Monopoly
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ACDC Leadership 2015
1
Four Market Structures
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Characteristics of Monopoly:
Examples: The Electric Company, De Beers
• One large firm (the firm is the market)
• Unique product (no close substitutes)
• High Barriers- Firms cannot enter the
industry
• Monopolies are “Price Makers”
• Some advertising – why?
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ACDC Leadership 2015
Average Total Costs
Long-Run ATC Shape
Economies
Of Scale
Diseconomies
Of Scale
Long-Run
ATC
Output
Long-run ATC curve where costs are
lowest only when large numbers are
participating
8-3
Barriers to Entry
Economies of scale
Legal barriers to entry
 Patents (Pharmaceuticals)
 Licenses (LCB, taxis)
Ownership or control of essential
resources (NFL)
Pricing and other strategic barriers
to entry (Netscape vs IE)
10-4
What do you already know about
monopolies?
True or False? All False!
1. All monopolies make a profit.
2. Monopolies charge the highest price
possible.
3. Monopolies are usually efficient.
4. All monopolies are bad for the economy.
5. Monopolies are illegal.
6. The government never prevents
monopolies from forming.
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Can a monopoly be good for the
economy?
Ex: Electric Companies
• If there were three competing electric companies they
would have higher costs.
• Having only one electric company keeps prices low
Economies of scale make it impractical
to have smaller firms.
Natural Monopoly- It is NATURAL for
only one firm to produce because they
can produce at the lowest cost.
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Drawing
Monopolies
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Monopoly Demand
Assumptions:
 Monopoly status is secure
 No government regulation
 Single-price monopolist
Face down-sloping demand
 Entire market demand
10-8
Good news…
1.Only one graph because the
firm IS the industry.
2.The cost curves are the same
3.The MR = MC rule still
applies
4.Shut down rule still applies
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The Main Difference
• 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!
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ACDC Leadership 2015
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Why is MR less than
Demand?
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ACDC Leadership 2015
P
Qd
$11
0
TR MR
0
-
11
Why is MR less than
Demand?
$10
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ACDC Leadership 2015
P
Qd
$11
$10
0
1
TR MR
0
10
10
12
Why is MR less than
Demand?
$10
$9
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ACDC Leadership 2015
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
18
10
8
$9
13
Why is MR less than
Demand?
$10
$9
$9
$8
$8
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
18
24
10
8
6
$8
14
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
18
24
28
10
8
6
4
$7
15
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
$6
0
1
2
3
4
5
TR MR
0
10
18
24
28
30
10
8
6
4
2
$6
16
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
$6
$5
0
1
2
3
4
5
6
TR MR
0
10
18
24
28
30
30
10
8
6
4
2
0
$5
17
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
18
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$8
$7
$7
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
19
Why is MR less than
Demand?
$10
$9
$9
$8
$8
$7
$7
$6
$6
$6
$6
$6
$5
$5
$5
$5
$5
$5
$4
$4
$4
$4
$4
$4
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
MR
$8 IS LESS THAN
$7 $7DEMAND
10
18
24
28
30
30
28
10
8
6
4
2
0
-2
$4
20
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To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
$6
0
$5
1
$4
2
$3
3
$2
4
$1
5
Total
Revenue
Marginal
Revenue
Does the Marginal Revenue equal the price?
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To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
Total
Revenue
$6
0
0
$5
1
5
$4
2
8
$3
3
9
$2
4
8
$1
5
5
Marginal
Revenue
Does the Marginal Revenue equal the price?
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To sell more a firm must lower its price. What
happens to Marginal Revenue?
Price
Quantity
Demanded
Total
Revenue
Marginal
Revenue
$6
0
0
-
$5
$4
MR
1 DOESN’T
5
2
8
EQUAL PRICE
5
3
$3
3
9
1
$2
4
8
-1
$1
5
5
-3
Draw Demand and Marginal Revenue Curves
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Monopoly Revenue and Costs – pg. 258
Cost Data
Revenue Data
(2)
Price
(1)
Quantity (Average
Of Output Revenue)
0
1
2
3
4
5
6
7
8
9
10
$172
162
152
142
132
122
112
102
92
82
72
(3)
Total
Revenue
(1) X (2)
$0 ]
162 ]
304 ]
426 ]
528 ]
610 ]
672 ]
714 ]
736 ]
738 ]
720
(4)
Marginal
Revenue
$162
142
122
102
82
62
42
22
2
-18
(5)
(6)
(7)
(8)
Average Total Cost Marginal Profit (+)
Total Cost (1) X (5)
Cost
or Loss (-)
$190.00
135.00
113.33
100.00
94.00
91.67
91.43
93.75
97.78
103.00
$100 ]
190 ]
270 ]
340 ]
400 ]
470 ]
550 ]
640 ]
750 ]
880 ]
1030
$90
80
70
60
70
80
90
110
130
150
$-100
-28
+34
+86
+128
+140
+122
+74
-14
-142
-310
Can you See Profit Maximization?
10-25
Monopoly Revenue
A
monopoly
will only
produce
in the Why?
elastic
range of
it’s
Demand
Curve!!
$200
Demand and Marginal-Revenue Curves
Elastic
Inelastic
Price
150
100
50
0
D
MR
2
4
Total Revenue
$750
6
8
10
12
Total-Revenue Curve
14
16
18
500
250
0
TR
2
4
6
8
10
12
14
16
18
10-26
Profit Maximization
Conclusion: A
monopolist
produces
where
MR=MC, but
charges the
price
consumers are
willing to pay
identified by
the demand
curve.
Price, Costs, and Revenue
$200
175
MC
150
Pm=$122
125
100
75
Economic
Profit
ATC
A=$94
D
MR=MC
50
25
0
MR
1
2
3
4
5
6
7
8
9
10
Quantity
10-27
Determining P and Q for a Monopolist
Using the
area on 
the graph
Calculating
TC and TR
using the table
Misconceptions
Not the highest price
Total, not unit, profit
Possibility of losses
10-29
Price, Costs, and Revenue
Loss Minimization
Will this
firm
produce?
MC
A
Pm
ATC
Loss
AVC
V
D
MR=MC
MR
0
Qm
Quantity
10-30
Identify and
Price
TR=
Calculate:
TC=
Profit/Loss=
Profit/Loss per Unit=
MC
$10
9
8
7
6
5
ATC
D
MR
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ACDC Leadership 2015
$50
$25
$25
$5
5 6 7 8
9 10 11
Q
31
Identify and
TR=
Calculate:
TC=
Profit/Loss=
Profit/Loss per Unit=
$54
$36
$18
$3
P
$10
9
8
7
6
MC= ATC
5
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D
MR
4
1 2 3 4 5 6 7 8
9 10
Q
32
2012 Multiple Choice #8
33
2012 Multiple Choice #9
34
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Monopolies are inefficient
because they…
1.Charge a higher price
2.Don’t produce enough
• Not allocatively efficiency
3.Produce at higher costs
• Not productively efficiency
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Monopolies vs. Perfect Competition
Allocative
Efficiency
S
=
MC
P
CS
In perfect competition,
CS and PS are
maximized.
Ppc
PS
D
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Qpc
Q
37
Monopolies vs. Perfect Competition
S = MC
P
At MR=MC,
A monopolist will
produce less and
charge a higher price
Pm
Ppc
D
MR
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Qm
Qpc
Q
38
Monopolies vs. Perfect Competition
Allocative Efficiency
Where is CS
and PS for a
monopoly?
P
S = MC
CS
Total surplus falls.
Now there is
DEADWEIGHT
LOSS
Pm
PS
Monopolies underproduce and over
D
charge, decreasing CS and
increasing
PS.
MR
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ACDC Leadership 2015
Qm
Q
39
Allocative Efficiency
Perfect Competition vs. Monopoly
Income transfer increases
inequality
Are Monopolies Productively Efficient?
Does Price = Min ATC?
P
$9
8
7
6
No. They are not
producing at the lowest
cost (min ATC)
MC
ATC
5
4
3
2
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D
MR
1 2 3 4 5 6 7 8 9 10 Q
41
Are Monopolies Allocatively Efficient?
Does Price = MC?
P
$9
8
7
6
No. Price is greater.
The monopoly is under
producing.
MC
ATC
5
4
3
D
Monopolies are NOT efficient!
2
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MR
1 2 3 4 5 6 7 8 9 10 Q
42
Cost Complications
 Economies of scale
 Simultaneous consumption – low MC
 iPhone vs.
Snapchat
 Other example?
 Network effects – popularity/ease
 Twitter or Excel
 Other example?
 Cyberdust
10-43
Cost Complications
 X-inefficiency
 Lowest ATC not achieved – why?
 Poor management, lack of competition
 Example?
 PENN-DOT!!!!
 Rent seeking behavior – survival
 How?
 Technological advance
 More likely with monopoly?
 Depends… are they motivated?
2012 Multiple Choice #44
45
2012 Question #21
2008 Audit Exam
2008 Audit Exam
2008 Audit Exam
…MOUNT UP.
Policy Options
Use antitrust laws
 Divide the firm
10-52
Policy Options
Natural monopoly
 Regulate price
Ignore
 Unstable in long run
Why Regulate?
Why would the government regulate
an monopoly?
1. To keep prices low and
increase quantity
2. To make monopolies efficient
How do they regulate?
•Use Price controls: Price Ceilings
•Why don’t taxes work?
•Taxes limit supply and that’s the problem
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Regulated Monopoly
Natural monopolies
Rate regulation
Socially optimum price
P = MC
Allocative Efficiency
Fair return price
P = ATC
Normal Profit
10-55
Regulated Monopoly
Dilemma of Regulation
Why does this
problem exist?
Price and Costs (Dollars)
Monopoly
Price
Pm
Fair-Return
Price
f
Pf a
Socially
Optimal
Price
(No DWL)
ATC
Pr
r
D
MR
0
b
Qm
What is the problem with the
socially optimal price?
MC
Qf
Quantity
Qr
Economies of
Scale…
10-56
Regulating a Natural Monopoly
What happens if the government sets a price ceiling
to get the socially optimal quantity?
P
The firm would make a
loss and would require a
subsidy
MC
ATC
Pso
MR
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Qsocially optimal Q
57
How do you
think this
process plays
out in the real
world?
2008 Audit Exam
Price Discrimination
•Price discrimination seeks to charge each
consumer what they are willing to pay in an
effort to increase profits.
•Those with inelastic demand are charged
more than those with elastic demand
Requires the following conditions:
1. Must have monopoly power
2. Must be able to segregate the market
3. Consumers must NOT be able to resell
product
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Price Discrimination
 Three forms
 1st degree - Charge each customer
max willingness to pay

Example?
 2nd degree - Charge one price for
first unit and a lower price for
subsequent units

Example?
 3rd degree - Charge different
customers different prices

Example?
10-61
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P
Qd
$11
0
TR MR
0
-
62
Results of Price
Discrimination
$10
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ACDC Leadership 2015
P
Qd
$11
$10
0
1
TR MR
0
10
10
63
Results of Price
Discrimination
$10
P
Qd
$11
$10
$9
0
1
2
TR MR
0
10
19
10
9
$10 $9
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Results of Price
Discrimination
$10
$10 $9
$10 $9
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P
Qd
$11
$10
$9
$8
0
1
2
3
TR MR
0
10
19
27
10
9
8
$8
65
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
0
1
2
3
4
TR MR
0
10
19
27
34
10
9
8
7
$7
66
Results of Price
Discrimination
$10
$10 $9
$10 $9
$8
$10 $9
$8
$7
$10 $9
$8
$7
$6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
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ACDC Leadership 2015
P
Qd
$11
$10
$9
$8
$7
$6
$5
$4
0
1
2
3
4
5
6
7
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
67
P
Qd
$10 $9
$11 0
$10 1
$9
2
$8
3
WHEN PRICE
$7
4
$8
DISCIMINATING
$6
5
$8 $7 MR = D$5 6
$4
7
$8 $7 $6
$10 $9
$8
$7
$6
$5
$10 $9
$8
$7
$6
$5
$10
$10 $9
$10 $9
$10 $9
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ACDC Leadership 2015
TR MR
0
10
19
27
34
40
45
49
10
$9
$8
$7
$6
$5
$4
$4
68
Regular Monopoly vs.
Price Discriminating Monopoly
P
MC
Pm
ATC
D
MR
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Qm
Q
69
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
P
MC
ATC
D
MR
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Q
70
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
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Qnm
Q
71
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
Identify the Price, Profit, CS, and DWL
P
MC
ATC
D =MR
Price Discrimination results in several
prices, more profit, no CS, and a higher
socially optimal
quantity
Q
Q
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72