Lecture%2021%20-%20Monopoly - 1 FIN 580 FE Financial...

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Unformatted text preview: 1 FIN 580 FE Financial Economics Monopoly Professor Nolan Miller 2 Announcements The final exam has been scheduled: Date: Wednesday, December 15, 2010. Time: 1:30 4:30. Place: BIF 1001 (auditorium). Who: everyone who wants to pass the course (all sections). The final exam is cumulative (covers the entire course). The last day of class is Tuesday, Dec. 7 (review). The last day of new material will be Thursday, Dec. 2. Midterm II: hopefully will be ready to be returned on Thursday. 3 Edward B. Rust, Jr., Chairman of the Board & Chief Executive Officer, State Farm Mutual Roman Kulich, CEO, Coventry Health Care Tom McCormick , Group Compliance & Ethics Officer, BP 4 Monopoly and Pricing Readings: MT, Chapter 14 IM, Chapter 13 Another reference. I have a set of notes that are written for a more technical audience, but are pretty accessible on this topic. They are at: http://business.illinois.edu/nmiller/notes2006/notes9.pdf 5 Competitive Assumptions and Market Failures In the last lecture(s), we considered the impact of relaxing the competitive assumption that there are no externalities. Market allocations in the presence of externalities are not efficient. Today, we relax the price taking assumption. Price taking: firms believe that they can sell as much as desired at the posted price. When price taking does not hold, firms believe that if they make more available for sale, the price will go down. We will focus on a particular case, Monopoly. Monopoly: there is a single firm that sells the good. 6 Monopoly Pricing Since a monopolist is the only producer of the good, it can choose the price it wants to charge. At any price, quantity demanded is given by the demand curve. Let q(p) denote the demand curve. At price p, the monopolist sells q(p) units. Let c(q) denote the monopolists cost function. The monopolist chooses price p to maximize profit: max p p q(p) c(q(p)). 7 Monopoly Pricing We typically think of the monopolist as choosing price and letting quantity be determined by the market. However, the demand curve gives a one-to-one relationship between prices and quantities. We could also think of the monopolist as choosing quantity and letting the price be determined by the market. This turns out to be a bit more convenient....
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This note was uploaded on 01/18/2011 for the course FIN fin580 taught by Professor Miller during the Spring '10 term at University of Illinois, Urbana Champaign.

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Lecture%2021%20-%20Monopoly - 1 FIN 580 FE Financial...

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