Simple Monopoly Lecture 23 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. April 23, 2018

Announcements(micro)-Spring 2018 About Prelim 2 See Blackboard for message. Keep working hard! About the final Cumulative Will stress LECTURE material since we drew the line for Prelim 2 more than anything else. 1st Final is Thursday May 17 at 9am in Uris Hall Aud. Please sign-up using the link on Bb (see left hand side menu) ASAP. 2nd Final is Monday May 21 at 9am in Barton Hall West (side closer to Statler). Note this is a venue change from what had been posted. Make special note of the location change.

Sources of Monopoly Entry Barriers Technical: Natural monopoly Vital input ownership Technical secrets (the better mousetrap) Legal: Patents Franchises Licenses Strategic: Buy ‘em up Blow ‘em up Let’s make a deal AT&T and Time Warner Chiefs to Testify,

Natural Monopoly versus Perfect Competition (& Non-natural Monopoly)

Monopoly Caveats Monopoly does not imply you’re big. Big does not imply you’re a monopoly. Monopoly does not imply you have absolute and unlimited control over price. Monopoly does not imply you must have positive economic profit. Short run profit does not imply monopoly power. Monopoly does not imply a badly behaved firm.

The Classic Simple Monopoly Polar extreme from perfect competition. Monopolist is a “price maker” rather than a “price taker”. Market demand = firm demand Dmarket=δfirm (and it is downward sloping) The simple monopolist abides by the “law of one price.” Everyone pays the same market price for all units purchased, there is no price discrimination... yet. Cost curves are pretty much the same (except in the case of natural monopoly – which we ignore). The big change from before is in the demand side of the profit function.

Relationship Between Price & Marginal Revenue for the Simple Monopolist For all quantities greater than zero, the simple monopolist’s price will be larger than the corresponding marginal revenue. Why? To sell an additional unit, the simple monopolist must lower the price on ALL units sold. Example:

Recall: Rules for SR Profit Maximization Suppose we are in the short run. Profit is still: π = total revenue – short run total cost Rules for profit maximization are still the same as before. If QSM maximizes profit, then (1) mr(at QSM) = srmc(at QSM). (2) QSM is a at a max and not a min. (3) at QSM it’s worth operating, rather than shutting down. Now apply to the simple monopolist! No real change in the looks of srmc, sratc, sravc, i.e., The Cost Graph Big change in the look of firm demand and marginal revenue. Market Demand (D) = perceived demand (δ) Marginal Revenue (mr) is below Market Demand (D) for all Q>0 Fact: when market demand is linear,  marginal revenue has the “same intercept and twice the slope”.

Simple Monopoly Marginal Revenue with Linear Demand Suppose demand is: QD = 10 – 1/2P or PD = 20 – 2Q With a linear demand, marginal revenue will have the same vertical intercept and will be twice as steep! Total Revenue(tr) = PD∙Q tr = (20 – 2Q)∙Q So tr = 20Q - 2Q2 Marginal Revenue(mr) me = ∆tr/∆Quantity mr = 20 - 4Q Now compare mr with PD Caution: Make sure P is on left hand side before doing this! $ $20 If PD = 20 – 2Q Demand 5 10 Q mrSM Then mrsm = 20 – 4Q

Graphical Display of Simple Monopolist’s Short Run Profit Maximizing Solution (1) The monopolist sets marginal revenue equal to marginal cost to get QSM. (1a) Then goes up to the demand curve to get the price PSM. (2) Then makes sure he is at a max (and not a min). (3) Then makes sure it is worth operating in the short run. $ srmc PSM Demand QSM Q mrSM

Algebra for Simple Monopolist’s Short Run Profit Maximizing Solution $ 20 srmc PSM Demand QSM 5 10 Q mrSM

The Author vs. Publisher Predicament $TE=P•Q Price Demand is Price elastic Demand is Price inelastic Demand Quantity Quantity your graph mrSM

Simple Monopoly with a Table: New Demand & Cost Information

Long Run Profit Maximization with Simple Monopoly Pretty much the same story as in the short run, but, use correctly calculated long run cost information. Positive economic profit invites entry, but since there are barriers to entry positive economic profit can persist. Negative economic profit encourages exit, and if the monopolist can get out he will. Monopolist might make long run adjustments to changes in the economic environment.