Transcript Marginal Revenue - University of California, Berkeley

Monopoly
• What is it
• What leads to
monopoly
– minimum size
– natural resources
– patent/copyright
• Competition& Min.
Size
– decreasing costs
• Economics of
Monopoly
– MR/Q/Profit
– Deadweight loss
• Why Competitors are
Price Takers
• Why firms like quota
regulation
• Utility regulation
Monopoly
• A monopolist is a
single seller.
• A competitor is one of
very many sellers
• An oligopolist is one
of a few sellers
Decreasing Costs
•
•
•
•
Means that average cost is decreasing
Increasing cost
Constant cost
A U shaped cost curve has a decreasing and
then an increasing portion. If the bottom
were flattened out, it would have a constant
portion
Returns to Scale
• F(x1…xn) a production function.
• For b > 1
– F(bx1,…,bxn) =bF(x1,…,xn) then constant
returns to scale
– F(bx1,…,bxn) < bF(x1,…,xn) then decreasing
returns to scale
– F(bx1,…,bxn) > bF(x1,…,xn) then increasing
returns to scale
RTS and Costs
• If doubling inputs more than doubles
output, then
– cost of inputs doubles/ output more than double
– AC is less when making twice as much
• could use b times as much to be more general
• Increasing Returns to Scale goes with
Decreasing Costs
– need this terminology bit. sorry.
Reasons for Imperfect
Competition
• Patent
• Copyright
• Scarce Resource
–
–
–
–
Cobalt in Zaire
Nickel, INCO
Oil and OPEC
De Beers Diamonds
• Room in the Market
for only a few firms.
– Decreasing Costs
– i.e. Power distribution
– often regulated
LRCE
Long Run Competitive Equilibrium:
N firms produce at P* = MC(q*) (firm’s supply
curve)
S(P*) = N MC-1(P*) = D(P*) (industry supply =
demand)
Profit = P*q* - C(q*) = 0 (no entry or exit)
N Firms in LRCE
D
AC
MC
P*
N MC-1(q*)
q*
1 Firms in LRCE
AC
D
Minimum Point of AC
takes up all of demand.
P*
Suppose another firm
tries to enter?
MC-1(q*)
q*
Why not raise price?
• No new firms will enter
– not room for two in market
• Will it make more $$$$?
Marginal Revenue
Monopolist sells one more unit.
Price decreases from P(Q) to P(Q+1).
Slope of demand is calculated between the
two red dots on the demand curve.
P(Q)
P(Q+1)
The slope of demand
Is [P(Q) – P(Q+1) ]/ 1
demand
Q
Q+1
Price falls by the slope of
demand.
Marginal Revenue
By adding 1 unit a monopolist gains
The area is 1 wide by P high = P
P(Q)
The monopolist looses
This area is the decrease in
price, which is the slope of
demand times Q.
P(Q+1)
Q
Q+1
So MR is the sum of
the two areas
MR= P + Q (slope
demand)
MR with linear Demand
•
•
•
•
MR(Q) = Q (slope of P(Q)) + P(Q)
P(Q) = a - b Q; slope = -b
MR(Q) = - Q b + (a -bQ) = a- 2bQ
MR has twice as negative a slope as
demand and the same intercept.
– special property of linear demand
MR = MC
• MR is amount revenue goes up for a unit
more output
• MC is additional cost
• So if MR > MC make more
• MR < MC make less
• MR = MC determines Q; output
• P(Q) demand, determines price
Monopoly profit
MC
Pm
AC
MR
Qm
D
Deadweight loss
Pm
MC
MR
Qm
D
MR and Competition
Let Q = nq. Competitor loses just q
times slope and gains P whilst
monopolist looses Q times slope (n
times as much) and gains P. So
when n is big,
MR = Q/n slope+ P
is approx P.
P(Q)
q
Q
Q+1
Text Book
• Baumol and Blinder, Chapt 10 provides the
straight dope.
• Chapter 11 includes monopolistic
competition and introduces the field of
industrial organization.
MR and Elasticity
• Let P = D(Q)
q1  q0
q0
p0
p0
1
1



p1  p0
p1  p0 q0 slope dem and q0
p0
q1  q0
Slope = (1/) P / Q
MR = Q slope + P = P (1/) + P
MR and Elasticity
• MR() = P (1/) + P= P(1+ 1/)
–
Remember it is P(Q) and MC(Q)
• MR is negative when elasticity of
demand is between 0 and -1
• MR is positive when elasticity is
less than -1
Quotas and Profits
• Assume LRCE.
• Now assume that quota on air holds number
of firms constant and demand increases
because people get richer over time.
• Firm’s now earn positive profits.
• And there is no entry.
• Quotas move market toward monopoly
Regulation
• Cost curve of power distribution:
–
–
–
–
–
AC = FC/Q + b where b > 0
Draw MC and AC
Now draw demand and MR
Find monopoly solution
Can a regulator set P = MC?
• Can regulator force firm to make losses?
– How great a Q can the regulator set?
Deadweight Loss
• Call Qr the regulated output
• What is the deadweight loss at Qr ?
• At Qm the monopoly output?
Regulation Diagram
Decreasing Cost Industry
also called Increasing Returns
to Scale
$/unit
Triangle is DWL
Pr
AC
b = MC
MR
Qr
D
Q
Any Way to Get DWL?
• Two part pricing scheme:
– First sell Qr at Pr
– Then sell the rest at MC.
– The trick is to separate the market so that the
cost of the next unit of power is MC.
• sell to big guys at MC
• make the peons pay more