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1、,CHAPTER 10 OUTLINE,10.1 Monopoly10.2 Monopoly Power10.3 Sources of Monopoly Power10.4 The Social Costs of Monopoly Power,monopoly Market with only one seller.,monopsony Market with only one buyer.,market power Ability of a seller or buyer to affect the price of a good.,Market Power: Monopoly and Mo
2、nopsony,MONOPOLY,Average Revenue and Marginal Revenue,marginal revenue Change in revenue resulting from a one-unit increase in output.,P = 6 - Q,MONOPOLY,Average Revenue and Marginal Revenue,Average and marginal revenue are shown for the demand curve P = 6 Q.,Average and Marginal Revenue,Figure 10.1
3、,MONOPOLY,The Monopolists Output Decision,Q* is the output level at which MR = MC. If the firm produces a smaller outputsay, Q1it sacrifices some profit because the extra revenue that could be earned from producing and selling the units between Q1 and Q* exceeds the cost of producing them. Similarly
4、, expanding output from Q* to Q2 would reduce profit because the additional cost would exceed the additional revenue.,Profit Is Maximized When Marginal Revenue Equals Marginal Cost,Figure 10.2,MONOPOLY,The Monopolists Output Decision,We can also see algebraically that Q* maximizes profit. Profit is
5、the difference between revenue and cost, both of which depend on Q:,As Q is increased from zero, profit will increase until it reaches a maximum and then begin to decrease. Thus the profit-maximizing Q is such that the incremental profit resulting from a small increase in Q is just zero (i.e., /Q =
6、0). Then,But R/Q is marginal revenue and C/Q is marginal cost. Thus the profit-maximizing condition is that, or,MONOPOLY,An Example,Part (a) shows total revenue R, total cost C, and profit, the difference between the two.Part (b) shows average and marginal revenue and average and marginal cost.Margi
7、nal revenue is the slope of the total revenue curve, and marginal cost is the slope of the total cost curve.The profit-maximizing output is Q* = 10, the point where marginal revenue equals marginal cost. At this output level, the slope of the profit curve is zero, and the slopes of the total revenue
8、 and total cost curves are equal. The profit per unit is $15, the difference between average revenue and average cost.Because 10 units are produced, total profit is $150.,Example of Profit Maximization,Figure 10.3,C(Q)= 50 + Q2P(Q)= 40 - Q,MONOPOLY,A Rule of Thumb for Pricing,We want to translate th
9、e condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice.To do this, we first write the expression for marginal revenue:,MONOPOLY,A Rule of Thumb for Pricing,Note that the extra revenue from an incremental unit of quantity, (PQ)/Q,
10、 has two components:1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P.2. But because the firm faces a downward-sloping demand curve, producing and selling this extra unit also results in a small drop in price P/Q, which reduces the revenue from all units sold (i.e.,
11、a change in revenue QP/Q).Thus,MONOPOLY,A Rule of Thumb for Pricing,(Q/P)(P/Q) is the reciprocal of the elasticity of demand, 1/Ed, measured at the profit-maximizing output, and,Now, because the firms objective is to maximize profit, we can set marginal revenue equal to marginal cost:,which can be r
12、earranged to give us,Equivalently, we can rearrange this equation to express price directly as a markup over marginal cost:,In 1995, Prilosec, represented a new generation of antiulcer medication. Prilosec was based on a very different biochemical mechanism and was much more effective than earlier d
13、rugs.By 1996, it had become the best-selling drug in the world and faced no major competitor.Astra-Merck was pricing Prilosec at about $3.50 per daily dose.The marginal cost of producing and packaging Prilosec is only about 30 to 40 cents per daily dose.The price elasticity of demand, ED, should be
14、in the range of roughly 1.0 to 1.2.Setting the price at a markup exceeding 400 percent over marginal cost is consistent with our rule of thumb for pricing.,MONOPOLY,MONOPOLY,Shifts in Demand,A monopolistic market has no supply curve. The reason is that the monopolists output decision depends not onl
15、y on marginal cost but also on the shape of the demand curve.Shifts in demand can lead to changes in price with no change in output, changes in output with no change in price, or changes in both price and output.,MONOPOLY,Shifts in Demand,Shifting the demand curve shows that a monopolistic market ha
16、s no supply curvei.e., there is no one-to-one relationship between price and quantity produced. In (a), the demand curve D1 shifts to new demand curve D2. But the new marginal revenue curve MR2 intersects marginal cost at the same point as the old marginal revenue curve MR1. The profit-maximizing ou
17、tput therefore remains the same, although price falls from P1 to P2. In (b), the new marginal revenue curve MR2 intersects marginal cost at a higher output level Q2.But because demand is now more elastic, price remains the same.,Shifts in Demand,Figure 10.4,MONOPOLY,The Effect of a Tax,With a tax t
18、per unit, the firms effective marginal cost is increased by the amount t to MC + t. In this example, the increase in price P is larger than the tax t.,Effect of Excise Tax on Monopolist,Figure 10.5,Suppose a specific tax of t dollars per unit is levied, so that the monopolist must remit t dollars to
19、 the government for every unit it sells. If MC was the firms original marginal cost, its optimal production decision is now given by,MONOPOLY,*The Multiplant Firm,Suppose a firm has two plants. What should its total output be, and how much of that output should each plant produce? We can find the an
20、swer intuitively in two steps.,Step 1. Whatever the total output, it should be divided between the two plants so that marginal cost is the same in each plant. Otherwise, the firm could reduce its costs and increase its profit by reallocating production.,Step 2. We know that total output must be such
21、 that marginal revenue equals marginal cost. Otherwise, the firm could increase its profit by raising or lowering total output.,MONOPOLY,*The Multiplant Firm,We can also derive this result algebraically. Let Q1 and C1 be the output and cost of production for Plant 1, Q2 and C2 be the output and cost
22、 of production for Plant 2, and QT = Q1 + Q2 be total output. Then profit is,The firm should increase output from each plant until the incremental profit from the last unit produced is zero. Start by setting incremental profit from output at Plant 1 to zero:,Here (PQT)/Q1 is the revenue from produci
23、ng and selling one more uniti.e., marginal revenue, MR, for all of the firms output.,MONOPOLY,*The Multiplant Firm,The next term, C1/Q1, is marginal cost at Plant 1, MC1. We thus have MR MC1 = 0, or,Similarly, we can set incremental profit from output at Plant 2 to zero,Putting these relations toget
24、her, we see that the firm should produce so that,MONOPOLY,*The Multiplant Firm,A firm with two plants maximizes profits by choosing output levels Q1 and Q2 so that marginal revenue MR (which depends on total output) equals marginal costs for each plant, MC1 and MC2.,Production with Two Plants,Figure
25、 10.6,MONOPOLY POWER,Part (a) shows the market demand for toothbrushes. Part (b) shows the demand for toothbrushes as seen by Firm A.At a market price of $1.50, elasticity of market demand is 1.5. Firm A, however, sees a much more elastic demand curve DA because of competition from other firms. At a
26、 price of $1.50, Firm As demand elasticity is 6. Still, Firm A has some monopoly power: Its profit-maximizing price is $1.50, which exceeds marginal cost.,The Demand for Toothbrushes,Figure 10.7,MONOPOLY POWER,Remember the important distinction between a perfectly competitive firm and a firm with mo
27、nopoly power: For the competitive firm, price equals marginal cost; for the firm with monopoly power, price exceeds marginal cost.,Measuring Monopoly Power,Lerner Index of Monopoly Power Measure of monopoly power calculated as excess of price over marginal cost as a fraction of price.,Mathematically
28、:,This index of monopoly power can also be expressed in terms of the elasticity of demand facing the firm.,(10.4),MONOPOLY POWER,The Rule of Thumb for Pricing,The markup (P MC)/P is equal to minus the inverse of the elasticity of demand facing the firm. If the firms demand is elastic, as in (a), the
29、 markup is small and the firm has little monopoly power.The opposite is true if demand is relatively inelastic, as in (b).,Elasticity of Demand and Price Markup,Figure 10.8,MONOPOLY POWER,Although the elasticity of market demand for food is small (about 1), no single supermarket can raise its prices
30、 very much without losing customers to other stores.The elasticity of demand for any one supermarket is often as large as 10. We find P = MC/(1 0.1) = MC/(0.9) = (1.11)MC.The manager of a typical supermarket should set prices about 11 percent above marginal cost.Small convenience stores typically ch
31、arge higher prices because its customers are generally less price sensitive. Because the elasticity of demand for a convenience store is about 5, the markup equation implies that its prices should be about 25 percent above marginal cost.With designer jeans, demand elasticities in the range of 2 to 3
32、 are typical.This means that price should be 50 to 100 percent higher than marginal cost.,MONOPOLY POWER,MONOPOLY POWER,Between 1990 and 1998, lower prices induced consumers to buy many more videos.By 2001, sales of DVDs overtook sales of VHS videocassettes. High-definition DVDs were introduced in 2
33、006, and are expected to displace sales of conventional DVDs.,Video Sales,Figure 10.9,SOURCES OF MONOPOLY POWER,If there is only one firma pure monopolistits demand curve is the market demand curve.Because the demand for oil is fairly inelastic (at least in the short run), OPEC could raise oil price
34、s far above marginal production cost during the 1970s and early 1980s.Because the demands for such commodities as coffee, cocoa, tin, and copper are much more elastic, attempts by producers to cartelize these markets and raise prices have largely failed.In each case, the elasticity of market demand
35、limits the potential monopoly power of individual producers.,The Elasticity of Market Demand,SOURCES OF MONOPOLY POWER,When only a few firms account for most of the sales in a market, we say that the market is highly concentrated.,The Number of Firms,barrier to entry Condition that impedes entry by
36、new competitors.,SOURCES OF MONOPOLY POWER,Firms might compete aggressively, undercutting one anothers prices to capture more market share. This could drive prices down to nearly competitive levels.Firms might even collude (in violation of the antitrust laws), agreeing to limit output and raise pric
37、es. Because raising prices in concert rather than individually is more likely to be profitable, collusion can generate substantial monopoly power.,The Interaction Among Firms,THE SOCIAL COSTS OF MONOPOLY POWER,The shaded rectangle and triangles show changes in consumer and producer surplus when movi
38、ng from competitive price and quantity, Pc and Qc, to a monopolists price and quantity, Pm and Qm. Because of the higher price, consumers lose A + B and producer gains A C. The deadweight loss is B + C.,Deadweight Loss from Monopoly Power,Figure 10.10,THE SOCIAL COSTS OF MONOPOLY POWER,Rent Seeking,
39、rent seeking Spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly.,In 1996, the Archer Daniels Midland Company (ADM) successfully lobbied the Clinton administration for regulations requiring that the ethanol (ethyl alcohol) used in motor vehicle fuel be produced
40、 from corn.Why? Because ADM had a near monopoly on corn-based ethanol production, so the regulation would increase its gains from monopoly power.,THE SOCIAL COSTS OF MONOPOLY POWER,Price Regulation,If left alone, a monopolist produces Qm and charges Pm. When the government imposes a price ceiling of
41、 P1 the firms average and marginal revenue are constant and equal to P1 for output levels up to Q1. For larger output levels, the original average and marginal revenue curves apply. The new marginal revenue curve is, therefore, the dark purple line, which intersects the marginal cost curve at Q1.,Pr
42、ice Regulation,Figure 10.11,THE SOCIAL COSTS OF MONOPOLY POWER,Price Regulation,When price is lowered to Pc, at the point where marginal cost intersects average revenue, output increases to its maximum Qc. This is the output that would be produced by a competitive industry. Lowering price further, t
43、o P3 reduces output to Q3 and causes a shortage, Q3 Q3.,Price Regulation,Figure 10.11,THE SOCIAL COSTS OF MONOPOLY POWER,Natural Monopoly,A firm is a natural monopoly because it has economies of scale (declining average and marginal costs) over its entire output range. If price were regulated to be
44、Pc the firm would lose money and go out of business. Setting the price at Pr yields the largest possible output consistent with the firms remaining in business; excess profit is zero.,natural monopoly Firm that can produce the entire output of the market at a cost lower than what it would be if ther
45、e were several firms.,Regulating the Price of a Natural Monopoly,Figure 10.12,THE SOCIAL COSTS OF MONOPOLY POWER,Regulation in Practice,rate-of-return regulation Maximum price allowed by a regulatory agency is based on the (expected) rate of return that a firm will earn.,The difficulty of agreeing o
46、n a set of numbers to be used in rate-of-return calculations often leads to delays in the regulatory response to changes in cost and other market conditions.The net result is regulatory lagthe delays of a year or more usually entailed in changing regulated prices.,Mini Case - Taking a Dim View of So
47、lar Energy,Analyzing the NewsUtilities have long had monopolies in electric power generation. However, as costs come down for individual systems these big utility companies are beginning to get concerned. Fewer customers mean that long run average costs will increase. It will be interesting to see i
48、f the business model followed by these monopolies will hold up with more competition. Thinking Critically QuestionsWhy have utilities had monopoly power up to this point? What are economies of scale? Why are utility companies attempting to thwart the growth of rooftop solar power?,Mini Case - Behind
49、 Oils Surprising Surge,Oil prices moved above $70 a barrel from a low of $34 on February 12, 2009. The higher price comes in spite of the fact that world demand for oil is expected to fall by about 3 percent this year due to the global recession. The market is being driven higher for two reasons. On
50、e reason is that the Organization of Petroleum Exporting Countries (OPEC) has slashed output. OPEC maintains the world price of oil should be between $75 and $85 a barrel in order to keep exploration and reinvestment going and not harm the economic recovery. And this time most of OPECs members appea
