One firm selling good or service with no substitutes Barriers to entry that prevent competition from new firms What is a monopoly Monopoly in the news Natural One firm can meet demand at a lower ATC than two or more firms ID: 733622
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Slide1
Chapter 16
MonopolySlide2
Market characterized by:
One firm selling good or service with no substitutes
Barriers to entry that prevent competition from new firms
What is a monopoly?Slide3
Monopoly in the newsSlide4
Natural
One firm can meet demand at a lower ATC than two or more firms
OwnershipOne firm controls the natural resources (for example, DeBeers)
LegalFranchise, license, patent, or copyright
Barriers to EntrySlide5
Single-Price
Sells its products for the same price to all its customers
DeBeers diamonds: if DeBeers tried to price-discriminate, higher-price customers would just buy diamonds from the lower-price ones
Price-Discriminating
Sells different units for different prices not related to cost differences
Examples include pizza (buy 1, get 1 half-off), discounts at theme parks (veterans discount, senior citizen discount, etc.), or airfare prices
Monopolies and PricingSlide6
Let’s examine the case of Cairo, Nebraska:
Price & Marginal RevenueSlide7
Price
QTY
TR
MR
A
20
0
0
18
B
18
1
18
14
C
16
2
32
10
D
14
3
426E124482F10550
So, Cairo, Nebraska SucksSlide8
Monopoly Output and Price Decision
Price
QTY
TR
MR
TC
MC
Profit
A
20
0
0
12
-12
18
5
B
18
1
18
17
1
146C16232239107D14
3
42
30
12610E12448408215F1055055-5
Graph D, ATC, MR, and MCSlide9
Economic profit is maximized when MC=MR (sound familiar?)
Economic profit is measured by the blue rectangle
$4 per haircut * 3 haircuts = $12
Does it look like this?Slide10
Intuitively, you should know that monopolies are inefficient compared to perfect competition
Here’s the economic reason why:
InefficiencySlide11
Single-Price
Price-Discriminating
Pricing StructureSlide12
Regulation: when the government provides rules and laws to prevent the concentration of power in the hands of one monopoly firm
Deregulation: the opposite of that
Overseeing MonopoliesSlide13
This suggests that monopolies should be regulated by the government
It is in the interest of society to “regulate away” inefficiency and deadweight loss
Social Interest TheorySlide14
This idea suggests that regulations end up serving the firms they are supposed to regulate
Lobbyists: firms have firepower; consumers have none
Capture TheorySlide15
Regulatory Issues