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