Monopoly Wk 4

7/30/2019 Monopoly Wk 4

1/17

1

Market Power andMonopoly


2/17

2

For a Perfectly Competitive firmThe Demand = Marginal Revenue

40

30

20

15

10

MarketPrice

1 2 3 4 5 6 7 8

Market QuantityMillions of Bushels ofWheat

MarketSupply ofWheat

MarketDemandfor Wheat

Marketfor Wheat

ChicagoMercantile

Exchange

40

30

20

15

10

Price

20 40 60 80 100

MarketPrice = D =MR

Farmer inNebraska

Farmers

Quantity ofWheat

Market sets the price.

Firm can sell all they want at the market price Demand Curve for the firm is perfectly elastic at the marketprice. Marginal Revenue = Change Revenue/Change in Output =Market Price. Market Price = D = MR


3/17

3

Demand Curve for Firmswith Market Power

0

$200

175

150

125

25

100

75

50

Price

1 2 3 4 5 6 7 8 9 10

Quantity

D

MarketPowermeans thefirm has

some controlover pricewhich meansthe demandcurve isdownward

sloping


4/17

4

Relation between theDemand Curve and

Revenues

Price Discrimination: The firm

charges each customer exactlywhat the customer is willing topay for the product.

No price Discrimination: Allcustomers pay exactly thesame price.

D d C d M i l R


5/17

5

Demand Curve and Marginal RevenuePerfect Price Discrimination

MR = (Change in Rev)/(Change in Q)

D = MR only if firms can perfectly pricediscriminate6

5

4

3

2

1

01 2 3 4 5 6 7 8

P Qd$5

$4

$3

$2

$1

1

2

3

4

5

DemandSchedule

P

Q

D = MR

$5

$4

$3

$2

$1

MarginalRevenue

$5

$9

$12

$14

$15

CumulativeRevenues

Revenues =$5 for the 1st

+ $4 for the second+

+ $1 for the 5th


6/17

6

Demand Curve and RevenuesNo Price Discrimination: All customers

pay the same price

6

5

4

3

2

1

01 2 3 4 5 6 7 8

P Qd$5

$4

$3

$2

$1

1

2

3

4

5

DemandSchedule

P

Q

D

$5

$8

$9

$8

$5

Revenues

Revenues= Price XQuantity =$3 X 3 = $9


7/177

No Price DiscriminationCharging all customers the

same price6

5

4

3

2

1

01 2 3 4 5 6 7 8

P

Q

D

Two Effects of a Price

Change1. Reprice effect. Change

the price for existingcustomers. (lower pricemeans existingcustomers pay less.raise price existingcustomers pay more).

2. Stimulation effect. Gain

or lose new customers(Lower prices gaincustomers. Raiseprices you losecustomers)

Example.

Lower price from $3 to$2.

Reprice effect: 3 existingpay $1 less = -$3

reprice effect.

Stimulation effect: Soldto 1 new customer atprice of $2 =$2 stimeffect.

Total effect = Reprice +Stim = -3 + 2 = -$1.


8/178

No Price DiscriminationCharging all customers the

same price6

5

4

3

2

1

01 2 3 4 5 6 7 8

P

Q

D

Two Effects of a Price

Change1. Reprice effect. Change

the price for existingcustomers. (lower pricemeans existingcustomers pay less.raise price existingcustomers pay more).

2. Stimulation effect. Gain

or lose new customers(Lower prices gaincustomers. Raiseprices you losecustomers)

MR from the 4thunit = $2 - $1 * 3

customers = -$1


9/179

eman anMarginal Revenue Curves

MR = (Change in Rev)/(Change in Q)

MR < Price for non price discriminating firm6

5

4

3

2

1

01 2 3 4 5 6 7 8

P Qd$5

$4

$3

$2

$1

1

2

3

4

5

DemandSchedule

P

Q

D

$5

$8

$9

$8

$5

RevenuesMR$5

$3

$1

-$1

-$3

MR

R d C t f Fi


10/1710

Revenue and Costs for Firmswith Market Power

To facilitate comparison to Perfect Competition

assume the same Short Run Cost Structure(1)

QuantityOf Output

(2)Price

(AverageRevenue)

(3)Total

Revenue(1) X (2)

(4)MarginalRevenue

(5)Average

Total Cost

(6)Total Cost

(1) X (5)

(7)Marginal

Cost

(8)Profit (+)

or Loss (-)

0

123456789

10

$172

162152142132122112102928272

$0

162304426528610672714736738720

$162142122102

8262

42222

-18

$190.00135.00113.33100.0094.0091.6791.4393.7597.78

103.00

$100

190270340400470550640750880

1030

$908070607080

90110130150

$-100

-28+34+86

+128+140+122

+74-14

-142-310

Revenue Data Cost Data

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Can you See Profit Maximization?


11/1711

Profit Maximization

0

$200

175

150

125

25

100

75

50

Price,

Costs,andRevenue

1 2 3 4 5 6 7 8 9 10

Quantity

Firms with market power

D

MR

ATC

MC

MR=MC

Pm=$122

A=$94

EconomicProfit


12/1712

Firms with Market Power

Monopoly

Oligopoly

Monopolistically CompetitiveFirms


13/1713

Monopoly

A single seller in a market

Must have barriers to entry elsethere would be entry and theeconomic profits would go to

zero. Special Recipe at a restaurant.

Patented product

Utility company


14/1714

A monopoly can earn economic

profits in the long run

0

$200

175

150

125

25

100

75

50

Price,

Costs,andRevenue

1 2 3 4 5 6 7 8 9 10

Quantity

D

MR

ATC

MC

MR=MC

Pm=$122

A=$94

EconomicProfit

M li ti ll C titi


15/1715

Monopolistically CompetitiveFirm

Product is differentiated from

other producers

But there are no barriers to entry.

Very similar to perfectcompetition (zero profits)

M li t d M li ti ll


16/1716

Monopolist and MonopolisticallyCompetitive Firms look the same in

the short run.Short-Run Economic Profits = (P-ATC)*Q = ($10-$9)*1000 =$1,000

Quantity

P

riceand

Costs

MR = MC

MC

MR

D1

ATC

EconomicProfit

1000

9

10

0


17/1717

Monopolistically Competitive Firms cannot earn economic profits in the long run

Short-Run Economic Profits = (P-ATC)*Q = ($10-$9)*1000 =$1,000

Quantity

P

riceand

Costs

MR = MC

MC

MR

D1

ATC

EconomicProfit

1000

9

10

0 950

LONG RUNEconomic Profits = (P-ATC)*Q = ($9-$9)*950 =$0

Documents

Monopoly Wk 4