Unit 4:
Imperfect
Competition
FOUR MARKET STRUCTURES
Perfect
Competition
Imperfect Competition
Monopolistic
Competition
Oligopoly
Pure
Monopoly
1
4
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
4. High Barriers to Entry
 New firms can NOT 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.
5
Examples of Monopolies
What do you already know about monopolies?
True or False?
1. All monopolies make a profit.
2. Monopolies are usually efficient.
3. All monopolies are bad for the economy.
4. All monopolies are illegal.
5. Monopolies charge the highest price possible
6. The government never prevents monopolies
from forming.
6
7
4 types of monopolies
Geographical
Technological
Government
Natural
4 types of monopolies
Geographical
Location or control
of resources limits
competition and
leads to one supplier.
Ex: Nowhere gas
stations, De Beers
Diamonds, San Diego
Chargers, Cable TV,
Qualcomm Hot Dogs…
Technological
Government
Natural
4 types of monopolies
Geographical
Location or control
of resources limits
competition and
leads to one
supplier.
Ex: Nowhere gas
stations, De Beers
Diamonds, San
Diego Chargers,
Cable TV, Qualcomm
Hot Dogs…
Technological
Government
Patents and widespread
availability of certain
products lead to only
one major firm
controlling a market.
Ex: Microsoft, Intel,
Frisbee, Band-Aide…
Natural
4 types of monopolies
Geographical
Location or control
of resources limits
competition and
leads to one
supplier.
Ex: Nowhere gas
stations, De Beers
Diamonds, San
Diego Chargers,
Cable TV, Qualcomm
Hot Dogs…
Technological
Patents and
widespread
availability of
certain
products lead
to only one
major firm
controlling a
market.
Ex: Microsoft,
Intel, Frisbee,
Band-Aide…
Government
Natural
• 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)
Ex: water company, firefighters,
the army, pharmaceutical drugs,
rubix cubes…
4 types of monopolies
Geographical
Government
Technological
Location or
control of
resources
limits
competition
and leads to
one supplier.
• 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)
Patents and widespread
availability of certain
products lead to only
one major firm
controlling a market.
Ex: Nowhere gas
stations, De Beers
Diamonds, San Diego
Chargers, Cable TV,
Qualcomm Hot
Dogs…
Ex: water company,
firefighters, the
army, pharmaceutical
drugs, rubix cubes…
Ex: Microsoft,
Intel, Frisbee,
Band-Aide…
Natural
• 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.
Ex: Electric Companies (SDGE)
 If there were three competing
electric companies they would have
higher costs.
 Having only one electric company keeps
prices low
Drawing Monopolies
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
13
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 DOES
EQUAL THE PRICE!
14
Combine the Demand of an
industry with the costs of a firm.
MC
Costs (dollars)
ATC
MR
D
Quantity
15
Why is MR less
than Demand?
$10
$9 $9
$8 $8 $8
$7 $7 $7 $7
$6 $6 $6 $6 $6
P
Qd TR MR
$11
0
0
-
$10
1
10
10
$9
2
18
8
$8
3
24
6
$7
4
28
4
$6
5
30
2
$5
6
30
0
$4
7
28
-2
$5 $5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
16
Why is MR less
than Demand?
$10
$9 $9
MR$8IS
$8 $8
$7 $7 $7
P
Qd TR MR
$11
0
0
-
$10
1
10
10
$9
2
18
8
$8
3
24
6
LESS THAN
$7
4
28
$6
5
30
PRICE
$7
$6 $6 $6 $6 $6
4
2
$5
6
30
0
$4
7
28
-2
$5 $5 $5 $5 $5 $5
$4 $4 $4 $4 $4 $4 $4
17
Why is MR below Demand?
P
How many units can be sold for a price of $100?
As price decreases from $100 to $90...
$100
90
Loss=$30
60
TR=$360
40
TR=$300
0
1
2
Revenue will increase with
the additional unit sold.
Gain
$90
3
But a lower price
results in a loss of
the $30 that was
D earned when price
was $10 higher.
Marginal Revenue is
ADDITIONAL REVENUE =?
= $360-$300
= $60
Q
4
5
= $90-$30
18
Why is MR below Demand?
P
$100
90
80
60
This is why MR is below Demand
As price continuously
decreases from $90 to
$80,
MR CURVE IS
LESS
Revenue will…
Loss=$40
THAN
Increase
DEMAND CURVE!!!
D
TR=$400
40
TR=$360
Gain
$80
0
1
2
3
4
5
How about the loss,
gain & MR?
MR MR = $400-$360
= $40
Q
= $80-$40 19
Calculating
Marginal Revenue
20
Calculate TR and Marginal Revenue
Quantity
Price
TR
MR
0
$16
0
-
1
15
15
15
2
14
28
13
3
13
39
11
4
12
48
9
5
11
55
7
6
10
60
5
7
9
63
3
8
8
64
1
9
7
63
-1
10
6
60
-3
21
Plot the
Demand
Demand,
& MR
MRCurves
& TR Curves
What happens to TR when MR hits zero?
Dollars
$15
10
5
D
Q
0 1 2 3 4 5 6 7 8 9 10 11 12
MR
Dollars
$64
40
When MR goes negative,
TR will fall
20
TR
0 1 2 3 4 5 6 7 8 9 10 11 12
Q
22
Elastic vs. Inelastic
Range of Demand Curve
23
Elastic vs. Inelastic Range
Elastic
Inelastic
Dollars
$200
150
Total Revenue Test
If price
& TR
demand is…ELASTIC
100
50
D
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Q
Dollars
$750
MR
500
250
A monopoly will
only produce in
the elastic range
TR
Q
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Total Revenue Test
If price
& TR
demand is…INELASTIC
24
What output should this monopoly produce?
MR = MC
Maximizing Profit
How much is the TR, TC and Profit or Loss?
$9
8
MC
Price
7
6
5
Profit =$6
4
3
2
MR
0 1 2 3 4 5 6 7 8 9 10
Conclusion:
A monopolists
produces where
MR=MC, but
charges the
D price consumer
are willing to pay
identified by the
demand curve.
ATC
Q
25
What if cost is higher?
How much is the TR, TC and Profit or Loss?
ATC
MC
$90
AVC
80
Costs 70
Price 60
Loss
50
40
30
20
D
Minimum AVC is
shut down point
10
MR
0 1 2 3 4 5 6 7 8 9
Q
26
Price, costs, and revenue
1.
2.
3.
4.
Quiz Time
TR = ----------------TC = ----------------Profit/Loss = ---------Profit/Loss per Unit = ---
$780
$600
$180
$30
$175
MC ATC
150
$130
125 Profit=$180
$110
100
75
TR=$780
TC=$600
50
0 1 2 3 4 5 6 7 8 9
D
MR
Q
27
Are Monopolies
Efficient?
28
Efficiency of Perfect Competition
CS and PS of a Perfect Competition
S = MC
P
An industry in
perfect competition
sells where supply &
demand are equal
CS
Pc
PS
D
Qc
Q
29
INEFFICIENCY OF MONOPOLY
Monopolies underproduce & over charge,
CS and PS of a Monopoly
decreasing CS & increasing PS.
Result is
DEADWEIGHT
LOSS to society
P
Pm
Pc
CS
PS
S = MC
At MR=MC,
A monopolist will
produce less and
charge higher price
D
Qm
Qc
MR
Q
30
MONOPOLIES AND EFFICIENCY
Productive Efficiency Allocative Efficiency
The production of a good
in a least costly way.
(minimum amount of
resources are being
used)
The apportionment of
resources towards the
production of products
most wanted by society
(as measured by their
price).
Graphically it is where… Graphically it is where…
Price = Minimum ATC
Price = MC
31
Are Monopolies Efficient?
Doesare NOT Monopolies
Does are NOT
Monopolies
Price = Minimum
ATC?
Price =efficient!
MC?
productive
efficient!
allocative
Price, costs, and revenue
MC
150
ATC
125
100
75
D
50
MR
25
0
1
2
3
4
5
6
7
8
Q
32
Are Monopolies Efficient?
Monopolies are
1. They charge a higher price
2. NOT
They don’t efficient!
produce enough
Monopolies are inefficient because…
3.
4.


No allocative efficiency
They produce at higher costs
No productive efficiency
They have little incentive to innovate
Why?
Because there is little external
pressure to be efficient
33
Natural Monopoly
One firm can produce the socially optimal quantity
at the lowest cost due to economies scale.
P
It is better to have only
one firm because ATC is
falling at socially
optimal quantity
MC
ATC
MR
D
Qsocially optimal Q
34
Regulating
Monopolies
Regulating Monopolies
Why would the government
regulate an monopoly?
1. To keep prices low
2. To make monopolies efficient
How do they regulate?
1. Use Price controls:
a. Price Ceiling b. Price Floor
2. Why don’t taxes work?
Taxes limit supply and that’s the problem
REGULATING MONOPOLY
What happens
if theof
government
sets a price
Dilemma
Regulation
ceiling to get the
socially
optimal quantity?
Which
Price?
Price and Costs
The firm would make a loss and would require a subsidy
Monopoly or
P
TR = TC
Unregulated Price Fair-Return Price
MR = MC
Normal Profit Only
MC
ATC
Pm
Pf
P = MC
Socially-Optimum
Price
Ps
MR
D
Qm
Qf
Qs
Q
38
Where should the government
place the price ceiling?
Socially-Optimum Price
P = MC (Allocative Efficiency)
OR
Fair-Return Price
P = ATC (Normal Profit)
39
Lump Sum vs. Per Unit
Taxes and Subsidies
ACDC Econ Video
40
2007 FRQ #1
Price
Discrimination
42
PRICE DISCRIMINATION
Practice of selling specific products to
different buyers at different prices.
Conditions
• Firm must have monopoly power
• Firm must be able to segregate
the market
• Consumers must not be able to
resell product
43
PRICE DISCRIMINATION
 Price discrimination seeks to charge each
consumer what they are willing to pay in
an effort to increase profits.
 Those with elastic demand are charged
less than those with inelastic.
Examples:
•
•
•
•
Airline Tickets (vacation vs. business)
Movie Theaters (child vs. adult)
All Coupons (spenders vs. savers)
DHS soda machine (students vs. teachers)
44
Monopoly
NON-PRICE DISCRIMINATION
P
with a single
MR=MC price
MC
ATC
Price
Costs
MR
Q1
D
Q
45
PRICE DISCRIMINATION
Price and Costs
A perfectly discriminating monopolist has MR=D,
producing more product and more profit!
P
MC
with price
discrimination
ATC
MR
Q1
Q2
D
MR’ Q
46
PRICE DISCRIMINATION
A perfectly discriminating can charge each person
differently so the Marginal Revenue = Demand
What’s the Point?
Perfectly price discriminating firms:
•Make more profit
•Produce more
•Produce at allocative efficiency
Price Discrimination results in
several prices, more profit, No CS,
and a higher socially optimal quantity
47
Can You Do The Following?
1.
Draw a monopoly making a profit
identify price, quantity, and profit.
2. Draw a perfectly competitive industry
firm at long-run equilibrium
3. Draw a price discriminating monopoly at
equilibrium and label price, quantity, MR,
and profit
48
Side-by-side graph for perfectly completive
industry and firm in the LONG RUN
Is the firm making a profit or a loss? Why?
Firm
Industry
P
(Price Taker)
S
P
$15
MC
ATC
MR=D
$15
D1
D
5000
Q
8
Q
49