11.1 Domestic Monopoly
page 1
Domestic Monopoly
Partial Equilibrium
Price
Initial
Equilibrium
Price
Market
Sharing
MC
MC
PW
PW
MR
MR
D
D
Quantity
QS
Quantity
QS
Limit
Pricing
Price
PW
MR
QS
Monopoly
Solution
Price
MC
D
Quantity
MC
PW
MR
QS
D
Quantity
At low tariffs, the competitive equilibrium occurs, and the domestic monopolist shares the market with
foreign competitors. The local price is just the world price plus the tariff. As the tariff is raised, the share
of the domestic monopolist rises to 100%. At this point, further increases in tariffs afford the domestic
supplier monopoly power and the response is higher prices and less output, until the full monopoly solution
occurs.
11.1 Domestic Monopoly
page 2
Dumping: Tariff Separating the Market
Initial Equilibrium
US Exports to Korea
QD - QS
Price
MC for Korean DRAM
US Price
PU
Korean Demand
QS
QD
Quantity
Protection with Limit
Pricing Squeezes US out of
Korean Market
Price
MC for Korean DRAM
Korean Protected Price
US Price
PU
Korean Demand
QS
Quantity
Korean Monopolist
Exports to US
QT - QK
Price
MC for Korean DRAM
NOTE: Production levels stay
the same. The tariff promotes
exports but does so by
discouraging local demnd.
Korean Home Monopoly Price
US Price
PU
Non-equivalence of quotas and tariffs with domestic
monopolist.
Korean Demand
QK QT
Quantity
11.1 Domestic Monopoly
page 3
MC
Pq
Pt
Pw
MR’
D’ = demand curve net of quota facing domestic monopolist
Pq = price prevailing internally
Pt = price that generates the same level of imports
D’
D
11.1 Domestic Monopoly
page 4
Domestic Monopoly:
Quotas versus Tariff: Output Objective (choose tariff)
MC
Pq
Dead-weight Loss of Quota
Dead-weight Loss of Tariff
Pt
Pw
D
D’
MR’
Target Quantity
Quotas versus Tariffs: price objective (choose quota)
MC
Additional Dead-weight Loss
due to higher output coming
from tariff
Pt=Pq
D
Pw
MR’
D’
11.1 Domestic Monopoly
page 5
Globalization and Domestic Monopoly
Here we have the domestic firm lowering price and increasing output. But this depends on where the
marginal cost lies. If it is higher, crossing above where the two marginal revenue curves cross, then the
firm cuts back output. Probably need to be careful about how we rotate the supply curve Q = a + bP has
elasticity (dQ/q)/(dp/p) = bp/Q = bp/ (a+bp). This elasticity can be increased by raising b or lowering a.
???
Price
Foreign Supply :S
Marginal Cost
S’
1
2
Quantity
Tariffs applied to Foreign Monopoly
11.1 Domestic Monopoly
page 6
Price
Marginal
Cost
1
2
Demand
Marginal
Revenue
Quantity
Buy less, pay less
Gain
Loss