Monopoly
Monopolies
• Pure Monopolies (rare)
– Public Utilities
– Cable TV (in some locations)
– Sports Teams?
• Near Monopolies
– Intel (81%)
– Wham-O (90%)
– De Beers (55%)
Barriers To Entry
• Economies of Scale
– ATC continues to decrease at high levels of
output
– “Natural Monopoly”
• Demand intersects LRATC where LRATC is still
declining
Barriers To Entry
• Legal
– Patents (20 years)
– Licenses
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FCC
Taxis
Liquor Licenses
Marijuana Dispensary
Barriers To Entry
• Ownership/Control of Resources
– Natural Resources
• Inco (90% of known nickel)
• Local Control
Barriers to Entry
• Pricing
– Predatory
– Package discounts
• Advertising and Other Practices
Monopoly
• Monopolists do not face a supply curve
• It is the Price Maker
Competitive Price and Output
Competitive Consumer/Producer Surplus
Monopolist Consumer/Producer Surplus/DWL
Productive Efficiency?
Allocative Efficiency?
Conclusions About Monopolist’s P and Q
Monopolist’s Costs- Higher or Lower
Monopolist’s Costs- Higher or Lower
• Economies of Scale/Natural Monopoly
– Multiple firms would lead to increased LRATC
– Examples:
• Utilities
• Nonrivalrous Consumption- Microsoft Windows
Wireless Service
• Network Effect- MySpace, Facebook
Monopolist’s Costs- Higher or Lower
– X-inefficiency: Reality that lack of competition
may lead to costs higher than those assumed
by economic theory
Monopolist’s Costs- Higher or Lower
– X-inefficiency: Reality that lack of competition
may lead to costs higher than those assumed
by economic theory
Monopolist’s Costs- Higher or Lower
• Rent Seeking
– Money spent on lobbying and other activities
to maintain monopoly through government
legislation/licensing
Monopolist’s Costs- Higher or Lower
• Advertising
– De Beers Commercials
Monopolist’s Costs- Higher or Lower
• Research and Development (LRATC)
– Historic View: Think X-Inefficiency
– Caveat: Think Google
Price Discrimination Conditions
1. Monopoly/Market Power
2. Market Segregation
3. No Resale
Price Discrimination
• Senior Discount Challenge
– Pick a market that employs senior discounts for
profit maximization
– Draw two sets of C and R curves
• Which look the same?
• Which look different?
– Indicate Profit on Senior and Regular Diagrams
Welcome to Market Failure
Natural Monopoly Regulatory Options
Natural Monopoly Regulatory Options
What happens if the monopoly is
broken?
Natural Monopoly Regulatory Options
Natural Monopoly Regulatory Options
1. UnregulatedPrice on D above MR = MC
2. Fair Return- P = ATC
3. Social Optimal (Allocatively Efficient)
P = MC
PER UNIT TAX
LUMP SUM TAX
PER UNIT
SUBSIDY
LUMP SUM
SUBSIDY
PER UNIT V. LUMP SUM
• PER UNIT
– SHIFTS MC
– Changes profit-max. Q and P
– Variable cost
• LUMP SUM
– SHIFTS FC/ATC, THEREFORE, NOT Q
– Fixed cost
– P and Q same; Profit/Loss Changes
Monopolistic Competition
Product Differentiation
• Physical Differences
• Perceived Differences
• Support Services
Monopoly v. Monopolistic
Competition
• Why is it called monopolistic competition?
• How will the demand curve differ?
• How will the MR curve differ?
• Long Run? (remember- no barriers)
Which go together?
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Allocatively Efficient
Productively Efficient
Profit-Max.
Fair Return
Socially Optimal
Min. ATC
MR = MC
P = ATC
P = MC
Fair Return and Socially
Optimal?
Excess Capacity
• Q Gap between profit max. and min. ATC
4 Firm Concentration Ratio
• Sum of 4 largest firms’ market share
• > 40% = Oligopoly
• < 40% = Monopolistic Competition
Herfindahl-Hirschman Index
• Sum of squared market shares of all firms
• s12 + s22 + …
• Range of 0 - 10,000
Herfindahl-Hirschman Index
• Sum of squared market shares of all firms
• (% Share of Firm 1)2 + (% Share of Firm
2)2 …
• Range of 0 - 10,000
Natural Oligopoly
Dollars
LRATCTypical Firm
H
$200
F
E
80
DMarket
0
25,000
100,000
Units per Month
47
Oligopoly- Kinked Demand
Horizontal Merger
• Two companies in same industry
– Red Flag: HHI increase of 100 or more
Vertical Merger
• Two companies in complimentary industries
Potential Competition Merger
FTC
Denied
Antitrust Laws
• Sherman Antitrust Act (1890)
– Banned predatory and unfair business practices
• Clayton Antitrust Act (1914)
– Specified unfair practices
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Interlocking Directories
Price Discrimination
Exclusive Dealings and Tying
Horizontal Mergers that Destroy Competition
• Federal Trade Commission (FTC)
– Approves mergers and enforces trade regulations
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Homework List
Legibly Applied to Our
Simulation
Players, Strategies, Payoffs
Dominate Strategy
Nash Equilibrium
Explicit Collusion
Tacit Collusion
Tit for Tat
Cheating
Cartel
Game Theory
• Players, Strategies, and Payoffs
• Dominate Strategy
– A player has a single best strategy regardless
of opponent’s strategy decision
• Nash Equilibrium
– No player can benefit from a unilateral move
• Dominate Strategy Equilibrium
– Nash Equilibrium AND both players are
playing a dominate strategy
Circle Method
• Dominate Strategy
– Player on Left
• Two circles in same row
– Player on Top
• Two circles in same column
• Nash Equilibrium
– Two circles in same box
• Dominate Strategy Equilibrium
– Two Circles in same box and both players have
dominate strategy