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1、Chapter Twenty-FourMonopolyPure MonopolyuA monopolized market has a single seller.uThe monopolists demand curve is the(downward sloping)market demand curve.uSo the monopolist can alter the market price by adjusting its output level.Pure MonopolyOutput Level,y$/output unitp(y)Higher output y causes a
2、lower market price,p(y).Why Monopolies?uWhat causes monopolies?a legal fiat;e.g.US Postal ServiceWhy Monopolies?uWhat causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a new drugWhy Monopolies?uWhat causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a new drugsole owners
3、hip of a resource;e.g.a toll highwayWhy Monopolies?uWhat causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a new drugsole ownership of a resource;e.g.a toll highwayformation of a cartel;e.g.OPEC Why Monopolies?uWhat causes monopolies?a legal fiat;e.g.US Postal Servicea patent;e.g.a ne
4、w drugsole ownership of a resource;e.g.a toll highwayformation of a cartel;e.g.OPEClarge economies of scale;e.g.local utility companies.Pure MonopolyuSuppose that the monopolist seeks to maximize its economic profit,uWhat output level y*maximizes profit?Profit-MaximizationAt the profit-maximizing ou
5、tput level y*so,for y=y*,y$R(y)=p(y)yProfit-Maximization$R(y)=p(y)yc(y)Profit-MaximizationyProfit-Maximization$R(y)=p(y)yc(y)yP P(y)Profit-Maximization$R(y)=p(y)yc(y)yP P(y)y*Profit-Maximization$R(y)=p(y)yc(y)yP P(y)y*Profit-Maximization$R(y)=p(y)yc(y)yP P(y)y*Profit-Maximization$R(y)=p(y)yc(y)yP P(
6、y)y*At the profit-maximizingoutput level the slopes ofthe revenue and total costcurves are equal;MR(y*)=MC(y*).Marginal RevenueMarginal revenue is the rate-of-change of revenue as the output level y increases;Marginal RevenueMarginal revenue is the rate-of-change of revenue as the output level y inc
7、reases;dp(y)/dy is the slope of the market inversedemand function so dp(y)/dy 0.Marginal RevenueE.g.if p(y)=a-by then R(y)=p(y)y=ay-by2and soMR(y)=a-2by 0.Marginal RevenueE.g.if p(y)=a-by then R(y)=p(y)y=ay-by2and soMR(y)=a-2by 0.p(y)=a-byaya/bMR(y)=a-2bya/2bMarginal CostMarginal cost is the rate-of
8、-change of totalcost as the output level y increases;E.g.if c(y)=F+a ay+b by2 thenMarginal CostFyyc(y)=F+a ay+b by2$MC(y)=a a+2b by$/output unita aProfit-Maximization;An ExampleAt the profit-maximizing output level y*,MR(y*)=MC(y*).So if p(y)=a-by andc(y)=F+a ay+b by2 thenProfit-Maximization;An Exam
9、pleAt the profit-maximizing output level y*,MR(y*)=MC(y*).So if p(y)=a-by and ifc(y)=F+a ay+b by2 thenand the profit-maximizing output level is Profit-Maximization;An ExampleAt the profit-maximizing output level y*,MR(y*)=MC(y*).So if p(y)=a-by and ifc(y)=F+a ay+b by2 thenand the profit-maximizing o
10、utput level is causing the market price to beProfit-Maximization;An Example$/output unityMC(y)=a a+2b byp(y)=a-byMR(y)=a-2byaa aProfit-Maximization;An Example$/output unityMC(y)=a a+2b byp(y)=a-byMR(y)=a-2byaa aProfit-Maximization;An Example$/output unityMC(y)=a a+2b byp(y)=a-byMR(y)=a-2byaa aMonopo
11、listic Pricing&Own-Price Elasticity of DemanduSuppose that market demand becomes less sensitive to changes in price(i.e.the own-price elasticity of demand becomes less negative).Does the monopolist exploit this by causing the market price to rise?Monopolistic Pricing&Own-Price Elasticity of DemandMo
12、nopolistic Pricing&Own-Price Elasticity of DemandOwn-price elasticity of demand isMonopolistic Pricing&Own-Price Elasticity of DemandOwn-price elasticity of demand issoMonopolistic Pricing&Own-Price Elasticity of DemandSuppose the monopolists marginal cost ofproduction is constant,at$k/output unit.F
13、or a profit-maximumwhich isMonopolistic Pricing&Own-Price Elasticity of DemandE.g.if e e=-3 then p(y*)=3k/2,and if e e=-2 then p(y*)=2k.So as e e rises towards-1 the monopolistalters its output level to make the marketprice of its product to rise.Monopolistic Pricing&Own-Price Elasticity of DemandNo
14、tice that,sinceMonopolistic Pricing&Own-Price Elasticity of DemandNotice that,sinceMonopolistic Pricing&Own-Price Elasticity of DemandNotice that,sinceThat is,Monopolistic Pricing&Own-Price Elasticity of DemandNotice that,sinceThat is,Monopolistic Pricing&Own-Price Elasticity of DemandNotice that,si
15、nceThat is,So a profit-maximizing monopolist alwaysselects an output level for which marketdemand is own-price elastic.Markup PricinguMarkup pricing:Output price is the marginal cost of production plus a“markup.”uHow big is a monopolists markup and how does it change with the own-price elasticity of
16、 demand?Markup Pricingis the monopolists price.Markup Pricingis the monopolists price.The markup isMarkup Pricingis the monopolists price.The markup isE.g.if e e=-3 then the markup is k/2,and if e e=-2 then the markup is k.The markup rises as the own-price elasticity of demand rises towards-1.A Prof
17、its Tax Levied on a MonopolyuA profits tax levied at rate t reduces profit from P P(y*)to(1-t)P P(y*).uQ:How is after-tax profit,(1-t)P P(y*),maximized?A Profits Tax Levied on a MonopolyuA profits tax levied at rate t reduces profit from P P(y*)to(1-t)P P(y*).uQ:How is after-tax profit,(1-t)P P(y*),
18、maximized?uA:By maximizing before-tax profit,P P(y*).A Profits Tax Levied on a MonopolyuA profits tax levied at rate t reduces profit from P P(y*)to(1-t)P P(y*).uQ:How is after-tax profit,(1-t)P P(y*),maximized?uA:By maximizing before-tax profit,P P(y*).uSo a profits tax has no effect on the monopol
19、ists choices of output level,output price,or demands for inputs.uI.e.the profits tax is a neutral tax.Quantity Tax Levied on a MonopolistuA quantity tax of$t/output unit raises the marginal cost of production by$t.uSo the tax reduces the profit-maximizing output level,causes the market price to rise
20、,and input demands to fall.uThe quantity tax is distortionary.Quantity Tax Levied on a Monopolist$/output unityMC(y)p(y)MR(y)y*p(y*)Quantity Tax Levied on a Monopolist$/output unityMC(y)p(y)MR(y)MC(y)+tty*p(y*)Quantity Tax Levied on a Monopolist$/output unityMC(y)p(y)MR(y)MC(y)+tty*p(y*)ytp(yt)Quant
21、ity Tax Levied on a Monopolist$/output unityMC(y)p(y)MR(y)MC(y)+tty*p(y*)ytp(yt)The quantity tax causes a dropin the output level,a rise in theoutputs price and a decline indemand for inputs.Quantity Tax Levied on a MonopolistuCan a monopolist“pass”all of a$t quantity tax to the consumers?uSuppose t
22、he marginal cost of production is constant at$k/output unit.uWith no tax,the monopolists price isQuantity Tax Levied on a MonopolistuThe tax increases marginal cost to$(k+t)/output unit,changing the profit-maximizing price touThe amount of the tax paid by buyers is Quantity Tax Levied on a Monopolis
23、tis the amount of the tax passed on tobuyers.E.g.if e e=-2,the amount ofthe tax passed on is 2t.Because e e 1 and so themonopolist passes on to consumers morethan the tax!The Inefficiency of MonopolyuA market is Pareto efficient if it achieves the maximum possible total gains-to-trade.uOtherwise a m
24、arket is Pareto inefficient.The Inefficiency of Monopoly$/output unityMC(y)p(y)yep(ye)The efficient output levelye satisfies p(y)=MC(y).The Inefficiency of Monopoly$/output unityMC(y)p(y)yep(ye)The efficient output levelye satisfies p(y)=MC(y).CSThe Inefficiency of Monopoly$/output unityMC(y)p(y)yep
25、(ye)The efficient output levelye satisfies p(y)=MC(y).CSPSThe Inefficiency of Monopoly$/output unityMC(y)p(y)yep(ye)The efficient output levelye satisfies p(y)=MC(y).Total gains-to-trade ismaximized.CSPSThe Inefficiency of Monopoly$/output unityMC(y)p(y)MR(y)y*p(y*)The Inefficiency of Monopoly$/outp
26、ut unityMC(y)p(y)MR(y)y*p(y*)CSThe Inefficiency of Monopoly$/output unityMC(y)p(y)MR(y)y*p(y*)CSPSThe Inefficiency of Monopoly$/output unityMC(y)p(y)MR(y)y*p(y*)CSPSThe Inefficiency of Monopoly$/output unityMC(y)p(y)MR(y)y*p(y*)CSPSThe Inefficiency of Monopoly$/output unityMC(y)p(y)MR(y)y*p(y*)CSPSM
27、C(y*+1)p(ye)ATC(ye)y$/output unitATC(y)MC(y)p(y)MR(y)p(ye)yeRegulating a Natural MonopolyAt the efficient outputlevel ye,ATC(ye)p(ye)so the firm makes aneconomic loss.ATC(ye)Economic lossRegulating a Natural MonopolyuSo a natural monopoly cannot be forced to use marginal cost pricing.Doing so makes the firm exit,destroying both the market and any gains-to-trade.uRegulatory schemes can induce the natural monopolist to produce the efficient output level without exiting.