Imperfect Competition: Monopoly

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1 Ierfect Coetition: Monooly New Toic: Monooly Q: What is a onooly? A onooly is a fir that faces a downward sloing deand, and has a choice about what rice to charge an increase in rice doesn t send ost or all of the custoers away to rivals. A Monoolistic Market consists of a single seller facing any buyers.

2 Monooly Q: What are exales of onoolies? There few ure onoolies in the world - US ostal ail faces coetition fro fed-ex, or even eails - Microsoft faces coetition fro ale or linux - But there is one roducer of aircraft carriers. But any firs have soe arket ower- can increase rices above arginal costs for a long eriod of tie, without driving away consuers.

3 Monooly Q: Why do onoolies arise? Three reasons: 1. Governent rovision- for exale atents, coyright laws, rights for satellite counication in certain countries, taxi erits 2. Large Econoies of Scale average cost of a single fir serving the entire arket is lower than two firs. Haens when there are large fixed costs. For exale: telehone lines, electricity generation before the 80s 3. Control of an essential inut that cannot be relicated- For exale, Coca-cola s recie, Google s algorith

4 Monooly Q: Why do onoolies arise? Definition: A arket is a natural onooly if the total cost incurred by a single fir roducing outut is less than the cobined total cost of two or ore firs roducing this sae level of outut aong the. Exales- Haens when there are high fixed costs. Electricity lants, Satelitte coanies,

5 Monooly Q: Why do onoolies arise? Definition: Entry barriers are Factors that allow an incubent fir to earn ositive econoic rofits while aking it unrofitable for newcoers to enter the industry. 1.Structural Barriers to Entry occur when incubent firs have cost or deand advantages that would ake it unattractive for a new fir to enter the industry Exale- Ebay or Facebook 2.Legal Barriers to Entry exist when an incubent fir is legally rotected against coetition Exale- Patent laws 3.Strategic Barriers to Entry result when an incubent fir takes exlicit stes to deter entry Exale- Polaroid's rice war with Kodak when Kodak entered the instant hotograhy arket in the 70s.

6 Monooly The onooly s roble: The onooly faces a downward sloing deand curve and chooses both rices and uantity to axiize rofits. Note, that the onooly is constrained by consuer s deand, if it charges a high rice consuers will buy less. We let that the onooly choose uantity, and the deand deterines the rice. The roble is to choose to axiize TR TC TC

7 Monooly s Proble A grahical analysis of the change in revenue: P Q 12 Q By increasing uantity fro 2 units to 5 units, the onoolist reduces the rice fro $10 to $7. The revenue gained is area III, the revenue lost is area I The sloe of the deand curve deterines the otial uantity and rice

8 Monooly s Proble The onooly faces a deand curve and choose uantity to axiize rofit. Total revenue TR The rofit: TR TC TC First order conditions: c dtr The Marginal revenue is MR d And the otiality condition is MR c 0

9 Marginal Revenue Exale suose deand is =12- What is the change in revenue when the fir oves fro roducing 2 units to 3 units? Fro 3 units to 4 units? And fro 4 units to 5 units? The Marginal revenue is dtr MR d Is the rate at which revenue changes with outut

10 Marginal Revenue The arginal revenue dtr MR d Key roerty: The arginal revenue lays below the deand curve: MR D MR

11 Monooly A grahical analysis of the onooly's roble MC Key oint: The onooly roduces a uantity such that arginal costs euals arginal revenue. MR c c MR D But the rice P is given by the deand curve. It is higher than the coetitive rice.

12 Monooly Exale: Suose deand and arginal costs are linear: a b Where a,b,c>0 are c c constants. What is the onoolist otial uantity and rice? TR MR ' a b b a 2b c MR c a 2b c a 2b a b c a 2b

13 Monooly Relationshi between the onooly's rice and the coetitive arket rice. c Dead Weight Loss MC The onooly charges a higher rice, and roduces less units than the coetitive outcoe. What is the social cost of the onoolist? D c MR

14 Monooly Elasticity and arginal revenue: The elasticity of deand: The arginal revenue: At the onoolist s otiu: 1 1 1, MR MR, c c or c MR,, 1 1 1

15 Monooly Relationshi between the onooly's rice and the coetitive arket rice. c Dead Weight Loss c MR c MC D 1, Key Proerty: The distance fro the coetitive rice is negatively related with the elasticity of deand. The ore elastic = flatter is the deand curve, the saller is the difference between the arket and the onooly rice. The ore inelastic = steeer is the deand curve, the larger is the difference.

16 Monooly Relationshi between the onooly's rice and the coetitive arket rice. Dead Weight Loss c MC 1, c c MR D Definition: The Lerner index is 1, Is used to easure onooly ower of a fir. It is the ercent arku of rice above arginal costs

17 Monooly Note A onoolist does not have a suly curve,the onoolist icks a referred oint on the deand curve. The uantity sulied is deterined by deand. One could also think of the onoolist choosing rice to axiize rofits subject to the constraint that outut is deterined by the deand curve.

18 Tyes of Monoolies Definition: A cartel is a grou of firs that collusively deterine the rice and outut in a arket. In other words, a cartel acts as a single onooly fir that axiizes total industry rofit. Exale- OPEC

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