12 PRICE AND OUTPUT DETERMINATION: Monopoly and Dominant Firms

…. While a competitive firm is a price taker, a monopoly firm is a price maker. A firm is considered a monopoly if . . it is the sole seller of its product. its product does not have close substitutes. www.themegallery.com Company Logo

WHY MONOPOLIES ARISE The fundamental cause of monopoly is barriers to entry.

WHY MONOPOLIES ARISE Barriers to entry have three sources: Ownership of a key resource. The government gives a single firm the exclusive right to produce some good. Costs of production make a single producer more efficient than a large number of producers.

Competition: Perfect and Otherwise Monopoly One seller, and seller controls price 6

Monopoly Resources Although exclusive ownership of a key resource is a potential source of monopoly, in practice monopolies rarely arise for this reason.

Government-Created Monopolies Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.

Government-Created Monopolies Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.

Natural Monopolies An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

Natural Monopolies A natural monopoly arises when there are economies of scale over the relevant range of output.

Figure 1: Economies of Scale as a Cause of Monopoly Cost Average total cost Quantity of Output Copyright © 2004 South-Western

HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS Monopoly versus Competition Monopoly Is the sole producer Faces a downward-sloping demand curve Is a price maker Reduces price to increase sales Competitive Firm Is one of many producers Faces a horizontal demand curve Is a price taker Sells as much or as little at same price

Figure 2 Demand Curves for Competitive and Monopoly Firms (a) A Competitive Firm ’ s Demand Curve (b) A Monopolist ’ s Demand Curve Price Price Demand Demand Quantity of Output Quantity of Output Copyright © 2004 South-Western

A Monopoly’s Revenue Total Revenue P  Q = TR Average Revenue TR/Q = AR = P Marginal Revenue DTR/DQ = MR

Table 1 A Monopoly’s Total, Average, and Marginal Revenue Copyright©2004 South-Western

A Monopoly’s Revenue A Monopoly’s Marginal Revenue A monopolist’s marginal revenue is always less than the price of its good. The demand curve is downward sloping. When a monopoly drops the price to sell one more unit, the revenue received from previously sold units also decreases.

A Monopoly’s Revenue A Monopoly’s Marginal Revenue When a monopoly increases the amount it sells, it has two effects on total revenue (P  Q). The output effect—more output is sold, so Q is higher. The price effect—price falls, so P is lower.

Figure 3 Demand and Marginal-Revenue Curves for a Monopoly Price $11 10 9 8 7 6 5 4 3 Demand (average revenue) 2 Marginal revenue 1 –1 1 2 3 4 5 6 7 8 Quantity of Water –2 –3 –4 Copyright © 2004 South-Western

Profit Maximization A monopoly maximizes profit by producing the quantity at which marginal revenue equals marginal cost. It then uses the demand curve to find the price that will induce consumers to buy that quantity.

Figure 4 Profit Maximization for a Monopoly Costs and 2. . . . and then the demand curve shows the price consistent with this quantity. Revenue 1. The intersection of the marginal-revenue curve and the marginal-cost curve determines the profit-maximizing quantity . . . Marginal revenue Demand Monopoly price QMAX B Marginal cost Average total cost A Q Q Quantity Copyright © 2004 South-Western

Profit Maximization Comparing Monopoly and Competition For a competitive firm, price equals marginal cost. P = MR = MC For a monopoly firm, price exceeds marginal cost. P > MR = MC

A Monopoly’s Profit Profit equals total revenue minus total costs. Profit = TR - TC Profit = (TR/Q - TC/Q)  Q Profit = (P - ATC)  Q

Figure 5 The Monopolist’s Profit Costs and Revenue Marginal revenue Demand Marginal cost Monopoly price QMAX B C E D Monopoly profit Average total cost Average total cost Quantity Copyright © 2004 South-Western

A Monopolist’s Profit The monopolist will receive economic profits as long as price is greater than average total cost.

Figure 6 The Market for Drugs Costs and Revenue Marginal revenue Demand Price during patent life Monopoly quantity Price after patent expires Marginal cost Competitive quantity Quantity Copyright © 2004 South-Western

THE WELFARE COST OF MONOPOLY In contrast to a competitive firm, the monopoly charges a price above the marginal cost (P ↑) From the standpoint of consumers, this high price makes monopoly undesirable. However, from the standpoint of the owners of the firm, the high price makes monopoly very desirable.

Figure 7 The Efficient Level of Output Price Marginal cost Demand (value to buyers) Value to buyers Cost to monopolist Efficient quantity Cost to monopolist Value to buyers Quantity Value to buyers is greater than cost to seller. Value to buyers is less than cost to seller. Copyright © 2004 South-Western

The Deadweight Loss Because a monopoly sets its price above marginal cost, it places a wedge between the consumer’s willingness to pay and the producer’s cost. This wedge causes the quantity sold to fall short of the social optimum.

Figure 8 The Inefficiency of Monopoly Price Demand Marginal revenue Marginal cost Deadweight loss Monopoly price quantity Efficient quantity Quantity Copyright © 2004 South-Western

The Deadweight Loss The Inefficiency of Monopoly The monopolist produces less than the socially efficient quantity of output.

The Deadweight Loss The deadweight loss caused by a monopoly is similar to the deadweight loss caused by a tax. The difference between the two cases is that the government gets the revenue from a tax, whereas a private firm gets the monopoly profit.

PUBLIC POLICY TOWARD MONOPOLIES Government responds to the problem of monopoly in one of four ways. Making monopolized industries more competitive. Regulating the behavior of monopolies. Turning some private monopolies into public enterprises. Doing nothing at all.

Increasing Competition with Antitrust Laws Antitrust laws are a collection of statutes aimed at curbing monopoly power. Antitrust laws give government various ways to promote competition. They allow government to prevent mergers. They allow government to break up companies. They prevent companies from performing activities that make markets less competitive.

Regulation Government may regulate the prices that the monopoly charges. The allocation of resources will be efficient if price is set to equal marginal cost.

Figure 9 Marginal-Cost Pricing for a Natural Monopoly Price Demand Average total cost Average total cost Loss Regulated price Marginal cost Quantity Copyright © 2004 South-Western

Regulation In practice, regulators will allow monopolists to keep some of the benefits from lower costs in the form of higher profit, a practice that requires some departure from marginal-cost pricing.

Public Ownership Rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly itself (e.g. in the United States, the government runs the Postal Service).

PRICE DISCRIMINATION Price discrimination is the business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.

PRICE DISCRIMINATION Price discrimination is not possible when a good is sold in a competitive market since there are many firms all selling at the market price. In order to price discriminate, the firm must have some market power. Perfect Price Discrimination Perfect price discrimination refers to the situation when the monopolist knows exactly the willingness to pay of each customer and can charge each customer a different price.

PRICE DISCRIMINATION Two important effects of price discrimination: It can increase the monopolist’s profits. It can reduce deadweight loss.

Figure 10 Welfare with and without Price Discrimination (a) Monopolist with Single Price Price Consumer surplus Demand Marginal revenue Deadweight loss Quantity sold Monopoly price Profit Marginal cost Quantity Copyright © 2004 South-Western

Figure 10 Welfare with and without Price Discrimination (b) Monopolist with Perfect Price Discrimination Price Profit Demand Marginal cost Quantity sold Quantity Copyright © 2004 South-Western

PRICE DISCRIMINATION Examples of Price Discrimination Movie tickets Airline prices Discount coupons Financial aid Quantity discounts

Sebuah fakta… Perusahaan multi nasional yang berbasis di 15 negara maju meningkat dari 7.000 pada tahun 1968 menjadi 27.000 perusahaan pada tahun 1993 Menurut Heertz: Modal kekayaan dari suatu perusahaan multinasinal terkemuka di dunia seperti Toyota, General Motor (GM), atau Ford sekarang ini sama seperti PDB dari banyak NSB. Tiga ratus perusahaan multinasional menguasai 25% aset dunia

Mengapa ada peningkatan Kemiskinan.? 800 juta orang penduduk dunia menderita kekurangan gizi dan 2,4 milyar orang hidup dibawah garis kemiskinan Mengapa Keberadaan multinasional begitu kuat….? Perusahaan-perusahaan multinasional menguasai kekayaan yang begitu besar (40% dari GDP dunia dan 70% perdagangan) dan memaksakan kepentingannya kepada dunia Diperkirakan hingga tahun 1997 ada 45.000 perusahaan induk yang memiliki 280.000 cabang, yang menciptakan penjualan di atas 7,0 trilyun dolar AS. Nilai saham mereka diperkirakan 3,2 Trilyun dolar AS;

Increasing Competition with Antitrust Laws Two Important Antitrust Laws Sherman Antitrust Act (1890) Reduced the market power of the large and powerful “trusts” of that time period. Clayton Act (1914) Strengthened the government’s powers and authorized private lawsuits.

Undang-Undang Antitrust di Amerika Sherman Antitrust Act (26 Stat 209, 1890) Semua kontrak, penggabungan dalam bentuk trust atau dalam bentuk lain seperti itu atau persekongkolan dalam pembatasan perdagangan antara beberapa negara bagia atau dengan negara-negara lain, dengan ini dinyatakan tidak sah menurut hukum… Semua orang yang akan memonopoli atau mencoba untukmemonopoli, atau bergabung atau bersekongkol dengan orang atau orang atau orang lain untuk memonopoli sebagian dari perdagangan atara beberapa negara, atau dengan negera-negara lain, akan dianggap berbuat kejahatan besar. Sherman Antirust Act

Clayton Antitrust Act …. Clayton Antitrust Act (38 Stat 730, 1914) Bahwa stiap orang yang terlibat dalam perdagangan akan dianggap melawan hukum, selama perdagangan yang dimaksud, langsung atau tidak langsung melakukan diskriminasi harga diantara para pembeli yang berbeda yang membeli komoditi dari standar dan mutu yang serupa… Bahwa setiap orang yang terlibat dalam perdagangan akan dianggap melawan hukum, selama perdagangan yang dimaksud, menyewakan atau mengadakan penjualan atau kontrak…dengan syarat, persetujuan, atau pengertian bahwa si penyewa atau si pembeli karenanya tidak akan menggunakan atau memebeli….komoditi dari seorang pesaing… Clayton Antitrust Act

Federal Trade Commision Act …. Federal Trade Commission Act (37 Stat 717, 1914) Cara persaingan yang tidak jujur….tindakan-tindakan atau praktek-praktek yang curang atau yang bersifat menipu dalam atau yang mempengaruhi perdagangan, dengan ini dinyatakan melawan hukum. Dengan ini komisi diberi wewenang dan diarahkan untuk mencegah…menggunakan cara-cara yang tidak jujur….atau tindakan-tindakan atau praktek-praktek yang bersifat menipu dalam perdagangan. Federal Trade Commision Act

Alternative Means of Deterrence Empat Bentuk Hukuman (Undang-Undang Federal) Pembayaran denda untuk pemerintah 1 Pembayaran kerugian sebesar tiga kali lipat pada pihak-pihak yang dirugikan 2 3 Hukuman penjara 4 Perintah pembubaran kerjasama

Beberapa faktor yang menyebabkan kita menolak untuk bekerja sama: Secara empiris, ketika dipersidangan para pihak-pihak yang dirugikan sebagian besar melakukan perdamaian dengan cara melakukan kerjasama bisnis dengan pihak tergugat. Pembubaran kerjasama akan berdampak besar terhadap perekonomian secara makro, misalnya terhadap harga saham, dan pengangguran dsb..

Komisi Pengawas Persaingan Usaha (KPPU) …saat mulai diperlakukannya UU No. 5 tahun 1999 tentang Larangan Praktek Monopoli dan Persaingan Tidak Sehat …kemudian dibentuk KPPU (Komisi Pengawas Persaingan Usaha) Tercatat hingga saat ini KPPU telah memutuskan dua kasus, yaitu kasus “Tender Kolusif Caltex” dan “Jaringan Minimarket Indomaret”. Sedangkan kasus-kasus lain, baru pada tahap monitoring dan atau penyidikan awal.

Pengawas Persaingan Usaha Dalam Pandangan Islam …Islam mengatur persaingan usaha tepatnya pada masa pemerintahan Islam di Semenanjung Arabia pada masa Khalifah Umar bin Khattab Dasar Hukum : …hasil dari usaha manusia tidak boleh ditimbun, tanpa dimanfaatkan untuk kepentinga sesama manusia (QS: 9:34) …segala sesuatu tidak boleh dilakukan dengan cara yang bathil atau curang antara lain dengan penipuan (QS: 6: 152) ….melanggar janji atau sumpah (QS: 16: 94) …melakukan perbuatan-perbuatan lain yang bertujuan mengambil hak orang lain tanpa izin, di luar pengetahuan dan kemampuan yang berhak (QS: 5: 38)

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