Lecture 17 _Mar 18_ - Economics 100A Lecture #17: Thursday,...

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1 Economics 100A Lecture #17: Thursday, Mar. 18 1) Monopoly: definition, examples, causes 2) Monopolist’s problem and its solution 3) Comparative statics 4) Welfare analysis of monopoly 5) Multi-market monopoly
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2 (1) Intro to monopoly Monopoly occurs when the entire market is supplied by a single firm No close substitute exists Entry is not allowed or infeasible Price taking buyers A monopolist is the price maker Monopolist’s demand curve = market demand curve Monopolist has no supply curve
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3 Examples of monopoly Monopoly by law ( de jure ) Postal, water, garbage collection Patents, ©, ® Monopoly in fact ( de facto ) Microsoft’s Windows operating system Zamboni’s ice grooming machine ETS’s SAT exam
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4 Why monopolies? Government grant of monopoly License issued to single party, e.g., patent Gov’t procurement (e.g., defense) Cartelization of the industry All suppliers act as one (e.g., OPEC) Somehow prevent “mavericks” from entering Monopoly is most efficient structure Two or more suppliers raise overall costs Market demand is small relative to MES Control over essential input
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5 Sources of cost advantages Essential input Firm controls an essential input, e.g., iron ore, radio spectrum Essential facility Firm owns critical infrastructure, e.g., bridge, tunnel, harbor Superior technology Better way of organizing production that firm keeps secret Cannot be replicated or imitated
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6 Natural monopoly One firm can produce total market output at lower cost than two (or more) firms If the cost function is C(q), then the market is a “natural monopoly” when: C(q 1 + q 2 ) < C(q 1 ) + C(q 2 ) Extends to 3 or more firms Similar, but not same as, an economy of scope
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7 Declining AC: sufficient for natural monopoly 15 20 30 10 6 01 2 1 5 Q , Units per day AC , MC , $ per unit AC = 10 + 60/Q AC T = 10 + 120/Q MC = 10 TC(Q) = 10Q + 60 (one firm) TC T (Q) = 2[10(Q/2) + 60] = 10Q + 120 (two firms) Note: split total quantity evenly between the two firms
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8 Gov’t also eliminates monopoly Antitrust laws Prohibit monopolization, price fixing, mergers Federal Trade Commission, Dept of Justice Ex ante regulation Prevent monopolies from exercising their market power by, e.g., price controls State commissions such as California PUC Electricity, water, telephone services
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9 (2) Monopolist’s problem Like any self-respecting capitalist, a monopolist wants to maximize its profit, Maintained Assumptions homogeneous good sold at one price no threat of entry or government regulation Monopolist’s Problem Choose Q so as to Maximize: (Q) = R(Q) - C(Q) Provided it breaks even: (Q) > 0
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10 Solution to monopolist’s problem Climb to the top of the “profit hill”
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Lecture 17 _Mar 18_ - Economics 100A Lecture #17: Thursday,...

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