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Chapter 10 Monopoly

Chapter 10 Monopoly. 3 Properties of Monopoly 1) One Seller 2) No Close Substitutes 3) Extremely High Barriers to Entry. What are the barriers to entry? 1) Government Restrictions – Patents 2) Economies of Scale – Natural Monopoly 3) Restricted Ownership of Raw Material - ALCOA.

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Chapter 10 Monopoly

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  1. Chapter 10Monopoly

  2. 3 Properties of Monopoly1) One Seller2) No Close Substitutes3) Extremely High Barriers to Entry

  3. What are the barriers to entry?1) Government Restrictions – Patents2) Economies of Scale – Natural Monopoly3) Restricted Ownership of Raw Material - ALCOA

  4. Monopoly and MicrosoftComputers in the early 1980’s1) Apple II2) Commodore PC3) Atari 400 (48k)4) TRS-805) IBM PC

  5. All had incompatible operating systems

  6. Next Generation – Mid 1980’s1) Early Macs2) Commodore Amiga3) Atari ST4) ---5) IBM 386’s, 486’s

  7. The Amiga and Atari ST are dying of software suffocation.

  8. By the late 1990’s, only the IBM and its clones, and the Mac are left.IBM doesn’t have near monopoly because of the clones, but Microsoft does for Windows

  9. Microsoft starts to use this monopoly of Windows to take over word processing and web browsing

  10. Government Antitrust Suit Against Microsoft (1999)

  11. Bush wins the election of 2000 and the Republican lawyers drop the case in return for Microsoft’s promise not to do it again.

  12. This is a variation of the economies of scale. How can you make a computer/operating system to compete with Microsoft when the software industry is designed to work with Windows? You would have to provide your own software, which would mean starting on a huge scale.

  13. If this is the market demand curve for the monopoly’s product, what is the monopoly firm’s demand curve? Market Firm P P P1 ? P2 D Q1 Q Q2 Q

  14. The firm’s demand curve is the same as the market’s because the firm is the market. Market Firm P P = P1 P1 P2 P2 D Q1 Q1 Q Q2 Q2 Q

  15. What’s the relationship between price and marginal revenue for amonopoly? Q P TR MR 0 $10 $0 -- 1 $8 $8 $8 2 $6 $12 $4 3 $4 $12 $0 4 $2 $8 -$4 5 $0 $0 -$8

  16. What’s the relationship between price and marginal revenue for amonopoly? Q P TR MR 0 $10 $0 -- Marginal revenue is 1 $8 $8 $8 below price because 2 $6 $12 $4 each additional unit 3 $4 $12 $0 you sell causes the 4 $2 $8 -$4 price of the other 5 $0 $0 -$8 units to drop also.

  17. Suppose McDonalds is currently selling 100 hamburgers at 50 cents each. TR = $50They lower their price to 40 cents and now sell 150. Will their total revenue rise by 50 hamburgers times 40 cents = $20?

  18. No. Total revenue rises by 50 hamburgers times 40 cents minus 100 hamburgers times 10 cents = $10. Let’s double-check. Q x P = TR100 hamburgers x 50 cents = $50150 hamburgers x 40 cents = $60Yep, it checks.

  19. How to graph the demand and marginal revenue curve for a monopoly. P For straight lines, the MR curve hits the horizontal axis halfway between where the demand curve does and the origin. D MR 0 Q 0

  20. So how much will the monopolist produce, and what price will he charge? Q P TR TCπ MR MC 0 $10 $0 $0 -$10 --- --- 1 $8 $8 $3 $5 $8 $3 2 $6 $12 $6 $6 $4 $3 3 $4 $12 $9 $3 $0 $3 4 $2 $8 $12 -$4 -$4 $3 5 $0 $0 $15 -$15 -$8 $3

  21. The Marginal Decision Rule AgainProduce the Quantity Where MR=MC Then up to the demand curve to determine the price.

  22. Profit or Loss? Same rule as before.P>ATC ProfitP<ATC Loss

  23. Price and quantity of donuts in a market with perfect competition. P Perfect Competition P=ATC MC=ATC Pc=0.4 D 0 Q 0 Qc=600

  24. Price and quantity of donuts in a monopoly. P m for monopoly c for competitive Monopoly MR=MC Pm=0.7 MC=ATC Pc=0.4 D MR 0 Q 0 Qc=600 Qm=300

  25. With perfect competition, the price of donuts is 40 cents and 600 are made.With monopoly, the price of the donuts is 70 cents and 300 are made.The monopolist makes less of the product to create a scarcity and raise the price up.

  26. Price discrimination is charging different prices to different customers.

  27. You would like to charge a higher price to the customers at the higher end of the demand curve. P D 0 Q 0

  28. Who are these people? Sometimes they are richer people. What traits are associated with being poor?

  29. What traits are associated with being poor?Traditionally, retired seniors have been poor, and students.

  30. It costs $6 to make dinners at your restaurant. When you charge $12, you get one customer, when you charge $10, you get two. Would you rather charge $12 or $10?Can you do better with price discrimination?What if you have noticed the additional customers when it is cheaper are mostly seniors?

  31. Charge straight $12Profit = $12 - $6 = $6Charge straight $10Profit = $20 - $12 = $8Charge one customer $12 and the other (senior) $10.Profit = $22 - $12 = $10

  32. This could also explain student discounts at the movie theater.What else could distinguish people from the high price end of the demand curve and the lower end?

  33. Think about men and women if this was demand for baseball tickets. P And what if it was demand at the hair salon? D 0 Q 0

  34. There’s a reason the Washington Nationals have ladies night and not mens night. There’s a reason California hair salons were sued for charging women higher prices.

  35. What about quantity discounts? There’s a reason bakers give a free donut if you buy a dozen. Donuts price = $1. Cost of making donuts = 50 cents.Sell 8 and charge for them all.Profit = $8 - $4 = $4Sell 13 and charge for 12.Profit = $12 - $6.50 = $5.50

  36. NEW YORK NYC Human Rights Commission Drops Charges Against Chinese RestaurantBy Meg Marco May 2, 2007 The case of the Wisconsin man who filed a complaint with the NYC Human Rights Commission has come to a close with the commission dropping charges against the restaurant.

  37. … “We saw other customers getting a different menu. We were told we could order from it if we spoke Chinese.” The Chinese menu had prices that were, on average, $1 cheaper per dish.

  38. Soon after the dust-up, Mayor Bloomberg urged a boycott of the shady Chinese restaurant. “It’s unconscionable to use race on any of these things, in terms of what kind of service, or how you charge, or whatever,” Bloomberg told the Daily News.

  39. The Human Rights Commission dropped the charges after the guy from Wisconsin settled with the restaurant for an undisclosed sum and, “a promise to change its menu – by “listing identical prices in English and Chinese for the same dishes,”

  40. Chapter 11Monopolistic Competition and Oligopoly

  41. Monopolistic Competition1) Many Sellers2) Similar Products or Differentiated Products3) Easy Entry/Exit

  42. Restaurants are the “typical” example of monopolistic competition that we are usually going to use. Other examples are barbers and hair salons, and auto-repair shops.

  43. So what does the demand curve look like for a firm in monopolistic competition? Perfect Competition P P Monopoly D D Q Q

  44. If McDonalds raises the price of the Big Mac by 10 cents, do they lose all of their customers?Do they have to lower their price to sell more?

  45. So McDonalds demand curve slopes down like a monopoly. It does probably lose more customers with a price increase than a monopoly, so it will be flatter. Monopolistic Competition P P Monopoly D D Q Q

  46. You don’t have to worry about drawing it flatter. We’ll assume the units on the axis take card of that. Monopolistic Competition P P Monopoly D D Q Q

  47. Since the demand curve slopes down showing that Rosa has to lower the price of all her spaghetti dinners to sell more, her marginal revenue is below price. Monopolistic Competition MC P D Q MR

  48. Now it is simply adding the MC and setting MR=MC as before. Monopolistic Competition MC P P1 D Q1 Q MR

  49. And guess what? The rule about showing a profit and loss is the same too. P> ATC then profit. P<ATC then loss. MC P ATC P1 D Q1 Q MR

  50. What about profits in the long-run?What happens when you have both easy entry and differentiated goods?

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