Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Long Run Adjustments? • None, unless the source of monopoly power is eliminated. Why Government Dislikes Monopoly? • P > MC Too little output, at too high a price. • Deadweight loss of monopoly. Deadweight Loss of Monopoly $ MC Deadweight Loss of Monopoly ATC PM D MC QM MR Q Arguments for Monopoly • The beneficial effects of economies of scale, economies of scope, and cost complementarities on price and output may outweigh the negative effects of market power. • Encourages innovation. Can we do it?? • Number 4 • You are the manager of a monopoly, and your demand and cost functions are give by P=200-2Q and C(Q)=2000+3Q2, respectively. What price-quantity combination maximizes your firm’s profits? Calculate the maximum profits Is demand elastic, inelastic, or unit elastic at the profitmaximizing price and quantity? What price-quantity combination maximizes revenue? Calculate the maximum revenues Is demand elastic, inelastic, or unit elastic at the revenuemaximizing price-quantity combination? Monopoly Multi-Plant Decisions • Consider a monopoly that produces identical output at two production facilities (think of a firm that generates and distributes electricity from two facilities). Let C1(Q2) be the production cost at facility 1. Let C2(Q2) be the production cost at facility 2. • Decision Rule: Produce output where MR(Q) = MC1(Q1) and MR(Q) = MC2(Q2) Set price equal to P(Q), where Q = Q1 + Q2. Managing a Monopolistic Firm (or Price-Making Business) Monopolistic Competition: Environment and Implications • Numerous buyers and sellers • Differentiated products Implication: Since products are differentiated, each firm faces a downward sloping demand curve. • Consumers view differentiated products as close substitutes: there exists some willingness to substitute. • Free entry and exit Implication: Firms will earn zero profits in the long run IF they don’t differentiate their products enough Can “we” change our market power??? • Why do we advertise? Tell you how we are different If successful • No substitutes in your mind If not successful • Free entry will reduce profits Does advertising work?? • Keeps going and going and going Energizer Batteries • We bring good things to life GE • M’m! M’m! Good Campbell’s Soup • Once you pop the fun doesn’t stop Pringles • Tastes Great. Less Filling Miller Lite • WASSSSSUP? Budweiser • Celebrate the Moments of your life General Foods International Coffee • Obey your thirst Sprite • I’m a pepper, you’re a pepper, …, wouldn’t you like to be a pepper too? Dr. Pepper • Gotta have my pops Corn Pops • Snap, Crackle, and Pop Rice Krispies • I’m lovin’ it McDonalds • So….does it work???