The demand curve for a monopolist is simply the
market demand curve for that product.
Unlike a perfectly competitive firm, a monopolist
faces a negatively sloped demand curve.
For a monopolist, sales can be increased only if
price is reduced and price can be increased only if sales are reduced.
The demand curve is also the monopolist's
average revenue curve
Because its demand curve is negatively sloped, the monopolist must reduce the price that it charges on all units in order to
sell an extra unit
Marginal revenue is therefore equal to the price minus the revenue lost from
reducing the price on all previous units
The monopolist's marginal revenue is less than the price at which it sells its output. Thus the monopolist's MR curve is
below its demand curve.
Two general rules about profit maximzation
firm should not produce at all unless the average revenue curve is above the AVC curve.
If the firm does produce, it should produce a level of output such that marginal revenue equals marginal costs.
Nothing guarantees that a monopolist will make positive profits in the short run, but if it suffers persistent losses, it will eventually
go out of business
A monopolist does not have a supply curve because
it is not a price taker; it chooses its profit-maximizing price-quantity combination from among the possible combinations on the market demand curve.
A monopolist does not face a
market price. The monopolist chooses the price-quantity combination on the market demand curve that maximizes its profits.
The profit-maximizing level of output is determined where the
MC and MR curves intersect.
The monopolist is the
industry. The short-run maximizing position of the firm is also the short-equilibrium of the industry.
The equilibrium output in a perfectly competitive industry is such that price equals
marginal costs.
For a monopolist, equilibrium output is such that price is
greater than marginal cost
The level of output in a monopolized industry is less than the level of output that would be produced if hte industry were instead
made up of many price-taking firms
A perfectly competitive industry produces a level of output such that price equals marginal cost. A monopolist produces a lower level of output, with price exceeding
marginal cost
Monopolist's profit-maximizing decisions to restrict output below the competitive level creates a
loss of economic surplus for society- a dead weight loss. in other words, it leads to market inefficiency.
A monopolist restricts output below the competitive level and thus reduces the amount of economic surplus generated in the market. The monopolist therefore creates an
inefficient market outcome.
If monopoly profits are to persist in the long run, the entry of new firms into the industry must be
prevented
Entry barrier
Any barrier to the entry of new firms into an industry. An entry barrier may be natural or created.
Natural monopoly
An industry characterized by economies of scale sufficiently large that only one firm can cover its costs while producing at its minimum efficient scale.
Natural barriers most commonlyh arise as a result of
economies of scale.
when LRAC curve is negatively sloped over a large range of output, big firms have significantly lower average total costs than
small firms
the MES is the
smallest size firm that can reap all the economies of large-scale production
Set up costs are another type of
natural entry barrier
Many entry barriers are created by
conscious government action
Ex. Patent laws, charter of franchise that prohibits competition by law, canada post
The threat of force or sabotage can
deter entry. This is encountered in organized crime
legal - price cutting, heavy brand-name advertising
In monopolized industries, profits can persist in the long run whenever
there are effective barriers to entry
In competitive industries, profits attract entry, and entry erodes profits. In monopolized industries, positive profits can persist as long as
there are effective entry barriers.
In the very long run, through technology, a monopoly will sooner or later find its barriers
circumvented by innovations
A firm may get around a natural monopoly by
inventing a technology that produces at a low minimum efficient scale (MES) and allows it to enter the industry and still cover its full costs.
A monopolist's entry barriers are often circumvented by
the innovation of production processes and the development of new goods and services. Such innovation explains why monopolies rarely persists over long periods, except those that are protected through government charter or regulation.
Cartel
An organization of producers who agree to act as a single seller in order to maximize joint profits
The incentive for firms to form a cartel lies in the cartel's ability to
restrict output, thereby raising price and increasing profits
The profit-maximizing cartelization of a competitive industry will reduce output and raise price from
the perfectly competitive levels
Cartels face two problems
Enforcement of output restrictions
Restricting entry
Firms in cartels have the incentive to
cheat" by producing too much output
Cartels tend to be unstable because of the
incentives for individual firms to violate the output restrictions needed to sustain the joint-profit-maximizing (monopoly) price.
Price discrimination
The sale by one firm of different units of a commodity at two or more different prices for reasons not associated with differences in cost
If price differences reflect cost differences, they are not
discriminatory.
When differences are based on different' buyer's valuations of the same product, they are
discriminatory
Firms price discriminate because
they find it profitable to do so
Price discrimination allows them to
capture" some consumer surplus that would otherwise go to the buyer.
allows firms to sell extra units of output without reducing the price on their existing sales.
Any firm that faces a downward-sloping demand curve can increase its profit if
it is able to charge different prices for different units of its product.
Only firms facing negatively sloped demand curves, that is, firms with market power are able to
price discriminate.
Firms will price discriminate if they are
able to
When is price discrimination possible?
market power
identification of consumers' different valuations
no arbitrage
Arbitrage
Whenever the same product is being sold at different prices, there is an incentive for buyers to purchase the product at the lower price and re-sell it at the higher price, thereby making a profit on the transaction.
Different forms of price discrimination
Price discrimination among units of output
Price discrimination among market segments
Perfect price discrimination
A firm that charge a different price for each different unit of the output and thereby extract all of the consumer surplus.
The elasticity of demand reflects
consumers' ability or willingness to substitute between this product and other products.
A firm with market power that can identify distinct market segments will
maximize its profits by charging higher prices in those segments with less elastic demand.
Price discrimination is easier for services than for tangible goods because for most services the firms transacts
directly with the customer and thus can more easily prevent arbitrage
Hurdle pricing exists when
firms crate an obstacle that consumers must overcome in order to get a lower price. Consumers then assign themselves to the various market segments- those who don't want to jump the hurdle and are willing to pay the high price, and those who choose to jum
hurdle pricing examples
immediate expensive prices of ipods, of which price drops after few months
coupons for discounts.
For any given level of output, the most profitable system of discriminatory prices will always provide
higher profits to the firm than the profit-maximizing single price.
A monopolist that price discriminates among units will produce more output than
will a single-price monopolist
If price discrimination leads the firm to increase total output, the total economic surplus generated in the market will increase, and the outcome will be
more efficient.
There is no general relationship between price discrimination and consumer welfare. Price discrimination usually makes some consumers better off and other consumers
worse off