© 2008 pearson addison wesley. all rights reserved chapter eleven monopoly

© 2008 Pearson Addison Wesley. All rights reserved

Chapter Eleven

Monopoly

© 2008 Pearson Addison Wesley. All rights reserved. 11-2

Monopoly

• Monopoly– the only supplier of a good for which there is no close substitute

– Examples: 台電，台肥，中鋼，中船


Monopoly

• In this chapter, we examine eight main topics– Monopoly Profit Maximization– Market Power – Welfare Effects of Monopoly– Taxes and Monopoly– Cost Advantages That Create Monopolies– Government Actions That Create Monopolies

– Government Actions That Reduce Market Power

– Monopoly Decisions Over Time


Monopoly Profit Maximization

• All firms, including competitive firms and monopolies, maximize their profits by setting marginal revenue equal to marginal cost.

The Necessary Condition for Profit Maximization

• Competitive firms and monopolies alike maximize their profits using a two-step procedure.

• First, the firm determines the output at which it makes the highest possible profit.

• Second, the firm decides whether to produce at that output level or to shut down.



Equation 11.1


Equation 11.2


Marginal Revenue and The Demand Curves

• The price is the average revenue the firm receives, so a firm’s revenue is .

• A firm that earns more revenue when it sells extra units of output has a marginal revenue of .

R pq

qR

/MR R q


Marginal Revenue and The Demand Curves

• The marginal revenue of a monopoly differs from that of a competitive firm because the monopoly faces a downward-sloping demand curve unlike the competitive firm.


Equation 11.3


Figure 11.1Average and Marginal Revenue


Figure 11.1 Average and Marginal Revenue

a) The competitive firm’s marginal revenue, area , equals the market price, .

b) The monopoly’s marginal revenue is less than the price by area C (the revenue lost due to a lower price on the units originally sold).

1p

Q2p

B


Marginal Revenue Curve

• A monopoly’s marginal revenue curve lies below the demand curve at every positive quantity.


Deriving the Marginal Revenue Curve

• The monopoly’s marginal revenue is

• Because the slope of the monopoly’s demand curve, is negative, the price is greater than the marginal revenue, which equals plus a negative term.

.p

MR p QQ

p

/p Q

d ( ) / d ( ) d ( ) / dMR R Q Q p Q p Q Q Q


Marginal Revenue and Price Elasticity of Demand

• At a given quantity, the marginal revenue equals the price times a term involving the elasticity of demand:

1(1 ).MR p

11( / )( / )

p QMR p p p

Q p Q p p Q


Equation 11.4


Figure 11.2Elasticity of Demand and Total, Average, and Marginal Revenue


Choosing Price or Quantity

• Any firm maximizes its profit by operating where its marginal revenue equals its marginal cost.

• Unlike a competitive firm, a monopoly can adjust its price, so it has a choice of setting its price or its quantity to maximize its profit.


Figure 11.3Maximizing Profit


Figure 11.3 Maximizing Profit

a) At , where marginal revenue, , equals marginal cost, , profit is maximized. The rectangle showing the maximum profit is average profit per unit, , times the number of units, 6.

MRMC

6Q

$18 $8 $10p AC $60


Figure 11.3 Maximizing Profit

b) Profit is maximized at a smaller quantity,

(where marginal revenue equals marginal cost), than is revenue, (where marginal revenue is zero).

12Q 6Q


Mathematical Approach

2MC Q

24 2 2MR Q Q MC

2( ) 12C Q Q

24 24 6 $18p Q


Figure 11.4 Effects of a Shift of the Demand Curve

a) A shift of the demand curve from to

causes the competitive equilibrium to move from to along the supply curve (the horizontal sum of the marginal cost curves of all the competitive firms). Because the competitive equilibrium lies on the supply curve, each quantity corresponds to only one possible equilibrium price.

2D

1D

2e1e


Figure 11.4Effects of a Shift of the Demand Curve


Figure 11.4 Effects of a Shift of the Demand Curve

b) With a monopoly, this same shift of demand causes the monopoly optimum to change from to . The monopoly quantity stays the same, but the monopoly price rises. Thus a shift in demand does not map out a unique relationship between price and quantity in a monopolized market: The same quantity, , is associated with two different price, and .

2E1E

2p1p1 2Q Q


Market Power

• A monopoly has market power: the ability of a firm to charge a price above marginal cost and earn a positive profit.


Market Power and the Shape of the Demand Curve

• The degree to which the monopoly raises its price above its marginal cost depends on the shape of the demand curve at the profit-maximizing quantity.

1

1 (1/ )

p

MC

1(1 )MR p MC


Table 11.1Elasticity of Demand, Price, and Marginal Cost


Lerner Index

• Another way to show how the elasticity of demand affects a monopoly’s price relative to its marginal cost is to look at the firm’s Lerner Index (or pricing markup): the ratio of the differences between price and marginal cost to the price: .

• The larger the Lerner Index and the greater the monopoly’s ability to set price above marginal cost.

( ) /p MC p


Equation 11.11


Sources of Market Power

• The elasticity of demand of the market demand curve depends on consumers’ taste and options.

• The more consumers want a good–the more willing they are to pay “virtually anything” for it–the less elastic is the demand curve.


Welfare Effects of Monopoly

• Welfare, (here defined as the sum of consumer surplus, , and producer surplus, ), is lower under monopoly than under competition.

CSW

PS


Figure 11.5Deadweight Loss of Monopoly


Figure 11.5 Deadweight Loss of Monopoly

• Deadweight Loss of Monopoly. A competitive market would produce at , where the demand curve intersects the marginal cost (supply) curve. A monopoly produces only at , where the marginal revenue curve intersects the marginal cost curve.

8cQ $16cp

6mQ $18mp


Figure 11.5 Deadweight Loss of Monopoly

• Under monopoly, consumer surplus is , producer surplus is , and the lost welfare or deadweight loss of monopoly is .

AB D

C E

Taxes and Monopoly

• Monopolies may face specific taxes or ad valorem taxes.

• Either type of tax raises the price that consumers pay and lowers welfare.

• The result of tax under monopoly may differ from that under competitive market.



Equation 11.12: Profit Maximization with A Specific Tax


Equation 11.13: Comparative Statics

Tax Incidence on Consumers

• In a competitive market, the incidence of a specific or ad valorem tax on consumers is less than or equal to 100% of the tax, and the incidence on consumers plus the incidence on suppliers is 100%.

• In a monopoly market, the incidence of specific tax falling on consumers can exceed 100%.



Equation 11.14: Example of Tax Incidence on Consumers > 100%


Welfare Effects of Ad Valorem Versus Specific Taxes

• Governments use ad valorem taxes more often than specific taxes.

• The answer is that a government raises more tax revenue with an ad valorem tax applied to a monopoly than with a specific tax when and are set so that the after-tax output is the same with either tax.


Figure 11.6Ad Valorem Versus Specific Tax


Figure 11.6 Ad Valorem Versus Specific Tax

• A specific tax and an ad valorem tax

that reduce the monopoly output by the same amount (from to ) raise different amounts of tax revenues for the government. The tax revenue from the specific tax is area . The tax revenue from the ad valorem tax is

( )( )

1Q 2Q

2A Q2 2. A B p Q


Cost Advantages that Create Monopolies

• Why are some markets monopolized?• Two key reasons are that a firm has a cost

advantage over other firms or that a government created the monopoly


Sources of Cost Advantages

• The firm controls a key input.• The firm uses a superior technology• The firm has a better way of organizing

production.

→ Keep the information secret or obtain a patent


焦點新聞 --- 知識產權報記者劉仁

• 微軟敗訴歐洲反壟斷案– 9 月 17 日，歐洲初審法院做出最終判決，支持

歐盟在 2004 年發佈的微軟反壟斷案裁決。在長達 244 頁的判決書中，歐洲初審法院駁回微軟大部分上訴請求，並要求微軟必須遵守2004年 3 月歐盟委員會做出的裁決，即向競爭對手公開網路協定的技術參數和提供未捆綁音視頻軟體版本的 Windows 系統。同時法院還支持歐盟對微軟處以 6 ． 13 億美元的罰款。


Natural Monopoly

• A market has a natural monopoly if one firm can produce the total output of the market at lower cost than several firms could.

• C(Q) < C(q1) + C(q2) + … + C(qn) (11.15)• If a firm has economies of scale at all level of

output, its average cost curve falls as output increases.

→ Natural Monopoly


Figure 11.7Natural Monopoly


Government Actions that Create Monopoly

• Barriers to Entry: by making it difficult for new firms to obtain a license to operate, by granting a firm the rights to be a monopoly, or by auctioning the rights to be a monopoly.

• Patent: an exclusive right granted to the inventor to sell a new and useful product, process, substance, or design for a fixed period of time.


Government Actions that Reduce Market Power

• Regulating Monopolies

1. Optimal Price Regulation: requiring that a monopoly charge no more than the competitive price.

2. Nonoptimal Price Regulation: welfare is reduced if the government does not set the price optimally.

• Increasing Competition


焦點新聞 --- 經濟日報記者陳秀蘭 2008.02.18

• 天然氣進口市場研擬開放 –繼國內油品自由化後，現行國內天然氣由中油

獨家進口的局面，也可望打破！經濟部能源局長葉惠青昨（ 17 ）日指出，能源局正規劃建置「代輸」制度，未來天然氣進口業者得委請中油代輸，不再由中油壟斷。


Figure 11.8Optimal Price Regulation


Figure 11.9Regulating a Telephone Utility


Monopoly Decisions over Time

• Network Externality: the situation where one person’s demand for a good depends on the consumption of the good by others.

• Bandwagon Effect: the situation in which a person places greater value on a good as more and more other people possess it.

• Snob Effect: the situation in which a person places greater value on a good as fewer and fewer other people possess it.

© 2008 pearson addison wesley. all rights reserved chapter eleven monopoly

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