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 Monopoly: Definition MR for Monopolist Monopolist’s choice of output Monopolist’s shutdown decision Measuring Market Power: Lerner Index Dominant firm with a competitive fringe
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Monopoly: Definition Definition : A monopoly is one supplier of a good for which there is no good substitute Examples: Postal monopoly, patents, electric utilities, DeBeers diamond mines
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Monopoly: Definition Unlike competition, firm will not lose all its sales to other firms if it raises price above marginal cost Monopolist is not a price-taker (just accepting price as is) It has influence over the price via Q picked For monopoly, the firm’s output (q) and the market output (Q) are the same Firm is the market
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 Monopoly: Definition (con’t) Monopolist faces the market demand curve for the good, which is downward sloping Monopolist still sets q or p to maximize its profit (it cannot set both, since it is constrained by the market demand curve) Sets profit max Q: MR = MC But what is MR? We know about firm’s cost curves: same
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MR for Monopolist Recall: Rev = p*q; Average revenue = Pq/q = p Marginal revenue MR = ΔR/Δq Recall, for competitive firm , MR = P If firm expands output by one unit, then the added R is just p
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MR for Monopolist (con’t) Say monopolist initially sells Q units at P 1 It can sell one extra unit only if the price falls to P 2 Thus it gains B but loses C if it increases Q by one unit: Net = B – C
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Average and Marginal Revenue
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Average and Marginal Revenue
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MR for Monopolist (con’t) Since monopoly sells the extra unit at P 2 , it gains B = P 2 in revenue But it loses the difference between the new price and the original price on Q units C = ΔpQ MR = B – C = P 2 – C = P 2 – ΔpQ
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PAM_2000_Spring_2009_Lecture_19 - PAM200Lecture19 Guest...

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