Professional Documents
Culture Documents
CHAPTER
2
Legal Restrictions
3
Patent and Invention Incentives
A patent awards an inventor the
exclusive right to produce a good
or service for 20 years
Patent laws
Encourage inventors to invest the time
and money required to discover and
develop new products and processes
Also provide the stimulus to turn an
invention into a marketable product, a
process called innovation
4
Licenses and other Entry Restrictions
Governments often confer
monopoly status by awarding a
single firm the exclusive right to
supply a particular good or service
5
Economies of Scale
A monopoly sometimes emerges
naturally when a firm experiences
economies of scale as reflected by
the downward-sloping, long-run
average cost curve
6
Exhibit 1: Economies of Scale as a Barrier to Entry
$
Put another way, market
demand is not great enough to
permit more than one firm to
achieve sufficient economies
of scale a single firm will
emerge from the competitive
Cost per unit
Long-run
average cost
8
Control of Essential Resources
Another source of monopoly power is a
firm’s control over some nonreproducible
resource critical to production
Professional sports teams try to block the
formation of competing leagues by signing the
best athletes to long-term contracts
Alcoa was the sole U.S. maker of aluminum for a
long period of time because it controlled the
supply of bauxite
China is the monopoly supplier of pandas
DeBeers controls the world’s diamond trade
9
Local Monopolies
Local monopolies are more common
that national or international
monopolies
11
Demand, Average and Marginal Revenue
Suppose De Beers controls the entire
diamond market and suppose they can
sell three diamonds a day at $7,000
each total revenue of $21,000
12
Demand, Average and Marginal Revenue
To sell a fourth diamond, De Beers
must lower the price to $6,750
total revenue for 4 diamonds is
$27,000 and average revenue is again
$6,750
16
0 16 32 1-carat diamonds per day
Firm’s Costs and Profit Maximization
22
Exhibit 7: The Monopolist Minimizes Losses in the
Short Run
Recall that average variable cost and
average fixed cost sum to average total Marginal cost
cost .
24
Long-Run Profit Maximization
For a monopoly, the distinction
between the long and short run is
not as important
26
Price and Output Comparison
Purpose here is to compare monopoly
using the benchmark established in our
discussion of perfect competition
27
Exhibit 8: Perfect Competition and Monopoly
The horizontal supply curve is a
based on the assumption of a
constant-cost industry.
Equilibrium in perfect competition m
p'm
30
Why the Welfare Loss Might Be Lower
The welfare loss shown in Exhibit 8
may also overstate the true cost of
monopoly because monopolists
may, in response to public scrutiny
and political pressure, keep prices
below what the market could bear
31
Why the Welfare Loss Might Be Higher
Another line of thought suggests
that the welfare loss of monopoly
may, in fact, be greater than shown
in our example
32
Why the Welfare Loss Might Be Higher
33
Why the Welfare Loss Might Be Higher
Because these rights are so
valuable, numerous applicants
spend millions on lawyers’ fees,
lobbying expenses, and other costs
associated with making themselves
appear the most deserving
35
Why the Welfare Loss Might Be Higher
36
Price Discrimination
A monopolist can sometimes increase
economic profit by charging higher
prices to customers who value the
product more
37
Conditions for Price Discrimination
Conditions
The demand curve for the firm’s product
must slope downward the firm has some
market power and control over price
There are at least two groups of consumers
for the product, each with a different price
elasticity of demand
The producer must be able, at little cost, to
charge each group a different price for
essentially the same product
The producer must be able to prevent those
who pay the lower price from reselling the
product to those who pay the higher price
38
Model of Price Discrimination
39
Exhibit 9: Price Discrimination
(a) (b)
$3.00
$1.50
1.00 LRAC, MC 1.00 LRAC, MC
D'
MR D MR'
0 400 Quantity per period 0 500 Quantity per period
At a given price, the price elasticity of demand in panel b(elastic) is greater than in panel a (inelastic). For
simplicity, assume the firm produces at a constant long-run average and marginal cost of $1. This firm
maximizes profits by finding the price in each market that equates marginal revenue with marginal cost
consumers with the lower price elasticity pay $3 and those with the higher price elasticity pay $1.50 in
markets with elastic demand the price will be lower than in markets where demand is inelastic.
40
Examples of Price Discrimination
Because businesspeople face
unpredictable yet urgent demands
for travel and communication, and
because employers pay such
expenses, businesspeople are less
sensitive to price than householders
41
Perfect Price Discrimination
If a monopolist could charge a
different price for each unit sold, the
firm’s marginal revenue curve from
selling one more unit would equal the
price of that unit the demand curve
would become the marginal revenue
curve
Profit
Long-run
e average cost
c
= marginal cost
D = Marginal
revenue
0 Q 43
Quantity per period
Perfect Price Discrimination
Perfect price discrimination gets high
marks based on allocative efficiency
44
Perfect Price Discrimination
As in perfect competition, the marginal
benefit of the final unit of output
produced just equals its marginal cost
45