Profit Maximization A monopoly can set its price above its marginal cost but does not necessarily make a supracompetitive profit. (Fixed Cost) It is common practice to say that whenever a firm can profitably set its price above its marginal cost without making a loss, it has monopoly power or market power. If improving the efficiency of operations increases profits, the firm should do it, whether it is a monopoly or a competitor. A monopoly may not have the same ability to produce as efficiently as a competitive firm. A monopoly may operate in the inelastic portion of its short-run demand curve to avoid long-run substitution.
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C HAPTER 4: M ONOPOLIES , M ONOPSONIES , AND D OMINANT F IRMS (2
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M ONOPOLY B EHAVIOR T HE C OSTS AND B ENEFITS OF M ONOPOLY CS INGLE PAND M AINTAININGRODUCT REATING RODUCT M ULTI P A M ONOPOLY P ROFITS AND M ONOPO
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M ONOPOLY B EHAVIOR T HE C OSTS AND B ENEFITS OF M ONOPOLY C REATING AND M AINTAINING A M ONOPOLY P ROFITS AND M ONOPO
Contents
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M ONOPOLY B EHAVIOR
The Costs and Benefits of Monopoly Monopoly creates a deadweight loss as a tax does. Ponser argues that the monopoly profits may also represents a loss to the society to the extent that it creates incentives for a firm to use real resources to become a monopoly.(rent seeking) He recalculates the DWL from regulated and unregulated monopoly, which exceeds previous estimates. If this is true, the recent rescinding of many government regulations will provide sizable benefits to the society.
Dependent Demands and Separable Costs C(q1 , q2 , · · · , qn ) = FOC leads to pi − Ci 1 = − pi ii (pj − Cj )Dj Ri ii
ij n i=1 Ci (qi )
j i
All goods are substitutes: All goods are complements: some Lerner index may be negative.
The Costs and Benefits of Monopoly An example with linear demand, see pp.97. As the demand curve becomes less elastic at the monopoly equilibrium, people as less willing to do without this good: an increase in price causes the quantity they purchase to fall less than if demand were more elastic. As the demand curve becomes steeper at a given quantity, the deadweight loss increases. The welfare harms from monopoly may be offset by several benefits. For example, the prospect of receiving monopoly profits may motivate firms to develop new products, improve products, or find lower-cost methods of manufacturing. If monopoly had no offsetting benefits, competition would be preferable.
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C HAPTER 4: M ONOPOLIES , M ONOPSONIES , AND D OMINANT F IRMS (3
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M ONOPOLY B EHAVIOR T HE C OSTS AND B ENEFITS OF M ONOPOLY CS INGLE PAND M AINTAININGRODUCT REATING RODUCT M ULTI P A M ONOPOLY P ROFITS AND M ONOPO
The Inverse Elasticity Rule Demand: q = D(p) and inverse demand: p = P(q). c = C(q) and D (p) < 0. The problem of the monopoly, choosing p = pm to maximize max[pD(p) − C(D(p))].
Outline
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M ONOPOLY B EHAVIOR
Single Product Multi Product
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T HE C OSTS AND B ENEFITS OF M ONOPOLY C REATING AND M AINTAINING A M ONOPOLY P ROFITS AND M ONOPOLY M ONOPSONY D OMINANT F IRM WITH A C OMPETITIVE F RINGE
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C HAPTER 4: M ONOPOLIES , M ONOPSONIES , AND D OMINANT F IRMS (8
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M ONOPOLY B EHAVIOR T HE C OSTS AND B ENEFITS OF M ONOPOLY C REATING AND M AINTAINING A M ONOPOLY P ROFITS AND M ONOPO
C HAPTER 4: M ONOPOLIES , M ONOPSONIES , AND D OMINANT F IRMS (6
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M ONOPOLY B EHAVIOR T HE C OSTS AND B ENEFITS OF M ONOPOLY CS INGLE PAND M AINTAININGRODUCT REATING RODUCT M ULTI P A M ONOPOLY P ROFITS AND M ONOPO
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M ONOPOLY B EHAVIOR T HE C OSTS AND B ENEFITS OF M ONOPOLY CS INGLE PAND M AINTAININGRODUCT REATING RODUCT M ULTI P A M ONOPOLY P ROFITS AND M ONOPO
Single Product Multi Product
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T HE C OSTS AND B ENEFITS OF M ONOPOLY C REATING AND M AINTAINING A M ONOPOLY P ROFITS AND M ONOPOLY M ONOPSONY D OMINANT F IRM WITH A C OMPETITIVE F RINGE
Dr. Xiaoyong Cao
School of International Economics and Business University of International Business and Economics
Spring, 2010
C HAPTER 4: M ONOPOLIES , M ONOPSONIES , AND D OMINANT F IRMS (1
Outline
1
M ONOPOLY B EHAVIOR
Single Product Multi Product
2
T HE C OSTS AND B ENEFITS OF M ONOPOLY C REATING AND M AINTAINING A M ONOPOLY P ROFITS AND M ONOPOLY M ONOPSONY D OMINANT F IRM WITH A C OMPETITIVE F RINGE