•
Obey your Thirst
–
Sprite
•
Is it in you
–
Gatorade
•
Two for me, none for you
–
Twix
•
Hungry, why wait?
–
Snickers
•
Give me a break
–
Kit Kat
• Like a good neighbor…
•
State Farm
•
My heart to yours
–
Pillsbury
Name
The Product

•
There is no wrong way to eat a
– Reese’s
• I’m love’n it
–
McDonalds
• Once you pop you can’t stop
–
Pringles
•
Choosy mothers choose _______.
–
Jiff
•
You can do it, we can help.
–
Home Depot
•
Zoom, zoom, zoom
–
Mazda
•
What is in your wallet?
–
Capital One
Name
The Product

• It just keeps going and going and going…
–
Energizer
Name
• Bet ya can’t eat just one.
The Product
–
Lays Potato Chips
•
Double your pleasure, double your fun
–
Doublemint Gum
•
Have it your way
–
Burger King
• Don’t leave home without it.
–
American Express
•
The quicker picker upper.
–
Bounty

5 Characteristics of a Monopoly
1. Single Seller
•
One Firm controls the vast majority of a market
•
The Firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
•
The firm can manipulate the price by changing the quantity it produces (ie. shifting the supply curve to the left).
•
Ex: California electric companies

5 Characteristics of a Monopoly
4. High Barriers to Entry
•
New firms CANNOT enter market
•
No immediate competitors
•
Firm can make profit in the long-run
5. Some “Nonprice” Competition
•
Despite having no close competitors, monopolies still advertise their products in an effort to increase demand.

•
Question
–
How does a firm obtain monopoly power?
•
Answers
–
Barriers to entry that allow the firm to make long-run economic profits
–
Barriers to entry are restrictions on who can start as well as stay in business.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-9

1. Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, Cable TV,
-Location or control of resources limits competition and leads to one supplier.
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army,
Pharmaceutical drugs, rubix cubes…
-Government allows monopoly for public benefits or to stimulate innovation.
-The government issues patents to protect inventors and forbids others from using their invention.
(They last 20 years)

3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Intel, Frisbee, Band-Aid…
-Patents and widespread availability of certain products lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to Entry
Ex: Electric Companies
•
If there were three competing electric companies they would have higher costs.
•
Having only one electric company keeps prices low
Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost.

International Policy Example:
Malaysia’s Drug-Labeling Monopoly
• Sellers of drugs and medical products are required to affix holographic labels providing information on usage.
• To obtain these labels, sellers have only one choice.
They must buy the labels from a company called
Mediharta.
• This company is the only label manufacturer that
Malaysia’s Registrar of Companies has approved to produce holographic labels.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-12

•
Legal or governmental restrictions
–
Patents
•
Intellectual property
–
Tariffs
•
Taxes on imported goods
–
Regulation
•
Safety and quality
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-13

•
Cartels
–
An association of producers in an industry that agree to set common prices and output quotas to prevent competition
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-14

The Demand Curve a Monopolist Faces
• The monopolist faces the industry demand curve because the monopolist is the entire industry.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-15

The Demand Curve a Monopolist Faces (cont'd)
•
Recall that under perfect competition
–
Firm faces perfectly elastic demand curve, it is a price taker
–
The forces of supply and demand establish the price per unit
–
Marginal revenue, average revenue, and price are all the same
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-16

Comparing Monopoly and Perfect
Competition
Monopoly
Single seller
Faces entire industry demand
Must lower price to sell more
Not all units sold for same price
Perfect Competition
Many sellers
Faces perfectly elastic demand
Must produce more to sell more
All units sold for same price ( P = MR )
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-17

•
The monopolist faces a downward-sloping demand curve, and cannot charge any price.
•
Thus, depending on the price charged a different quantity will be demanded.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-18

Cost and Monopoly
Profit Maximization
•
We assume profit maximization is the goal of the pure monopolist, just as it is for the prefect competitor.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-19

Cost and Monopoly
Profit Maximization (cont'd)
•
Perfect competitor has only to decide on the profit-maximizing output rate because price is given.
•
For the pure monopolist, we must seek a profit-maximizing price output combination .
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-20

Cost and Monopoly
Profit Maximization (cont'd)
•
Price Searcher
–
A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-21

Cost and Monopoly
Profit Maximization (cont'd)
•
We can determine the profit-maximizing price-output combination with either of two equivalent approaches.
–
By looking at total revenues and total costs or by looking at marginal revenues and marginal costs.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-22

Cost and Monopoly
Profit Maximization (cont'd)
•
Total revenues-total costs approach
–
Maximize the positive difference between total revenues and total costs
•
Marginal revenue-marginal cost approach
–
Profit maximization will also occur where marginal revenue equals marginal cost.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-23

Only one graph because the firm
IS the industry.
1.The cost curves are the same
2.The MR= MC rule still applies
3.Shut down rule still applies

•
Monopolies (and all Imperfectly competitive firms) have downward sloping demand curve.
•
Which means, to sell more a firm must lower its price.
• This changes MR…
THE MARGINAL REVENUE
DOESN’T EQUAL THE PRICE!

This is what a monopoly looks like when graphed…always!
MC
ATC
D
MR
Quantity

Remember…Perfect Competition
$20
15
14
10
6
5
MC
MR=P
ATC
AVC
0
1 2 3 4 5 6 7 8 9 10

•
Monopoly profit is given by the shaded area, which is equal to total revenues (P

Q) minus total costs (ATC

Q).
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-28

Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-29

Calculating Monopoly Profit (cont'd)
•
No guarantee of profit
–
The term monopoly conjures up the notion of a greedy firm ripping off the public…Not always true!
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-30

Figure 25-7
Monopolies: Not Always Profitable
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-31

Conclusion: A monopolists produces where
MR=MC, buts charges the price consumer are
175
$9
150
8
125
7
MC
ATC
D
4
50
3
25
2 MR
0 1 2 3 4 5 6 7 8 9 10
Q

Calculate TR and Marginal Revenue
Quantity
0
1
2
5
6
3
4
7
8
9
10
13
12
11
10
9
Price
$16
15
14
8
7
6
TR MR

Calculate TR and Marginal Revenue
Quantity
0
1
2
5
6
3
4
7
8
9
10
13
12
11
10
9
Price
$16
15
14
8
7
6
39
48
55
60
63
TR
0
15
28
64
63
60
MR

Calculate TR and Marginal Revenue
Quantity
0
1
2
5
6
3
4
7
8
9
10
13
12
11
10
9
Price
$16
15
14
8
7
6
39
48
55
60
63
TR
0
15
28
64
63
60
11
9
7
5
3
MR
-
15
13
1
-1
-3

On Making Higher Profits:
Price Discrimination
•
Price Discrimination
–
Selling a given product at more than one price, with the difference being unrelated to differences in cost
•
Senior discounts
•
Military discounts
•
Student discounts
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-37

On Making Higher Profits:
Price Discrimination (cont'd)
•
Price Differentiation
–
Establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-38

•
Comparing monopoly with perfect competition
– Let’s assume a monopolist comes in and buys up every single perfect competitor.
–
Notice the monopolist produces a smaller quantity and sells at a higher price.
–
Monopolists raise the price and restrict production compared to a perfectly competitive situation.
–
Consumers pay a price that exceeds the marginal cost of production and resources are misallocated in such a situation.
Copyright © 2008 Pearson Addison Wesley.
All rights reserved.
25-39

Monopolies are inefficient because they…
•
Charge a higher price
• Don’t produce enough
•
No allocative efficiency
•
Produce at higher costs
•
No productive efficiency
•
Have little incentive to innovate
Why?
Because there is little external pressure to be efficient

Monopoly