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Lecture 12 - Monopoly

# Lecture 12 - Monopoly - Review Quiz 10 Marginal Cos t 8...

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1 Monopoly Chapter 4 2 Review Quiz 2 8 6 4 200 400 600 800 1000 10 1200 1400 Marginal Cost ATC 3 Click to add title Click to add an outline 4 Monopolies Set the price/quantity Marginal Revenue is now a function of firm output choices. 5 TR 2 TR 1 Deriving Marginal Revenue MR = Δ TR/ Δ Q TR = PQ Δ TR = (P 2 – P 1 )Q 1 + (Q 2 – Q 1 )P 2 Q P 1 P 2 \$ (P) Demand Q 1 Q 2 = Δ P * Q 1 + Δ Q * P 2 6 Profit Maximization Still equate MR and MC, but MR is a function of q Pick q where MC = MR, charge the price from the demand curve Marginal Cost Marginal Revenue Demand ATC \$ Q q* p*

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7 Welfare under monopolies Marginal Cost Marginal Revenue Demand ATC \$ Q q* p* DWL Consumer Surplus Profit 8 Click to add title 2 8 6 4 200 400 600 800 1000 10 1200 1400 Marginal Cost ATC 9 Regulation What is the efficient price? 2 8 6 4 200 400 600 800 1000 10 1200 1400 Marginal Cost ATC 10 Creating and Maintaining a Monopoly Monopoly by merger Government decree Patents for R + D Post Office/trade barriers Monopolize resource – DeBeers Corner the Copper Market Natural Monopoly Cost-advantage for one firm Knowledge advantage Colonel’s secret recipe Famous Painter / Tom Cruise? 11 Monopoly by Merger Idea: Buy up all your competitors Problem: Free-Entry…cost advantages? Predatory Pricing? • Examples: – South African Breweries – Standard Oil – American Tobacco: Duke and the Plug Wars 12 Lerner Index Year Industry Index 1992 Fruit Cocktail 1.41 1987 Retail Gas 0.100 1982 Tobacco 0.648 1984 Coffee Roasting0.055 1991 Coconut Oil 0.89 1992 Coke 0.64
13 Click to add title quantity 0.10 0.40 0.30 0.20 100 200 300 400 500 Demand 0.50 \$ 600 700 ATC MC Marginal Revenue 14 Collusion and Cartels What is collusion? – An attempt to suppress competition What is a cartel? – A group of firms who have agreed explicitly to coordinate their activities to raise market price or decrease market output. 15 Why form a cartel A single firm cannot affect the market price, but many firms together can If we co-ordinate, what level of output would we choose? – Monopoly output – In perfect competition, we all make zero profits. 16 No cartel Demand Supply (MC) Marginal Revenue ATC MC p comp q comp 17 Cartel Demand Supply (MC) Marginal Revenue ATC MC p comp q comp p monop q monop profits 18 Why doesn't everyone collude?

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