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Chap 6.2

The document discusses monopoly, including its key characteristics, sources of monopoly power, how a monopolist determines price and quantity, marginal revenue curve, profit maximization, deadweight loss, and market power. It also discusses price discrimination as a way for firms to extract more consumer surplus.

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Annie Duolingo
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25 views

Chap 6.2

The document discusses monopoly, including its key characteristics, sources of monopoly power, how a monopolist determines price and quantity, marginal revenue curve, profit maximization, deadweight loss, and market power. It also discusses price discrimination as a way for firms to extract more consumer surplus.

Uploaded by

Annie Duolingo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 6: MONOPOLY

1. Characteristic

The key difference between a competitive firm and a monopoly is the monopoly’s ability to
influence the price of its output. A competitive firm is small relative to the market in which it
operates and, therefore, has no power to influence the price of its output. It takes the price
as given by market conditions. By contrast, because a monopoly is the sole producer in its
market, it can alter the price of its goods by adjusting the quantity it supplies to the market.

Why does monopoly arise?

The main cause of monopolies is barriers to entry—other firms cannot enter the market.
Three sources of barriers to entry:

➢ 1.A single firm owns a key resource.


E.g., DeBeers owns most of the world’s diamond mines

➢ 2.The govt gives a single firm the exclusive right to produce the good
E.g., patents, copyright laws3

➢ 3. Natural monopoly
a single firm can produce the entire market Q at lower cost than could several firms.
2. Demand curve

Monopolist is the only seller => face the market demand curve (độc quyền nên là market luôn )

A monopolist’s demand curve is downward-sloping


=> To sell a larger Q, the firm must reduce P ( Law of Demand )

3. Marginal revenue curve

MR < P

=> A monopolist’s MR curve is downward- sloping, below its demand curve

! Three Characteristics ( quan trọng nè )


❖ Downward sloping
❖ Slope Twice as steep
❖ Below demand curve

Exercise

A monopolist’s demand equation as follow: Q = (-1/5)P + 600


Finding its marginal revenue equation ?
MR (Q) = TR’ ( Q) = 2aQ + b
=> MR= 2aQ + b = (-⅖ ) Q + 600
3. The firm’s decision

• To maximize profit: Π (Q) = TR (Q) - TC (Q) ⇔ MR = MC

• Once the monopolist identifies this quantity, it sets the highest price consumers are willing
to pay for that quantity

• It finds this price from the D curve

Π(𝑄) = 𝑇𝑅(𝑄) − 𝑇𝐶(𝑄) = (𝑃 − 𝐴𝑇𝐶) × 𝑄

As long as the price that the monopolist sets is higher than the average total cost, the
monopoly earns profits.
Exercise

4. Deadweight loss

• In the monopoly, P > MR = MC : P higher than Eq’m point

• The value to buyers of an additional unit (P) exceeds the cost of the resources needed to
produce that unit (MC)

• The monopoly Q is too low – could increase the total surplus with a larger Q
• Thus, monopoly results in a deadweight loss.

Because a monopoly charges a price above marginal cost, not all consumers who value the
good at more than its cost buy it. Thus, the quantity produced and sold by a monopoly is
below the socially efficient level.

The deadweight loss is represented by the area of the triangle between the demand curve
(which reflects the value of the goods to consumers) and the marginal-cost curve (which
reflects the costs of the monopoly producer).

Total Surplus
Perfect Competition vs Monopoly
Exercise
5. The firm’s supply curve

★ A competitive firm
• takes P as given
• has a supply curve that shows how its Q depends on P

★ A monopoly firm
• is a “price-maker,” not a “price-taker”
• Q does not depend on P

Q and P are jointly determined by MC, MR, and the demand curve

=> no supply curve for monopoly.


A monopoly firm is a price-setter, this means that the relation of the quantity of an output and
the selling price is different. A monopolist determines the quantity that makes marginal
revenue equal marginal cost, which maximizes the profits. That monopolist then sets the
maximum price the consumers are willing to pay based on the market demand curve. This
means that the quantity of an output and the selling price is based on the shape of the
marginal revenue (MR), marginal cost (MC), and market demand (D) curves.

By this method of setting quantity and price of an output, there are scenarios that at the
same level of price, the monopolist produces different quantities of products. Similarly, there
are scenarios that at the same quantity of products, the monopolist sells at different prices.
Both types of scenarios do not obey the law of supply. Henceforth, there is no supply curve
for the monopoly.

6. Market power
Found in 1934 by Abba Lerner:

❖ In perfect competition: P = MC => L = 0

❖ The higher value of L is - the stronger market power a firm can gain

! D curve steeper => Price sensitivity lower => More power

! Different monopolist have different market power ( EVN > Đường sắt VN)
Exercise

A monopolist X determines P = 4$/unit and MC = 2,4$.


A monopolist Y determines P = 8$/unit and MC = 3$.
1. Finding L of each monopolist.
2. Which monopolist has stronger market power?

__________________________

( Cô hong dạy )

Price Discrimination
● Discrimination: treating people differently based on some characteristic, e.g. race or
gender
● Price discrimination: selling the same good at different prices to different buyers
● The characteristic used in price discrimination is the willingness to pay(WTP):
A firm can increase profit by charging a higher price to buyers with higher WTP
Price Discrimination in the Real World
● In the real world, perfect price discrimination is not possible:
○ no firm knows every buyer’s WTP
○ buyers do not announce it to sellers
● So, firms divide customers into groups based on some observable trait that
is likely related to WTP, such as age

Movie tickets
Discounts for seniors, students, and people who can attend during weekday afternoons.
They are all more likely to have lower WTP than people who pay full price on Friday night.

Airline prices
Discounts for Saturday-night stay overs help distinguish business travelers, who usually
have higher WTP, from more price-sensitive leisure travelers.

Discount coupons
People who have time to clip and organize coupons are more likely to have lower income
and lower WTP than others.

Need-based financial aid


Low income families have lower WTP for their children’s college education. Schools
price-discriminate by offering need-based aid to low income families.

Quantity discounts
A buyer’s WTP often declines with additional units, so firms charge less per unit for large
quantities than small ones.
Example: A movie theater charges $4 for a small popcorn and $5 for a large one that’s twice as big.

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