We look for the intersection of marginal cost and revenue instead of looking for an intersection of marginal cost and price.
The associated rate of output is 4 a day.
The profit-maximizing rate is 4 bushels.
The monopolist would like to charge a high price.
The demand curve limits the ability to charge a high price.
3 dead fish were left unsold by M A R K E T S T R U C T U R E. The price is $10.
A monopolist who tries to charge more than $10 won't be able to sell all of their crops.
The figure shows the total profits of the catfish monopoly.
The profit per unit is $2.
The shaded rectangle shows that the total profits of $8 per day are given by the multiplying profit per unit by the quantity sold.
We can return to the computer market of Chapter 23 to develop a better appreciation of market power.
We make different assumptions about market structure.
It isn't going to allow every would-be Horatio Alger to have a piece of the profit pie.
They didn't want anyone else to produce sable furs that could compete with their monopoly.
Universal Electronics will not allow anyone to sell or give away any rights to its patent or the chips it makes.
Universal Electronics is a computer monopoly.
Universal has a lot of manufacturing plants that are similar to the typical competitive firm in Chapter 23.
One of the best known consumer American's used to trade a rare North American species of Fur for goods exported from the Soviet Union.
In exchange for two live Russian sables, the Soviet Union earned $100 million last year.
The Soviet Union has a monopoly that no one else has.
Excerpted with permission.
Barriers to entry are needed to ward off competition.
Russia had a monopoly on sable furs because they didn't let live sables leave the country.
The competitive industry is in Chapter 23.
The rate of output can be sold at the monop monopolist.
Universal would only maintain a multitude of tions in minimum average costs of small plants if the returns to scale and actual diseconomies of scale were constant.
By assuming that multiple plants are maintained, we can compare plant and equipment.
Universal will face the same short-run marginal and average cost curves if it continues to operate plants that were once part of the competitive home computer industry.
We relax the assumption of multiplant operations later in the chapter to see if a monopolist can lower production costs.
We assume that the costs of operating one of Universal's plants are expressed in the MC curve.
The extension of monopoly control is assumed to have no immediate effect on production costs.
The demand for computers is assumed to be the same.
The market was competitive when people were willing to buy computers.
Consumers don't know how many firms produce a product.
There is no reason why their demand for the product would change even if they knew.
Universal Electronics, as a monopolist, will respond to these unchanged demand and cost curves.
Universal will take into account the fact that an increase in output will put downward pressure on computer prices.
Corporate profits may be threatened by this.
Universal can't afford to let its plants compete with each other.
A reduction of output by each Universal plant will cause a reduction in the quantity of computers supplied to the market.
The market demand curve will move up due to the reduced supply.
Expansion of output by all Universal plants will lead to an increase in quantity supplied to the market and a slide down the market demand curve.
Each of the monopolist's plants face a downward-sloping demand curve.
They all act like they confronted a horizontal demand curve at the market price of $1,000.
A firm that doesn't behave in this fashion will lose sales to other firms.
The downward-sloping demand curve now confronting each Universal plant implies that marginal revenue no longer equals price.
Universal's plants don't want to produce up to the point where marginal revenue is less than price for a monopoly.
Firms that equate a horizontal demand curve face marginal cost and price.
Universal's plants need to stick to the generic profit-maximizing rule.
Universal's central management will fire the individual plant managers if they forget this rule.
As we look at the new revenue and cost relationships, we can see the implications of Universal's monopoly position.
In the early days of the home computer boom, the equilibrium price was $1,000.
Each firm was making 600 computers a month.
The typical Universal plant would have marginal costs far in excess of marginal revenues.
It is not consistent with profit maximization.
We're assuming that the central management of Universal determines the profi t-maximizing rate of output and instructs all individual plants to produce equal shares of that output.
The Universal plant manager will soon discover that the profit-maximizing rate is less than 600 computers per month.
The output level of this intersection is 475 computers per month.
There was no incentive for individual firms to cut production.
They weren't coordinated by a central management and couldn't alter the market supply curve on their own.
Reduction in the rate of industry output is the first consequence of Universal's monopoly position.
Consumers will bid computer prices up as they compete for less market supply.
We can see the increased prices by looking at either the Universal plant or the computer market.
The demand curve shows how much consumers are willing to pay.
Universal's goal was to maximize profits.
Consumers will pay for this output.
The monthly profit of a competitive firm in the early stages of the computer boom is $180,000.
Universal management has learned its economic principles.
It has been able to increase profits by reducing output and raising prices.
Our single-plant and competitive-firm comparison is translated into the dimensions of the whole industry by the figure.
The larger profit rectangle is shaded in the figure.
Universal is very happy and consumers are a little sadder and wiser because of the larger profits.
Consumers are paying more and getting less.
Universal Electronics achieved higher profits as a result of its monopoly position, but that isn't the end of the story.
Entrepreneurs swarm like locusts when economic profit is present.
Music industry consolidation has led to higher ticket fees.
The members of Godsmack claim to be at the Amphitheater in Irvine.
They want to make tickets affordable for their current U.S. tour.
Clear Channel has dominated the mosh pit at the band's shows in recent years.
The face value of a general admission ticket to Godsmack's is $20.
Permission was granted for this article to be reproduced.
Control of concert sites and ticket distribution allows Clear Channel and Ticketmaster to charge monopoly prices for live concerts.
The lure of high profits brought about an expansion of computer output and a decline in computer prices.
Universal is assumed to have an exclusive patent on chips and can use it as a barrier to entry.
Universal isn't about to let them in on the spoils, so wouldbe competitors can swarm around Universal's profits until their wings drop off.
The surge in computer output pushed prices down.
The more affluent consumers will be able to use computers if Universal is able to keep out the competition.
The ticket prices for live concerts are high.
Fans have to pay monopoly prices to see Godsmack, Bare Naked Ladies, Pearl Jam or other live concerts because Clear Channel controls most concert venues.
Basic features of market structures are shown in the different outcomes of the computer industry.
New suppliers are attracted by the high profits.
There are barriers to entry.
Supplies and production increase.
There are constraints on production and supplies.
The market curve doesn't show prices moving down it.
More of the desired product is produced, average costs aren't necessarily at or its price falls, and economic profits are at a maximum.
There is no pressure to squeeze profits or reduce costs because there is no pressure to keep ahead of the profit.
In our discussion, we assumed that the monopoly and the competitive industry started from the same position, which is $1,000 for a computer.
It is possible that the sequence of events depicted may be changed.
There are differences between competitive and monopolistic behavior.
The price and output of a specific product are not the only things that are affected by monopolies.
Competitive industries tend to produce at minimum average costs.
Competitive industries strive for cost reductions and product improvements.
Our production possibilities can be expanded by these pressures.
The monopoly we've discussed here is not being worked on by such forces.
There's a tendency for monopolies to prevent productivity advances and economic growth.
Marginal cost pricing is important to consumers because it permits rational choices among alternative goods and services.
Consumers end up getting fewer computers than they want, while the economy continues to produce other, less desired goods.
When Universal took over the industry, the mix of output shifted away from computers.
Our economic welfare may be affected by the power of prices and product flows.
Changes in prices and product flows affect the level and composition of output, employment and resource allocation, the level and distribution of income, and, of course, the level and structure of prices.
Firms that have significant market power affect economic welfare in many ways.
Market power is only one type of power wielded in society.
Political power is important in its own right.
The power to influence an election or sway a Senate committee vote is more important than the power to raise laundry soap prices.
Market power affects the way we live, the incomes we earn, and our relationships with other countries.
Market power may be the basis for political power, as the individual or firm with considerable market power is likely to have the necessary resources to influence an election or sway a vote on a congressional committee.
A monopolist can't get everything it wants.
Universal is constrained to sell that quantity of computers at a lower price because of its monopoly position.
Monopolists have little things that they don't like.
Figure 24.6 shows the limits of a monopolist's power.
This is not an absolute power.
If price is increased, the per ers will reduce their purchases.
Consumer demand quantity can be divided by percentage change in price.
The power of a monopolist is to raise the market price of a good and also to charge different prices for the same good.
The combined willingness of many individuals to buy is reflected in the market demand curve.
Some people are willing to buy the good at higher prices than other people are willing to buy.
Price discrimination has been practiced by the airline industry for a long time.
There are two different groups of travelers: business and nonbusiness.
They may have no other way to get to their destination if they make flight arrangements on short notice.
People on vacation and students going home during semester break have more flexibility in their schedules.
They can plan their trips weeks or months in advance and can choose to travel by car, bus, or train.
Business and vacation travelers have different travel needs.
Business demand for air travel is less elastic than the demand of nonbusiness travelers.
Business executives wouldn't stop flying if airfares went up.
Air travel by nonbusiness travelers would be discouraged by higher airfares.
The airlines offer a full-fare ride, available at any time, and a discount-fare ride, available only by purchasing a ticket in advance and agreeing to some restrictions on time of departure.
Most business travelers end up paying full fare because of the advance purchase and other restrictions on discount fares.
Most nonbusiness travelers can fly at a discount if the full fare is higher.
The airlines are able to sell essentially identical units of the same good at substantially different prices to different customers.
Monopolists have pricing power due to the lack of competitors.
Barriers to market entry must be maintained by a monopoly.
There were no entry barriers that allowed iPod clones to attack Apple's profits.