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Lecture 21 - Monopoly - FIN580FE FinancialEconomics...

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1 FIN 580 FE Financial Economics Monopoly Professor Nolan Miller
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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.
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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
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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
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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.
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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 monopolist’s cost function. The monopolist chooses price p to maximize profit: max p  p q(p) – c(q(p)).
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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. Let p(q) denote the monopolist’s inverse demand curve.
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