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Lecture Economics: Chapter 14 - Dean Karlan, Jonathan Morduch

Chapter 14 - Monopoly, in this chapter you will learn: Why monopolies exist and how they cause barriers to entry? Why monopolists are constrained by demand? How monopolists set price and quantity? What social welfare losses are associated with monopolies? | Chapter 14 Monopoly © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • Why monopolies exist and how they cause barriers to entry. • Why monopolists are constrained by demand. • How monopolists set price and quantity. • What social welfare losses are associated with monopolies. • What the common public policy responses to monopolies are. • Why firms have incentives to price discriminate. © 2014 by McGraw‐Hill Education 2 Why do monopolies exist? • A monopoly refers to a firm that is the only producer of a good or service with no close substitutes. – A firm is a perfect monopoly if it controls the entire market. – A firm has monopoly power if it can manipulate the price. • Monopolies exist because of barriers to entry that prevent other firms from entering the market. Scarce resources Governmental intervention Economies of scale Aggressive business tactics • A natural monopoly refers to a market where a single firm can produce the entire market quantity demanded at a lower cost than multiple firms. © 2014 by McGraw‐Hill Education 3 1 Active Learning: Identify the barrier to entry For each of the following, identify which barrier to entry permits monopoly power. 1. H2O Company owns all of the water rights to a town’s drinking water supply. 2. XYZ Pharmaceuticals is awarded a patent for their new asthma drug. 3. National Brewing Company buys a successful, local microbrewery. 4. ABC Motor Company produces cars at a lower cost than smaller firms could. © 2014 by McGraw‐Hill Education 4 Monopolists and the demand curve Monopoly markets differ from perfectly competitive markets with regard to their demand curves. Perfectly competitive firm’s demand curve Price ($) Monopolist’s demand curve Price ($) Competitive firms face a horizontal demand curve. 2,500 D Monopolists face a downward‐ sloping demand curve. 5,00 0 2,50 0 D 0 0 Quantity of diamonds Firms cannot .