I should comment here that the textbook lumps natural monopoly in with other barriers to entry, and while it can potentially be thought of as a barrier, it is not one that is created by a market-power-seeking firm. Posner © Penn State is licensed under CC BY-NC-SA 4.0 The following diagram can help to illustrate just why.Ĭredit: B. This is called a “natural monopoly” because it is economically efficient for there to only be one supplier. In such a case, the marginal cost curve, and thus, the supply curve, will be downward sloping or flat over the relevant range of production. There are cases where the marginal cost, that is, the cost of satisfying one more customer, is lower than the cost of servicing the previous customer. Simply put, we can reasonably expect supply curves to be upward sloping.īut sometimes, they are not. That is, if we want to open a factory to make more detergent, we will have to hire workers, and assuming that we have something close to full employment, to get those workers, you will have to offer them higher wages than what they are receiving from their existing jobs. This is a reasonable assumption to make, because as production of some good increases, the cost will increase because we have to compete with other goods for consumption of the inputs. For this situation to be able to occur, we make the assumption of upward-sloping supply (marginal cost) curves. In a competitive market, we expect firms to compete with each other until the point where marginal cost increases to match the demand curve at the equilibrium point. 9b Advertising in Monopolistic Competition dall advertise B $120 A 60 C ATCads 50 ATCno ads dads dno ads 1,000 6,000 2,000Īmerican's Actions Run Safety Ads Don't Run Ads American earns low profit American earns very low profit Run Safety Ads United earns low profit United earns high profit United's Actions American earns high profit American earns medium profit United earns medium profit Don't Run Ads United earns very low profit Fig.Please reread "Characteristics of a Monopoly" on pages 210-213 in Chapter 11 for this section. Dollars Bottles of Perfume per Month Fig. or to a lower price in the long run, as in this panel. 9a Advertising in Monopolistic Competition B $120 C 100 ATCads ATCno ads A 60 dads dall advertise dno ads 1,000 6,000 2,000ĥ. 4.Ědvertising can lead to a higherprice in the long run, as in this panel. Dollars 3.ěut in the long run,imitation and entry bring economic profit back to zero. In the short run, the first firms to advertise earn economic profit. 8 A Duopoly Gameġ.Before advertising, long-run economicprofit is zero. Gus’s Actions Confess Don’t Confess Gus’s profit = $25,000 Gus’s profit = –$10,000 Confess Filip’s Profit = $25,000 Filip’s Profit = $75,000 Filip’s Actions Gus’s profit = $75,000 Gus’s profit = $50,000 Don’t Confess Filip’s Profit = $–10,000 Filip’s Profit = $50,000 Fig. 7 A Monopolistically Competitive Firm in the Long Run MC ATC E $40 d1 MR1 MR2 d2 100 250 The typical firm produces where its new MR crosses MC. Dollars Entry continues until P = ATC at the best output level, and economic profit is zero. In the long run, profit attracts entry, which shifts the firm's demand curve leftward. 6 A Monopolistically Competitive Firm in the Short Run MC A $70 ATC d1 30 MR1 250 Kafka's monthly profit–$10,000–is the area of the shaded rectangle. 3.ĚTC at 250 units is less than price, so profit per unit is positive. Kafka services 250 homes per month, where MC and MR intersect. 5c Comparing Monopoly and Perfect Competition (c) Monopoly Price per Unit S = MC F $15 E 10 MR D Quantity of Output 100,000 60,000ĭollars 1. with a higher price and lower market output than under perfect competition. 5a/b Comparing Monopoly and Perfect Competition S MC ATC E $10 $10 d D 1,000 100,000Ĥ. In this competitive market of 100 firms, equilibrium price is $10 Fig. When monopoly takes over, the old market supply curve. and each firm produces 1,000 units, where P = MC. (a) Competitive Market (b) Competitive Firm Price per Unit Dollars per Unit 2. 4 Monopoly Profit and Loss ATC MC ATC MC AVC $50 E E $40 40 32 Total Loss Total Profit D D 10,000 10,000 MR MR (a) (b) Dollars Dollars Number of Subscribers Number of Subscribers Fig. 3 Monopoly Price and Output Determination MC E D 10,000 30,000 MR $60 Monthly Price per Subscriber 40 Number of Subscribers Fig. Monthly Price per Subscriber Number of Subscribers Fig. 1 A Natural Monopoly A 15 B 12 LRATC C 5 DMarket 300 350
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