Ch 12 – Monopoly

Ch 12 – Monopoly - Ch. 12: Monopoly Olivier...

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Ch. 12: M onopoly Olivier Giovannoni ECO 304K – Introduction to Microeconomics
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Outline 1. M arket power 2. Single-price monopoly: 1. Output and price decision 2. Comparison with perfect competition; the case of rent-seeking 3. Price discrimination 4. M onopoly policy issues Ch. 12 – Monopoly –
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1. Market power Definition: A monopoly is a situation where… 1. There is only one firm 2. The monopolist produces a good or service for which there is no close substitute (the MR is not equal to the price and MR is not flat) 3. There are entry/exit barriers to the market. I mplication: Because a monopoly doesn’t have competition, a monopoly enjoys market power. This is the ability to influence the market, especially the market price, in order to influence the quantities sold and the revenue. That makes monopolies price makers ( price takers in perfect competition) A monopoly can have two pricing strategies (2 types of monopoly) depending on whether the good produced can be resold or not: Ch. 12 – Monopoly –
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§2: Single-price monopolies are selling their products at a unique price. This usually happens when resale of the good is possible. §3: Price-discriminating monopolies charge different prices for the same goods sold (airlines, movie theaters). This is usually the case when resale is not possible. Examples: Monopoly situations are quite widespread. They include a lot of utility and high-tech companies (because when you have a technological advance you are the only one to produce such product, i.e. the iPhone) but also… resource control: when a company has acquired the majority of the resource (like DeBeers for diamonds, or Mittal for steel, or other companies for Teak wood or other natural resources) 1. Market power (…) Ch. 12 – Monopoly –
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legally : there are copyrights, patents, licenses so that some products can only be produced by certain companies (pharmaceuticals and chemistry are good examples, but also some professions such as doctors or lawyers are restricted). 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 that never end (they never enter the stage of diseconomies of scale). That means that the more the firm produces, the lower its costs per unit (ex: electricity, water and utilities in general). We start with single-price monopolies : firms who are price makers and charge each and every customer the same price for the same good. 1. Market power (…) Ch. 12 – Monopoly –
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2.1. Q and P decisions More features: by definition a monopoly captures the whole market. As a result, i. the firm’s individual demand is the same as the total market demand ( perfect competition) ii.
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Ch 12 – Monopoly - Ch. 12: Monopoly Olivier...

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