why do monopoly markets exist?(11.6)

• Natural monopoly

• Barriers to entry

Natural monopoly

• High fixed costs

• Average cost decreases with output: economies of scale

• Low demand

FIGURE 11-17 Natural Monopoly Market

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-17

Barrier to entry

• Structural barriers to entry :

1. natural monopoly

2. Network externalities : eBay vs Yahoo

In Taiwan : Yahoo ! Vs 露天市集

Barriers to entry (II)

• Legal barriers to entry: patent

• Strategic barriers to entry :

when an incumbent firm takes explicit steps to deter entry : (price war)

11.1 Profit maximization by a monopolist

FIGURE 11-1 The Monopolist’s Demand Curve is theMarket Demand Curve

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-01

Monopolist’s problem

0)(")(')(")(":...

0)(')(')(':..

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)()(max

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NUMERICAL EXAMPLE

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2

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2

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Q

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QQQQCQQP

QQTCQQP

Q

TABLE 11.1

FIGURE 11-2 Profit Maximization by a Monopolist

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-02

(Figure continues on next slide)

FIGURE 11-2 (Continued)

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-02 continued

FIGURE 11-3 The Change in Total Revenue When the Monopolist Increases Output

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-03

圖有誤• FROM Q=2 TO Q=5

• TR FROM II+I TO II+III

• WHERE I=2*(3)=6, III=3*7=21

• NET INCREASE=15

AR VS MR

PQ

PQP

Q

QQP

Q

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QPQQTRQAR

)()(

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FIGURE 11-4 Total, Average, and Marginal Revenue

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-04

(Figure continues on next slide)

FIGURE 11-4 (Continued)

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-04 continued

FIGURE 11-5 The Monopolist’s Profit-Maximization Condition

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-05

A monopolist does not have a supply curve

• The monopolist might sell the same quantity at different prices

FIGURE 11-6 The Monopolist Does Not Have a Supply Curve

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-06

11.2Elasticity and marginal revenue

0)(01

0)(1

0)(1

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QMRUNITARY

QMRElastic

PQ

P

P

QP

Q

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Q

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Q

QTRQMR

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FIGURE 11-7 How Price Elasticity of Demand AffectsMonopoly Pricing

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-07

FIGURE 11-8 Marginal Revenue and Price Elasticity of Demand for a Linear Demand Curve (P=a-b Q)

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-08

FIGURE 11-9 Why a Profit-Maximizing Monopolist Will Not Operate on the Inelastic Region of the Market Demand Curve

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-09

Inverse elasticity pricing rule (IEPR)

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Quantifying market power

• Market power: The power of an individual economic agent to affect the price

• Lerner Index of market power

0 < (P-MC)/P <1• Why ?• (P-MC)/P relates to elasticity • Elasticity indicates the degree of substitutes• 彈性大 : 替代性高 , 欠缺 market power

11.4 Multi-plant monopoly

)()(

)()(

)()())((max

2221

1121

22112121, 21

QMCQQMR

QMCQQMR

QCQCQQQQPQQ

FIGURE 11-14 Profit Maximization by a Multiplant Monopolist

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-14

OPEC的配額生產• 合作的方法• 不穩定的合作 :

FIGURE 11-15 Profit Maximization by a Cartel

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-15

11.5 The welfare economics of monopoly

• Deadweight loss : F+G

• Rent seeking activities : B+E+H

FIGURE 11-16 Deadweight Loss in a Monopoly

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-16

FIGURE 11-18 The Monopoly Equilibrium

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-18

FIGURE 11-19 Deadweight Loss from Monopoly

Besanko & Braeutigam/Microeconomics: An Integrated ApproachChapter 11, Figure 11-19

• Suppose a monopolist faces a demand given by P=100-Q. The monopolist has two plants. The first has a marginal cost curve given by MC1=10+Q1 and the second has a marginal cost curve by MC2=20+Q2

Q1: find the monopolist’s optimal total quantity and price

Q2: find the optimal division of the monopolist’s quantity between its two plants