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Ann Liu

on 15 January 2013

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Transcript of Monopoly

The Monopoly's Profit: A Social Cost? The problem in a monopolized market includes:

both consumers and producers. There is a that the firm will produce and sell a quantity of output below the level that maximizes total surplus. This inefficiency lies with the monopoly's high price Consumers buy fewer units when firm raises its price above marginal cost. But keep in mind. The profit earned on the units that continue to be sold is not the problem. The problem stems from the inefficiently low quantity of output. If the high monopoly price did not discourage some consumers from buying the good, it would raise producer surplus by the amount it reduced consumer surplus achieved by the Benevolent
Social Planner Exception to this
conclusion: A monopoly firm has to incur costs to maintain its monopoly position the monopoly may use up some of its monopoly profits to pay for additional costs. Public Policies Because monopolies fail to allocate resources efficiently, the government can respond... By trying to make monopolized industries more competitive
By regulating the behavior of the monopolies
By turning some private monopolies into public enterprises
By doing nothing "Making monopolized industries more competitive" Anti Trust Acts:
Sherman Anti Trust Act (1890) to break powerful trusts
Clayton Anti Trust Act (1914) strengthened the government's powers and allowed private lawsuits Public Ownership Rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly itself. Regulation Natural Monopoly! Natural Monopoly! Usually for natural monopolies.
Companies are not allowed to make prices-- the government does. p q Do Nothing Most policies have drawbacks Price Discrimination Price Discrimination: the business practice of selling the same good at different prices to different customers (not possible when a good is sold in a competitive market) Morals ABOUT PRICING EXAMPLES Movie Tickets Airline Prices Discount Coupons Financial Aid Quantity Discount PRICE MAKER SOLE SELLER NO CLOSE SUBS BARRIERS TO ENTRY key resource government patents efficiency PRICING
DECISIONS When a monopoly increases the amount it sells, it can affect the total revenue (P x Q) in two ways...

OUTPUT EFFECT: more output sold, Q is higher

PRICE EFFECT: price falls, P is lower P>MR=MC PROFIT MAX PROFIT WELFARE COST (perfectly competitive firm: P = MR = MC) (P - ATC) * Q A monopoly maximizes profit by choosing the Q at which MR = MC. It then uses the demand curve to set the price. DEADWEIGHT LOSS Because a monopoly charges a P above MC, not all customers who value the good at more than its cost buy it. Thus, the Q is below the socially efficient level. In the standpoint of maximizing total surplus, a monopoly fails to maximize total economic well-being. Price discrimination is a rational strategy for a profit maximizing monopolist.
Requires the ability to separate customers according to willingness to pay
Arbitrage: process of buying a good in one market at a low price and selling it in another market at a higher price in order to profit from the price difference
Price discrimination can raise economic welfare. Competition versus Monopoly Similarities:
Maximize profits
Economic Profits in short run
C M Many firms One firm MR = P MR < P P = MC MR < P Entry in long run No entry in long run No economic profits Economic profits in long run no price discriminating price discriminating 1) A monopolist maximizes profit by producing the quantity at which...

a) MR = MC

b) MR = P

c) MC = P

d) MC = D 2) If MR exceeds MC, a monopolist should...

a) increase output

b) decrease output

c) keep output the same because profits are maximized when MR > MC

d) raise the price 4) Using government regulation to force a natural monopoly to charge a P = MC will...a) improve efficiency b) raise the P of good
c) attract additional firms to enter market
d) cause monopolist to exit market Perfect Price discrimination: when a monopolist charges each customer his or her exact willingness
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