Economics - Monopoly, Study notes of Economics

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MONOPOLY

 Define monopoly.

 Explain the four main reasons monopolies

arise.

 Explain how a monopoly chooses price and

output.

 Use a graph to illustrate how monopoly

affects economic surplus.

 Price Discrimination

 Entry barriers include:

 Government blocks the entry of more than one firm into a

market.

 Granting a patent or copyright gives an individual or firm the

exclusive right to produce a product. A patent is the exclusive

right to a product for a period of 20 years from the date the product

was invented.

 U.S. copyright law gives the creator of a book, film, or piece of

music the exclusive right to use the creation during the creator’s

lifetime.

 Granting a firm a public franchise makes it the exclusive legal

provider of a good or service. A public franchise is a designation

by the government that a firm is the only legal provider of a good

or service.

 One firm has control of a key raw material necessary to

produce a good.

• (^) Marginal Revenue Once Again



Thus we can say that MR is a straight

line with the same intercept as the

average revenue curve but its slope is

twice that of AR curve.

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• (^) Comparing Monopoly and Competition What Happens If a Perfectly Competitive Industry Becomes a Monopoly?

1. A monopoly maximizes profit by producing the level of output where marginal revenue equals marginal cost.  (^) The monopoly’s demand curve is the market demand curve for the product.  (^) The monopolist is a price maker. It faces a downward sloping demand curve and its marginal revenue is less than its price.  (^) If the monopolist earns an economic profit new firms will not be able to enter the market. Therefore, long-run economic profits can be earned.

• (^) Profit Maximization For a Monopolist 14 - 3 Profit-Maximizing Price and Output for a Monopoly

Price Discrimination  Price discrimination is said to exist when the same product is sold at different prices to different buyers. Example: Cinema tickets  Conditions where price discrimination would be possible:

 Difference in price elasticity

 Market segmentation

 Effective separation of sub markets

 Legal sanction for discrimination

 Lack of mobility amongst buyers

Degree of Price Discrimination  Price Discrimination of the first degree: Monopolist is able to sell each separate unit of the output at a different price to the same buyer.  Price discrimination of the second degree: Goods are divided into separate blocks and for each block a different price is being charged.  Price discrimination of the third degree : The seller divides the buyers in to different groups on the basis of income, location, types of uses of the products.

 (^) Is the Cable Television Monopoly Over?  (^) In June 2005 executives of Cablevision Systems Corp. offered to buy all public shares of the company for $7.9 billion. Cablevision, which has had a virtual monopoly on cable television service in Long Island and parts of New York City, was feeling the competitive heat from regulatory reform and new technology. The Satellite Home Viewer Improvement Act of 1999 allowed Digital Satellite Systems (DBS) to carry local broadcast signals back to their home markets. An aggressive campaign by DBS systems, such as DirecTV, to lure cable customers with low prices for equipment and service resulted in an increase in their national market share from 7 to 17 percent between 1998 and 2003.  (^) But Cablevision had more to worry about. So-called Baby Bell phone companies were preparing to invade cable’s turf by offering not only digital television programming, but high-speed Internet access and phone service. Ironically, the Baby Bell companies were formed after the breakup AT&T which for years had a monopoly on local and long-distance telephone service. One of the Baby Bells is Verizon, which was awaiting local government approval to offer phone service in New York when Cablevision’s announcement of its offer to go private was made. Verizon officials hinted they will offer more channels for less money than cable companies can charge. Industry analysts believe that Cablevision planned to invest more money in customer service and technology, moves that would lower short-run profits and share price if it were to remain a publicly-owned company.  (^) Sources: “Cable System’s New Weapon In Phone Battle: Going Private” by Peter Grant , Wall Street Journal ,” June 21, 2005.  (^) “Cable TV Suffers From High Rate Increases, Lower Satisfaction,” by Robyn Greenspan, Hardware. August 21, 2003.  (^) What is the definition of monopoly?  (^) Are cable television companies such as Cablevision monopolies?