1 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Chapter 4 Organization  Basic Monopoly Model Profit Maximization Efficiency  Dominant Firms  Monopsony

2 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Single Price Monopoly  Assumptions Single Good One firm with no threat of entry Charges the same price for all units of the product Maximizes Profit

3 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Graphing Profit Maximization  Inverse Demand Curve: P = 100 – 2Q  Cost = q + q 2 q Price TR, Profit q

4 Calculations This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.  Inverse Demand Curve: P = 100 – 2Q  Cost = q + q 2

5 Calculations This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.  Inverse Demand Curve: P = 100 – 2Q  Cost = q + q 2

6 Calculations This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.  Inverse Demand Curve: P = 100 – 2Q  Cost = q + q 2

7 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Monopoly Profit, Deadweight Loss Q P  Inverse Demand Curve: P = 100 –Q  Cost = 50q MC MR

8 Calculations This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.  Inverse Demand Curve: P = 100 –Q  Cost = 50q

9 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Monopoly Markup

10 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Incentives for Efficient Operation  X-inefficiency  Rent-seeking  Deadweight Loss and Elasticity  Benefit of a monopoly Economies of scale Network effects Patents and technological development

11 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Creating and Maintaining Monopoly  Knowledge advantage  Controlling a key ingredient  Government  Natural Monopoly  Strategic Devices Incumbent Reactions  Specific Assets  Scale Economies  Reputation Effects  Excess Capacity Incumbent Advantages  Pre-commitment Contracts  Licenses and Patents  Learning-Curve Effects  Pioneering Brand Advantages

12 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Profit and monopoly  Is any firm that earns a profit a monopoly?  Does a monopoly always earn a positive profit?

13 Can a monopoly have profit <0? This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Q P  Inverse Demand Curve: P = 100 –Q  Cost = 50q MC MR

14 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Dominant Firm with a Competitive Fringe  Why are some firms dominant? Efficiency Patents Early Entry Government Favoritism Network Effects

15 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. The No-Entry Model  Assumptions The large firm has lower production costs than the other firms All firms, except the dominant firm, are price takers. The dominant firm knows the demand curve The dominant firm can predict how much the fringe will produce at any price.

16 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Figure 4.6 Dominant Firm & Fringe $/q qQ Demand, D(p) Supply from the Fringe, S(p) Monopoly MR

17 Example  Inverse market demand: P = 1000-Q  Inverse Fringe Supply: P = Q f This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.

18 Example  Inverse market demand: P = 1000-Q  Inverse Fringe Supply: P = Q f This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.

19 Figure 4.6 Dominant Firm & Fringe This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. $/q qQ Demand, D(p) Supply from the Fringe, S(p) Monopoly MR

20 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Figure 4.6 Dominant Firm & Fringe $/q qQ Demand, D(p) Supply from the Fringe, S(p) Monopoly MR MR Dominant Firm

21 This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. Figure 4.6 Dominant Firm & Fringe $/q qQ Demand, D(p) Supply from the Fringe, S(p) MR Dominant Firm

22 Monoposony  Single buyer  Sellers are price takers This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.

23 Monopsony This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill. L W Supply: W = L  Marginal Revenue Product of Labor = 100 – L 50 MRP L = L

24 Monopsony Workspace This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.

25 Monopsony Workspace This slideshow was written by Ken Chapman, but is substantially based on concepts from Modern Industrial Organization by Carlton and Perloff, 4 th edition, McGraw-Hill.