ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

Monopolist Demand Curve Monopoly • A single seller in a market  Rare Monopolist Demand Curve D Q

Marginal revenue lies below demand for the monopolist. Monopoly Monopolist diagram MR D = AR = P Q Marginal revenue lies below demand for the monopolist.

Monopoly Example: QD P TR MR $172 -- 1 162 2 152 304 142 3 426 122 4 $172 -- 1 162 2 152 304 142 3 426 122 4 132 528 102 5 610 82 6 112 672 62 7 714 42 8 92 736 22 9 738 10 72 720 -18

Monopolist  - Maximizing Diagram Monopoly Monopolist  - Maximizing Diagram P MC ATC C P0 A B D MR Q Q0

Monopolist  - Maximization Monopoly Monopolist  - Maximization P ATC MC Q0 D MR P0 A C B Q NOTE: Always set price from the demand curve.  = TR – TC = OPoCQo – OABQo = APoCB  will last to long run because there is no entry by competitors.

Monopolist Could Also Make A Loss Monopoly Monopolist Could Also Make A Loss P ATC MC Q0 D MR P0 A C B Q  = TR – TC = OPoBQo – OACQo = PoACB(shaded area)  A LOSS

Special Case of Monopoly Discriminating Monopoly or Price Discrimination charging different prices to different customers for the same commodity. Necessary Condition: (1) Must have some monopoly power (2) Must face at least two different demands (3) Must be able to keep the two demand separate.

Reminder Consumer Surplus is measured as the area above the price line and under the demand curve. Q P Consumer Surplus D PO QO

Special Case of Monopoly Discriminating Monopoly or Price Discrimination Result: Take away some consumer surplus. Consumer surplus is difference between what a consumer actually pays for a commodity and what she/he would be willing to pay: A B Q1 sells at P1 ; Q0 – Q1 sells at P0 . P0P1AB is no longer consumer surplus, but rather is now part of total revenue for firm.

Special Case of Monopoly Perfect Price Discrimination Price will follow the Demand Curve. OUTCOME: Completely Eliminate Consumer Surplus.

Special Case of Monopoly Market Structure Spectrum Degree of Competition Perfect Competition Monopolistic Competition Oligopoly Monopoly Concentration Ratio is a measure of market power: is the the fraction of total market sales controlled by the industry’s largest firms. — 4 - firm concentration ratio — 8 - firm concentration ratio

Monopolistic Competition Characteristics: 1. Lots of firms 2. Free entry and exit 3. Product differentiation D Q

Monopolistic Competition The steepness of demand depends on the number of close substitutes. Q D Perfect Competition Q D Q1 Q2 P1 P2 Monopolistic Competition Monopoly Q D Q1 Q2 P1 P2

Monopolistic Competition Profit-Maximizing in Monopolistic Competition in Short Run P MC SRATC A P C B D MR Q Q  = CPAB

Monopolistic Competition Profit-Maximizing in Monopolistic Competition in Long Run P MC LRATC A P D MR Q Q  = TR – TC = OPAQ – OPAQ = 0

Term is Greek for “few sellers” Oligopoly Term is Greek for “few sellers” — Is a type of industry where a few large firms account for the majority of sales. — Their products are usually differentiated, but there are close substitutes. — Most of the big brand name items that you are aware of are produced under oligopolistic conditions. — There can be small sellers in these markets also, but the very large ones account for the vast majority of sales.

Oligopoly Continued —These firms are not price-takers, they are price-setters. —They know that their competitions will react to what they do. So there is strategic behavior. —Collusion is illegal, but frequently there is “tacit collusion”.

Profit-Maximizing Diagram for Oligopoly MC ATC B P0 A C D MR Q Q0 These profit can persist to the long-run because of barriers to entry.  = CP0AB P > MC

Barriers to Entry 1. Cost Advantage 2. Predatory Pricing 3. Advertising - Creating Brand Loyalties 4. Product Proliferation 5. Government Barriers – Licensing, etc.

THANK YOU! HAVE A NICE DAY.