BUSS1040 Lecture Notes - Lecture 5: Price Fixing, Happy Hour, Marginal Cost
28 May 2018
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WEEK 5: MONOPOLY AND MARKET POWER
CHAPTER 13: MONOPOLY
CHARACTERISTICS OF A MONOPOLY
1. One seller and many buyers
o NO close substitutes for the product
2. Price maker à b/c only firm in the market
3. Barriers to entry
o Legal barriers:
§ Exclusive right over a goods production (patent, copyright)
§ Public franchise (Aus Post); government licences (taxis, practice of medicine)
o Natural barrier:
§ Control over essential input not available to other firms
§ Lower COP effectively allows firm to prevent others entering
•
E.g. favourable access to raw materials, geographic location, learning curve advantages
§ Natural monopoly: where single firm can supply entire market at lower cost than 2+ firms could
•
E.g. water provision
•
Declining average total cost implies
natural monopoly
o i.e. substantial EOS
o Often large capital costs but
low marginal cost of supply
• MARKET POWER: a firm can raise its prices above the level that
would exist in a perfectly competitive industry and not lose all
its customers
o A competitive firm must take price determined in the
market = price taker
§ Perfectly elastic demand curve
o Monopolist = price maker
§ Downward sloping demand curve
THE SINGLE PRICE MONOPOLIST
• Single-price monopolist: a firm that must sell each unit of output for the same price
o Monopolist chooses quantity + price to maximise profits
o Sole producer = faces all demand in market
§ Downward sloping D curve
§ Has market power à raise price, QD doesn’t = zero
• Alters price in market by changing quantity
o If increases output, price falls
o If decreases output, price rises
§ Trade-off à sell less Q for higher price, or sell more Q for lower price
MARGINAL REVENUE (MR)
• Additional revenue a firm receives from selling one extra unit of a good
o Output effect: as you sell more units, $P falls and you lose revenue from additional units sold
o Price effect: as you sell more units, $P falls and you lose revenue on existing units sold
• Deriving MR from monopolist’s demand curve:
o
!* ={I°
{G
• GRAPH: when MR + demand are linear à MR + D have same y-intercept and MR has twice slope of D
Document Summary
Characteristics of a monopoly: one seller and many buyers, no close substitutes for the product, price maker b/c only firm in the market, barriers to entry. Exclusive right over a goods production (patent, copyright) Public franchise (aus post); government licences (taxis, practice of medicine: natural barrier: Control over essential input not available to other firms. Lower cop effectively allows firm to prevent others entering. E. g. favourable access to raw materials, geographic location, learning curve advantages. Natural monopoly: where single firm can supply entire market at lower cost than 2+ firms could. Perfectly elastic demand curve: monopolist = price maker. Single-price monopolist: a firm that must sell each unit of output for the same price: monopolist chooses quantity + price to maximise profits, sole producer = faces all demand in market. Has market power raise price, qd doesn"t = zero: alters price in market by changing quantity. Trade-off sell less q for higher price, or sell more q for lower price.
