Chapter 15 Monopoly Outline Why Monopolies Arise How Monopolies Make Production and Pricing Decisions The Welware Cost of Monopolies Price Discrimination Public Policy Toward Monopolies Part V: Firm Behavior and the Organization of Industry 13. The Cost of Production 14. Competitive Markets 15. Monopoly 16. Monopolistic Competition 17. Oligopoly 1 / 43
Chapter 15
Nov 08, 2014
Chapter 15 powerpoint for AP Environmental Science
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Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Part V: Firm Behavior and the Organization of
Industry
13. The Cost of Production
14. Competitive Markets
15. Monopoly
16. Monopolistic Competition
17. Oligopoly
1 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Chapter 15
Monopoly
2012.12.7.
2 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
1 Why Monopolies Arise
2 How Monopolies Make Production and Pricing Decisions
3 The Welware Cost of Monopolies
4 Price Discrimination
5 Public Policy Toward Monopolies
3 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Monopoly獨占
• A firm is considered a monopoly if• it is the sole seller of its product.• its product does not have close substitutes.
• While a competitive firm is a price taker, a
monopoly firm is a price maker.
4 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Why Monopolies Arise
• The fundamental cause of monopoly is barriers
to entry.• Barriers to entry have three sources:
• Monopoly resources: A key resource required for
production is owned by a single firm.• Government regulation: The government gives a
single firm the exclusive right to produce some good
or service.• The production process: A single firm can produce
output at a lower cost than can a larger number of
products.
5 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Monopoly Resources
• Although exclusive ownership of a key resource
is a potential source of monopoly, in practice
monopolies rarely arise for this reason.
• Economies are large, and resources are owned
by many people.
6 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Government-Created Monopolies
• Governments may restrict entry by giving a
single firm the exclusive right to sell a
particular good in certain markets.
• Patent and copyright laws are two important
examples of how government creates a
monopoly to serve the public interest.
• 國營事業,政黨, 中小學, 大學
7 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Natural Monopolies
• An industry is a natural monopoly (自然獨佔)
when a single firm can supply a good or service
to an entire market at a smaller cost than could
two or more firms.
• A natural monopoly arises when there are
economies of scale (規模經濟) over the relevant
range of output.
• An example of natural monopoly is the
distribution of water.
8 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
9 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
How Monopolies Make
Production and Pricing
Decisions
• We want to consider how a monopoly firm
decides how much of its product to make and
what price to charge for it.
10 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Monopoly versus Competition
• Monopoly• is the sole producer.• faces a downward-sloping demand curve.• is a price maker.• reduces price to increase sales.
• Competitive firm• is one of many producers.• faces a horizontal demand curve.• is a price taker.• sells as much or as little at same price.
11 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
12 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
A Monopoly’s Revenue
• Total Revenue
P × Q = T R
• Average Revenue
T RQ= AR = P
• Marginal Revenue
1T R1Q
= M R
13 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
14 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
• A monopolist’s marginal revenue is always lessthan 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.
• When a monopoly increases the amount it sells,it has two effects on total revenue (P × Q).• The output effect: More output is sold, so Q is
higher, which tends to increase total revenue.• The price effect: The price falls, so P is lower, which
tends to decrease total revenue.
15 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
16 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
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.
17 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
18 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Comparing Monopoly and Competition
• For a competitive firm, price equals marginal
cost.
P = M R = MC
• For a monopoly firm, price exceeds marginal
cost.
P > M R = MC
Remember, all profit-maximizing firms set
M R = MC .
19 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
A Monopoly’s Profit
• Profit equals total revenue minus total costs.
Profit = T R − T C
= (T RQ−
T CQ
)× Q
= (P − AT C)× Q
• The monopolist will receive economic profits
as long as price is greater than average total
cost.
20 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
21 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Case Study: Monopoly Drugs Versus Generic Drugs (學名藥)
22 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
The Welfare Cost of
Monopolies
• 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 of the owners of
the firm, the high price makes monopoly very
desirable.
23 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
The Efficient Level of Output
24 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
The Deadweight Loss
• Because a monopoly sets its price abovemarginal cost, it places a wedge between theconsumer’s willingness to pay and theproducer’s cost.• This wedge causes the quantity sold to fall short of
the social optimum.
• The Inefficiency of Monopoly• The monopolist produces less than the socially
efficient quantity of output.
25 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
26 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
• The inefficiency of monopoly can be measured
with a deadweight loss triangle, as illustrated in
Figure 8.
• The deadweight loss caused by 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.
27 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
The Monopoly’s Profit: A Social Cost?
• The monopoly profit itself represents not a
reduction in the size of the economic pie but
merely a bigger slice for producers and a
smaller slice for consumers.
• The problem in a monopolized market arises
because the firm produces and sells a quantity
of output below the level that mazimizes total
surplus.
• The problem stems from the inefficiently low
quantity of output.
28 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Price Discrimination
• Price discrimination (差別取價) is the business
practice of selling the same good at different
prices to different customers, even though the
costs for producing for the two customers are
the same.
• 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.
29 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
A Parable about Pricing
• Readalot Publishing Company (RPC) has just pusblished
a novel for a best-selling author. It pays the author a flat
$2 million, and assume that the cost of printing the book
is zero.
• How would RPC decide the book’s price?
• The book will appeal to the author’s 100,000 die-hard
fans who are willing to pay as much as $30. In addition,
the book will appeal to about 400,000 less enthusiastic
readers who will pay up to $5.
• If RPC charges a single price to all customers, what price
maximizes profit?
30 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
• At a price of $30, RPC sells 100,000 copies, has revenue
of $3 million, and makes profit of $1 million.
• At a price of $5, RPC sells 500,000 copies, (why?) has
revenue of $2.5 million, and makes profit of $0.5 million.
• RPC maximizes profit by charging $30 and forgoing the
opportunity to sell to the 400,000 less enthusiastic
readers. This causes a deadweight loss of $2 million.
• Now suppose that these two groups of readers are in
seperated markets. The die-hard fans live in Australia,
and the other readers live in the United States. Can RPC
change its pricing strategy and increase profits?
31 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
• To the 100,000 Australia readers, RPC can charge $30 for
the book. To the 400,000 American readers, RPC can
charge $5 for the book.
• In this case, revenue is $3 million in Australia and $2
million in the U.S., for a total of $5 million. Profit is then
$3 million.
• RPC will follow this strategy of price discrimination.
• There is no deadweight loss.
• The increase in total surplus (decrease in deadweight
loss) accrues to RPC in the form of $2 million higher
profit.
32 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
• Three facts about price discrimination:• Price discrimination is a rational strategy for a
profit-maximizing monopolist.• Price discrimination requirs the ability to separate
customers according to their willingness to pay.• Price discrimination can raise economic welfare.
33 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
• Perfect Price Discrimination• Perfect price discrimination refers to the situation
when the monopolist knows exactly the willingness
to pay of each customer and can charge each
customer a different price.
• Two important effects of price discrimination.• It can increase the monopolist’s profits.• It can reduce deadweight loss.
34 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
35 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Examples of Price Discrimination
• Movie tickets
• Airline prices
• Discount coupons
• Financial aid
• Quantity discounts
• 精裝書與平裝書
• 學生版軟體, 亞洲版英文教科書
36 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Public Policy Toward
Monopolies
• Government responds to the problem ofmonopoly 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.
37 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Increasing Competition with Antitrust Laws
• Antitrust laws are a collection of statutes aimed
at 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.
38 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
Regulation
• Government may regulate the prices that themonopoly charges.• The allocation of resources will be efficient if price
is set to equal marginal cost.
• In practice, regulators will allow monopolists
to keep some of the benefits from lower costs in
the form of higher profit, a practice that
requires some departure from marginal-cost
pricing.
39 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
40 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
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).
• The key issue is how the ownership of the firm
affects the costs of production.
Doing Nothing
• Government can do nothing at all if the market
failure is deemed small compared to the
imperfections of public policies.
41 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
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 with substantial monopoly power are
rare. Few goods are truly unique.
42 / 43
Chapter 15
Monopoly
Outline
Why
Monopolies
Arise
How
Monopolies
Make
Production and
Pricing
Decisions
The Welware
Cost of
Monopolies
Price
Discrimination
Public Policy
Toward
Monopolies
43 / 43
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