Monopoly 1. Types of market structure 2. The diamond market 3. Monopoly pricing 4. Why do monopolies exist? 5. The social cost of monopoly power 6. Government regulation 7. Price discrimination • We are going to cover sections 10.1-10.4, sections 11.1-11.2, and for all practical purposes skip chapter 12. • Ben Friedman will speak in class on March 23 on his book The Moral Consequences of Economic Growth 1 3 2
Types of Market Structure In the real world there is a mind-boggling array of diﬀerent markets. • In some markets, producers are extremely competitive (e.g. grain) • In other markets, producers somehow coordinate actions to avoid directly competing with each other (e.g. breakfast cereals) • In others, there is no competition (e.g. ﬂights out of Tweed-New Haven airport). In general we classify market structures into four types: • perfect competition – many producers of a single, unique good. • monopoly - single producer of an unique good (e.g. cable TV, diamonds, particular drugs) • monopolistic competition – many producers of slightly diﬀerentiated goods (e.g. fast food) • oligopoly – few producers, with a single or only slightly diﬀerentiated good (e.g. cigarettes, cell phones, BDL to ORD ﬂights) 4
What determines market structure? • It really depends on how diﬃcult it is to enter the market. That depends on control of the necessary resources or inputs, government regulations, economies of scale, network externalities, or technological superiority. It also depends on how easy it is to diﬀerentiate goods: • Soft drinks, economic textbooks, breakfast cereals can readily be made into diﬀerent varieties in the eyes and tastes of consumers. • Red roses are less easy to diﬀerentiate
The Diamond Market • Geologically diamonds are more common than any other gem-quality colored stone. But if you price them, they seem a lot rarer ... • Why? Diamonds are rare because The De Beers Company, the world’s main supplier of diamonds, makes them rare. The company controls most of the worlds diamond mines and limits the quantity of diamonds supplied to the market. • The De Beers monopoly of South Africa was created in the 1880s by Cecil Rhodes, a British businessman. In 1880 mines in South Africa dominated the world’s supply of diamonds. There were many producers until Rhodes bought them up. • By 1889 De Beers controlled almost all the world’s diamond production. • Since then large diamond deposits have been discovered in other African countries, Russia, Australia, and India. De Beers has either bought out new producers or entered into agreements with local governments • For example, all Russian diamonds are marketed through De Beers. 5 7 6
Monopoly • A monopolist is a ﬁrm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is know as monopoly. • In practice, true monopolies are hard to ﬁnd in the U.S. today because of legal barriers. If today someone tried to do what Rhodes did, s/he would be accused of breaking anti-trust laws. • Oligopoly, a market structure in which there is a small number of large producers, is much more common.
Monopoly Pricing • A monopolist, unlike a producer in a perfectly competitive market, faces a downward sloping demand curve. • Average revenue is P (Q) × Q = P (Q) Q 8
• Recall a ﬁrm’s proﬁt is the diﬀerence between its revenue and its costs: π(Q) = R(Q) − C(Q) where π(Q) = proﬁts R(Q) = total revenue C(Q) = total economic cost • Since a monopolist faces a downward-sloping demand curve, At higher prices, the monopolist sells less output. The price it can charge depends negatively on the quantity it sells. In this case R(Q) = P (Q) × Q and the revenue function is curved. • Marginal revenue is the change in total revenue generated by an additional unit of output. It is the slope of the revenue curve.
is just the market demand curve. • Recall from before break, the proﬁt maximizing production condition was MR = MC •...
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