PAM_2000_Spring_2009_Lecture_19

# PAM_2000_Spring_2009_Lecture_19 - PAM200Lecture19 Guest...

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PAM 200 Lecture 19 Guest Speaker next Thursday: Jess Sharp Agenda n Monopoly: Definition n MR for Monopolist n Monopolist’s choice of output n Monopolist’s shutdown decision n Measuring Market Power: Lerner Index § Dominant firm with a competitive fringe

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Monopoly: Definition n Definition : A monopoly is one supplier of a good for which there is no good substitute n Examples: Postal monopoly, patents, electric utilities, DeBeers diamond mines
Monopoly: Definition n Unlike competition, firm will not lose all its sales to other firms if it raises price above marginal cost n Monopolist is not a price-taker (just accepting price as is) n It has influence over the price via Q picked n For monopoly, the firm’s output (q) and the market output (Q) are the same n Firm is the market

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Monopoly: Definition (con’t) n Monopolist faces the market demand curve for the good, which is downward sloping n Monopolist still sets q or p to maximize its profit (it cannot set both, since it is constrained by the market demand curve) n Sets profit max Q: MR = MC n But what is MR? n We know about firm’s cost curves: same
MR for Monopolist n Recall: Rev = p*q; n Average revenue = Pq/q = p n Marginal revenue MR = ΔR/Δq n Recall, for competitive firm , MR = P n If firm expands output by one unit, then the added R is just p

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MR for Monopolist (con’t) n Say monopolist initially sells Q units at P1 n It can sell one extra unit only if the price falls to P2 n Thus it gains B but loses C if it increases Q by one unit: Net = B – C
Average and Marginal Revenue

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Average and Marginal Revenue
MR for Monopolist (con’t) n Since monopoly sells the extra unit at P2, it gains B = P2 in revenue n But it loses the difference between the new price and the original price on Q units n C = ΔpQ n MR = B – C = P2 – C = P2 – ΔpQ

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PAM_2000_Spring_2009_Lecture_19 - PAM200Lecture19 Guest...

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