Managerial Economics & Business Strategy

Managerial Economics &
Business Strategy
Chapter 8
Managing in Competitive, Monopolistic,
and Monopolistically Competitive
Long Run Adjustments?
• None, unless the
source of monopoly
power is eliminated.
Why Government Dislikes
• P > MC
Too little output, at too high a price.
• Deadweight loss of monopoly.
Deadweight Loss of Monopoly
Deadweight Loss
of Monopoly
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
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
• 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
• M’m! M’m! Good
Campbell’s Soup
• Once you pop the fun doesn’t stop
• Tastes Great. Less Filling
Miller Lite
• Celebrate the Moments of your life
General Foods International Coffee
• Obey your thirst
• 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
• So….does it work???