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1、Lesson 5,Market Structures Monopoly&Oligopoly,While a competitive firm is a price taker,a monopoly firm is a price maker.,A firm is considered a monopoly if.it is the sole seller of its product.its product does not have close substitutes.,WHY MONOPOLIES ARISE,The fundamental cause of monopoly is bar
2、riers to entry.,WHY MONOPOLIES ARISE,Barriers to entry have three sources:Ownership of a key resource.The government gives a single firm the exclusive right to produce some good.Costs of production make a single producer more efficient than a large number of producers.,Monopoly Resources,Although ex
3、clusive ownership of a key resource is a potential source of monopoly,in practice monopolies rarely arise for this reason.,Government-Created Monopolies,Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.,Government-Created Monopol
4、ies,Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.,Natural Monopolies,An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.,Natural
5、 Monopolies,A natural monopoly arises when there are economies of scale over the relevant range of output.,Figure 1 Economies of Scale as a Cause of Monopoly,Copyright 2004 South-Western,Quantity of Output,0,Cost,HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS,Monopoly versus CompetitionMonopol
6、yIs the sole producerFaces a downward-sloping demand curveIs a price makerReduces price to increase salesCompetitive FirmIs one of many producersFaces a horizontal demand curveIs a price takerSells as much or as little at same price,Figure 2 Demand Curves for Competitive and Monopoly Firms,Copyright
7、 2004 South-Western,Quantity of Output,(a)A Competitive Firm,s Demand Curve,(b)A Monopolist,s Demand Curve,0,Price,Quantity of Output,0,Price,A Monopolys Revenue,Total RevenueP Q=TRAverage RevenueTR/Q=AR=PMarginal RevenueTR/Q=MR,Table 1 A Monopolys Total,Average,and Marginal Revenue,Copyright2004 So
8、uth-Western,A Monopolys Revenue,A Monopolys Marginal RevenueA monopolists marginal revenue is always less than the price of its good.The demand curve is downward sloping.When a monopoly drops the price to sell one more unit,the revenue received from previously sold units also decreases.,A Monopolys
9、Revenue,A Monopolys Marginal RevenueWhen a monopoly increases the amount it sells,it has two effects on total revenue(P Q).The output effectmore output is sold,so Q is higher.The price effectprice falls,so P is lower.,Figure 3 Demand and Marginal-Revenue Curves for a Monopoly,Copyright 2004 South-We
10、stern,Quantity of Water,Price,$11,10,9,8,7,6,5,4,3,2,1,0,1,2,3,4,1,2,3,4,5,6,7,8,Profit Maximization,A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost.It then uses the demand curve to find the price that will induce consumers to buy that quantity.,F
11、igure 4 Profit Maximization for a Monopoly,Copyright 2004 South-Western,Quantity,Q,0,Costs and,Revenue,Profit Maximization,Comparing Monopoly and Competition For a competitive firm,price equals marginal cost.P=MR=MCFor a monopoly firm,price exceeds marginal cost.P MR=MC,A Monopolys Profit,Profit equ
12、als total revenue minus total costs.Profit=TR-TCProfit=(TR/Q-TC/Q)QProfit=(P-ATC)Q,Figure 5 The Monopolists Profit,Copyright 2004 South-Western,Quantity,0,Costs and,Revenue,A Monopolists Profit,The monopolist will receive economic profits as long as price is greater than average total cost.,Figure 6
13、 The Market for Drugs,Copyright 2004 South-Western,Quantity,0,Costs and,Revenue,THE WELFARE COST OF MONOPOLY,In contrast to a competitive firm,the monopoly charges a price above the marginal cost.From the standpoint of consumers,this high price makes monopoly undesirable.However,from the standpoint
14、of the owners of the firm,the high price makes monopoly very desirable.,Figure 7 The Efficient Level of Output,Copyright 2004 South-Western,Quantity,0,Price,The Deadweight Loss,Because a monopoly sets its price above marginal cost,it places a wedge between the consumers willingness to pay and the pr
15、oducers cost.This wedge causes the quantity sold to fall short of the social optimum.,Figure 8 The Inefficiency of Monopoly,Copyright 2004 South-Western,Quantity,0,Price,The Deadweight Loss,The Inefficiency of MonopolyThe monopolist produces less than the socially efficient quantity of output.,The D
16、eadweight Loss,The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax.The difference between the two cases is that the government gets the revenue from a tax,whereas a private firm gets the monopoly profit.,PUBLIC POLICY TOWARD MONOPOLIES,Government responds to th
17、e problem of monopoly in one of four ways.Making monopolized industries more competitive.Regulating the behavior of monopolies.Turning some private monopolies into public enterprises.Doing nothing at all.,Increasing Competition with Antitrust Laws,Antitrust laws are a collection of statutes aimed at
18、 curbing monopoly power.Antitrust laws give government various ways to promote competition.They allow government to prevent mergers.They allow government to break up companies.They prevent companies from performing activities that make markets less competitive.,Increasing Competition with Antitrust
19、Laws,Two Important Antitrust LawsSherman Antitrust Act(1890)Reduced the market power of the large and powerful“trusts”of that time period.Clayton Act(1914)Strengthened the governments powers and authorized private lawsuits.,Regulation,Government may regulate the prices that the monopoly charges.The
20、allocation of resources will be efficient if price is set to equal marginal cost.,Figure 9 Marginal-Cost Pricing for a Natural Monopoly,Copyright 2004 South-Western,Quantity,0,Price,Regulation,In practice,regulators will allow monopolists to keep some of the benefits from lower costs in the form of
21、higher profit,a practice that requires some departure from marginal-cost pricing.,Public Ownership,Rather than regulating a natural monopoly that is run by a private firm,the government can run the monopoly itself(e.g.in the United States,the government runs the Postal Service).,Doing Nothing,Govern
22、ment can do nothing at all if the market failure is deemed small compared to the imperfections of public policies.,PRICE DISCRIMINATION,Price discrimination is the business practice of selling the same good at different prices to different customers,even though the costs for producing for the two cu
23、stomers are the same.,PRICE DISCRIMINATION,Price discrimination is not possible when a good is sold in a competitive market since there are many firms all selling at the market price.In order to price discriminate,the firm must have some market power.Perfect Price DiscriminationPerfect price discrim
24、ination refers to the situation when the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.,PRICE DISCRIMINATION,Two important effects of price discrimination:It can increase the monopolists profits.It can reduce deadweight loss.,Figure 1
25、0 Welfare with and without Price Discrimination,Copyright 2004 South-Western,(a)Monopolist with Single Price,Price,0,Quantity,Figure 10 Welfare with and without Price Discrimination,Copyright 2004 South-Western,(b)Monopolist with Perfect Price Discrimination,Price,0,Quantity,PRICE DISCRIMINATION,Exa
26、mples of Price DiscriminationMovie ticketsAirline pricesDiscount couponsFinancial aidQuantity discounts,CONCLUSION:THE PREVALENCE OF MONOPOLY,How prevalent are the problems of monopolies?Monopolies are common.Most firms have some control over their prices because of differentiated products.Firms wit
27、h substantial monopoly power are rare.Few goods are truly unique.,Summary,A monopoly is a firm that is the sole seller in its market.It faces a downward-sloping demand curve for its product.A monopolys marginal revenue is always below the price of its good.,Summary,Like a competitive firm,a monopoly
28、 maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal.Unlike a competitive firm,its price exceeds its marginal revenue,so its price exceeds marginal cost.,Summary,A monopolists profit-maximizing level of output is below the level that maximizes the sum of
29、consumer and producer surplus.A monopoly causes deadweight losses similar to the deadweight losses caused by taxes.,Summary,Policymakers can respond to the inefficiencies of monopoly behavior with antitrust laws,regulation of prices,or by turning the monopoly into a government-run enterprise.If the
30、market failure is deemed small,policymakers may decide to do nothing at all.,Summary,Monopolists can raise their profits by charging different prices to different buyers based on their willingness to pay.Price discrimination can raise economic welfare and lessen deadweight losses.,Oligopoly,BETWEEN
31、MONOPOLY AND PERFECT COMPETITION,Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.,BETWEEN MONOPOLY AND PERFECT COMPETITION,Imperfect competition includes industries in which firms have competitors but do not face so much competition tha
32、t they are price takers.,BETWEEN MONOPOLY AND PERFECT COMPETITION,Types of Imperfectly Competitive MarketsOligopolyOnly a few sellers,each offering a similar or identical product to the others.Monopolistic CompetitionMany firms selling products that are similar but not identical.,Figure 1 The Four T
33、ypes of Market Structure,Copyright 2004 South-Western,MARKETS WITH ONLY A FEW SELLERS,Because of the few sellers,the key feature of oligopoly is the tension between cooperation and self-interest.,MARKETS WITH ONLY A FEW SELLERS,Characteristics of an Oligopoly MarketFew sellers offering similar or id
34、entical productsInterdependent firmsBest off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost,A Duopoly Example,A duopoly is an oligopoly with only two members.It is the simplest type of oligopoly.,Table 1 The Demand Schedule f
35、or Water,Copyright 2004 South-Western,A Duopoly Example,Price and Quantity SuppliedThe price of water in a perfectly competitive market would be driven to where the marginal cost is zero:P=MC=$0Q=120 gallonsThe price and quantity in a monopoly market would be where total profit is maximized:P=$60Q=6
36、0 gallons,A Duopoly Example,Price and Quantity SuppliedThe socially efficient quantity of water is 120 gallons,but a monopolist would produce only 60 gallons of water.So what outcome then could be expected from duopolists?,Competition,Monopolies,and Cartels,The duopolists may agree on a monopoly out
37、come.CollusionAn agreement among firms in a market about quantities to produce or prices to charge.CartelA group of firms acting in unison.,Competition,Monopolies,and Cartels,Although oligopolists would like to form cartels and earn monopoly profits,often that is not possible.Antitrust laws prohibit
38、 explicit agreements among oligopolists as a matter of public policy.,The Equilibrium for an Oligopoly,A Nash equilibrium is a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen.,The Equilibrium for an
39、Oligopoly,When firms in an oligopoly individually choose production to maximize profit,they produce quantity of output greater than the level produced by monopoly and less than the level produced by competition.,The Equilibrium for an Oligopoly,The oligopoly price is less than the monopoly price but
40、 greater than the competitive price(which equals marginal cost).,Equilibrium for an Oligopoly,SummaryPossible outcome if oligopoly firms pursue their own self-interests:Joint output is greater than the monopoly quantity but less than the competitive industry quantity.Market prices are lower than mon
41、opoly price but greater than competitive price.Total profits are less than the monopoly profit.,Table 1 The Demand Schedule for Water,Copyright 2004 South-Western,How the Size of an Oligopoly Affects the Market Outcome,How increasing the number of sellers affects the price and quantity:The output ef
42、fect:Because price is above marginal cost,selling more at the going price raises profits.The price effect:Raising production will increase the amount sold,which will lower the price and the profit per unit on all units sold.,How the Size of an Oligopoly Affects the Market Outcome,As the number of se
43、llers in an oligopoly grows larger,an oligopolistic market looks more and more like a competitive market.The price approaches marginal cost,and the quantity produced approaches the socially efficient level.,GAME THEORY AND THE ECONOMICS OF COOPERATION,Game theory is the study of how people behave in
44、 strategic situations.Strategic decisions are those in which each person,in deciding what actions to take,must consider how others might respond to that action.,GAME THEORY AND THE ECONOMICS OF COOPERATION,Because the number of firms in an oligopolistic market is small,each firm must act strategical
45、ly.Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.,The Prisoners Dilemma,The prisoners dilemma provides insight into the difficulty in maintaining cooperation.Often people(firms)fail to cooperate with one another even when cooper
46、ation would make them better off.,The Prisoners Dilemma,The prisoners dilemma is a particular“game”between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.,Figure 2 The Prisoners Dilemma,Copyright2003 Southwestern/Thomson Learning,
47、Bonnie s Decision,Confess,Confess,Remain Silent,Remain,Silent,Clydes,Decision,The Prisoners Dilemma,The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players.,The Prisoners Dilemma,Cooperation is difficult to maintain,because cooperati
48、on is not in the best interest of the individual player.,Figure 3 An Oligopoly Game,Copyright2003 Southwestern/Thomson Learning,Iraq,s Decision,High,Production,High Production,Low Production,Low,Production,Iran,s,Decision,Oligopolies as a Prisoners Dilemma,Self-interest makes it difficult for the ol
49、igopoly to maintain a cooperative outcome with low production,high prices,and monopoly profits.,Figure 4 An Arms-Race Game,Copyright2003 Southwestern/Thomson Learning,Decision of the United States(U.S.),Arm,Arm,Disarm,Disarm,Decision,of the,Soviet Union,(USSR),Figure 5 An Advertising Game,Copyright2
50、003 Southwestern/Thomson Learning,Marlboro s Decision,Advertise,Advertise,Don,t Advertise,Don,t,Advertise,Camels,Decision,Figure 6 A Common-Resource Game,Copyright2003 Southwestern/Thomson Learning,Exxon,s Decision,Drill Two,Wells,Drill Two Wells,Drill One Well,Drill One,Well,Texacos,Decision,Why Pe
