Markets with Market Power Chapter Eighteen: Markets with Market Power

Pure Monopoly: One Seller

Table 18.1: Marginal Revenue for a Monopolist

Figure 18.1: Monopoly Profit Maximization A monopolist decides how much to produce by setting marginal cost equal to marginal revenue (point A). The price that buyers are willing to pay for this quantity is read off the demand curve (point B). The monopolist produces less, and charges more, than would firms in a competitive equilibrium (point C).

Figure 18.2: The Welfare Costs of Monopoly Power A monopolist imposes a deadweight loss on society relative to a situation of perfect competition and transfers surplus from consumers to itself.

Figure 18.3: Price Discrimination A price-discriminating seller can charge different prices to different people, thereby capturing what would otherwise be consumer surplus.

Figure 18.4: Perfectly Price-Discriminating Monopolist With perfect price discrimination, a monopolist has no reason to restrict output and will therefore create no deadweight loss.

Monopolistic Competition

Figure 18.5: The Effect of the Entry of New Firms on a Monopolistically Competitive Firm A condition of easy entry and exit means that new firms can enter, driving down the demand experienced by any one monopolistically competitive firm.

Oligopoly

Figure 18.6: A Payoff Matrix A payoff matrix shows what the profit outcomes will be for each of two oligopolistic firms, given their decisions about what price to charge.

Imperfect Competition in Agriculture and Health Care

Figure 18.7: Impact of Agricultural Subsidies When the government provides a subsidy, it distorts the market. With the subsidy, farmers overproduce, and inefficiency results.

Summary and a Final Note

Table 18.2: Summary of Traditional Market Structures

Appendix: Formal Analysis of Monopoly and Monopolistic Competition

Figure 18.8: Monopoly Profits The monopolist sells its product at a per-unit price that is higher than its per-unit cost of production, thus reaping positive economic profits. Revenues are represented by the total shaded area. The part of revenues that goes to paying costs is represented by the darker shaded area. Thus the lighter area represents an excess of revenues over costs—the economic profit.

Figure 18.9: Zero Economic Profits for a Monopolistically Competitive Firm A monopolistically competitive firm sets MC = MR, but economic profits are kept at zero by the free entry and exit of firms.