Monopoly 1 Copyright ACDC Leadership 2015

Perfect Competition Monopoly Monopolistic Competition Oligopoly Four Market Structures Characteristics of Monopoly: One large firm (the firm is the market) Unique product (no close substitutes) High Barriers- Firms cannot enter the industry Monopolies are “Price Makers” Some advertising – why? Examples: The Electric Company, De Beers 2 Copyright ACDC Leadership 2015

Output Long-run ATC curve where costs are lowest only when large numbers are participating Average Total Costs Economies Of Scale Diseconomies Of Scale Long-Run ATC Long-Run ATC Shape 8-3

Barriers to Entry Economies of scale Legal barriers to entry Patents (Pharmaceuticals) Licenses (LCB, taxis) Ownership or control of essential resources (NFL) Pricing and other strategic barriers to entry (Netscape vs IE) 10-4

What do you already know about monopolies? True or False? 1.All monopolies make a profit. 2.Monopolies charge the highest price possible. 3.Monopolies are usually efficient. 4.All monopolies are bad for the economy. 5.Monopolies are illegal. 6.The government never prevents monopolies from forming. 5 Copyright ACDC Leadership 2015 All False!

Can a monopoly be good for the economy? 6 Ex: Electric Companies If there were three competing electric companies they would have higher costs. Having only one electric company keeps prices low 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. Copyright ACDC Leadership 2015

Drawing Monopolies 7 Copyright ACDC Leadership 2015

Monopoly Demand Assumptions: Monopoly status is secure No government regulation Single-price monopolist Face down-sloping demand Entire market demand 10-8

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 9 Copyright ACDC Leadership 2015

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 DOESN’T EQUAL THE PRICE! 10 Copyright ACDC Leadership 2015

PQdTRMR $1100- Why is MR less than Demand? 11 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 Why is MR less than Demand? 12 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92188 Why is MR less than Demand? $9 13 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92188 $83246 Why is MR less than Demand? $9 $8 14 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92188 $83246 $74284 Why is MR less than Demand? $9 $8 $7 15 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92188 $83246 $74284 $65302 Why is MR less than Demand? $9 $8 $7 $6 $7 $6 16 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92188 $83246 $74284 $65302 $56300 Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5 17 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92188 $83246 $74284 $65302 $56300 $ Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5 $4 18 Copyright ACDC Leadership 2015

$10 PQdTRMR $110-- $10110 $92188 $83246 $74284 $65302 $56300 $ Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5 $4 19 Copyright ACDC Leadership 2015

$10 PQdTRMR $110-- $10110 $92188 $83246 $74284 $65302 $56300 $ Why is MR less than Demand? $9 $8 $7 $6 $7 $6 $5 $4 MR IS LESS THAN DEMAND 20 Copyright ACDC Leadership 2015

21 Copyright ACDC Leadership 2015

To sell more a firm must lower its price. What happens to Marginal Revenue? PriceQuantity Demanded Total Revenue Marginal Revenue $60 $51 $42 $33 $24 $15 Does the Marginal Revenue equal the price? 22 Copyright ACDC Leadership 2015

To sell more a firm must lower its price. What happens to Marginal Revenue? PriceQuantity Demanded Total Revenue Marginal Revenue $600 $515 $428 $339 $248 $155 Does the Marginal Revenue equal the price? 23 Copyright ACDC Leadership 2015

To sell more a firm must lower its price. What happens to Marginal Revenue? PriceQuantity Demanded Total Revenue Marginal Revenue $600- $5155 $4283 $3391 $248 $155-3 Draw Demand and Marginal Revenue Curves MR DOESN’T EQUAL PRICE 24 Copyright ACDC Leadership 2015

Monopoly Revenue and Costs – pg. 258 (1) Quantity Of Output (2) Price (Average Revenue) (3) Total Revenue (1) X (2) (4) Marginal Revenue (5) Average Total Cost (6) Total Cost (1) X (5) (7) Marginal Cost (8) Profit (+) or Loss (-) $ $ $ $ $ $ $ Revenue Data Cost Data ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Can you See Profit Maximization? 10-25

$ $ Price Total Revenue Monopoly Revenue ElasticInelastic Demand and Marginal-Revenue Curves Total-Revenue Curve D MR TR A monopoly will only produce in the elastic range of it’s Demand Curve!! Why?

Profit Maximization 0 $ Price, Costs, and Revenue Quantity D MR ATC MC MR=MC P m =$122 A=$94 Economic Profit Conclusion: A monopolist produces where MR=MC, but charges the price consumers are willing to pay identified by the demand curve.

Determining P and Q for a Monopolist Using the area on  the graph Calculating TC and TR  using the table

Misconceptions Not the highest price Total, not unit, profit Possibility of losses 10-29

Loss Minimization 0 Price, Costs, and Revenue Quantity D MR ATC MC MR=MC Loss AVC PmPm QmQm V A Will this firm produce?

D MC MR TR= TC= Profit/Loss= Profit/Loss per Unit= Identify and Calculate: $50 $25 ATC $5 31 $ Q Price Copyright ACDC Leadership 2015

D MR TR= TC= Profit/Loss= Profit/Loss per Unit= Identify and Calculate: $54 $18 $36 MC= ATC $3 32 $ Q P Copyright ACDC Leadership 2015

Multiple Choice #8

Multiple Choice #9

35 Copyright ACDC Leadership 2015

Monopolies are inefficient because they… 1.Charge a higher price 2.Don’t produce enough Not allocatively efficiency 3.Produce at higher costs Not productively efficiency 36 Copyright ACDC Leadership 2015

Q P D S = MC P pc Q pc CS PS 37 In perfect competition, CS and PS are maximized. Monopolies vs. Perfect Competition Allocative Efficiency Copyright ACDC Leadership 2015

At MR=MC, A monopolist will produce less and charge a higher price 38 Monopolies vs. Perfect Competition Q P D S = MC P pc Q pc MR PmPm QmQm Copyright ACDC Leadership 2015

Where is CS and PS for a monopoly? 39 Monopolies vs. Perfect Competition Allocative Efficiency Q P D S = MC MR PmPm QmQm CS PS Total surplus falls. Now there is DEADWEIGHT LOSS Copyright ACDC Leadership 2015 Monopolies underproduce and over charge, decreasing CS and increasing PS.

Perfect Competition vs. Monopoly Income transfer increases inequality Allocative Efficiency

Are Monopolies Productively Efficient? Does Price = Min ATC? No. They are not producing at the lowest cost (min ATC) 41 D $ MC ATC Q P MR Copyright ACDC Leadership 2015

Are Monopolies Allocatively Efficient? Does Price = MC? No. Price is greater. The monopoly is under producing. 42 D $ MC ATC Q P MR Monopolies are NOT efficient! Copyright ACDC Leadership 2015

Cost Complications Economies of scale Simultaneous consumption – low MC iPhone vs. Snapchat Other example? Network effects – popularity/ease Twitter or Excel Other example? Cyberdust 10-43

Cost Complications X-inefficiency Lowest ATC not achieved – why? Poor management, lack of competition Example? PENN-DOT!!!! Rent seeking behavior – survival How? Technological advance More likely with monopoly? Depends… are they motivated?

Multiple Choice #44

2012 Question #21

2008 Audit Exam

…MOUNT UP.

Policy Options Use antitrust laws Divide the firm 10-52

Policy Options Natural monopoly Regulate price Ignore Unstable in long run

How do they regulate? Use Price controls: Price Ceilings Why don’t taxes work? Taxes limit supply and that’s the problem Why Regulate? Why would the government regulate an monopoly? 1.To keep prices low and increase quantity 2.To make monopolies efficient 54 Copyright ACDC Leadership 2015

Regulated Monopoly Natural monopolies Rate regulation Socially optimum price P = MC Allocative Efficiency Fair return price P = ATC Normal Profit 10-55

0 Price and Costs (Dollars) Quantity Dilemma of Regulation Monopoly Price Fair-Return Price Socially Optimal Price (No DWL) PrPr D r f b a PfPf PmPm QmQm QfQf QrQr MR MC ATC Regulated Monopoly What is the problem with the socially optimal price? Why does this problem exist? Economies of Scale…

Q D MC ATC P Regulating a Natural Monopoly 57 Q socially optimal What happens if the government sets a price ceiling to get the socially optimal quantity? The firm would make a loss and would require a subsidy P so Copyright ACDC Leadership 2015 MR

How do you think this process plays out in the real world?

2008 Audit Exam

Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits. Those with inelastic demand are charged more than those with elastic demand Requires the following conditions: 1.Must have monopoly power 2.Must be able to segregate the market 3.Consumers must NOT be able to resell product 60 Copyright ACDC Leadership 2015 Price Discrimination

Three forms 1 st degree - Charge each customer max willingness to pay Example? 2 nd degree - Charge one price for first unit and a lower price for subsequent units Example? 3 rd degree - Charge different customers different prices Example? 10-61

PQdTRMR $ Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 Results of Price Discrimination 63 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92199 $10$9 Results of Price Discrimination 64 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92199 $83278 $10$9 $10$9$8 Results of Price Discrimination 65 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $92199 $83278 $74347 $10$9 $10$9$8 $10$9$8$7 Results of Price Discrimination 66 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $9219$9 $8327$8 $7434$7 $6540$6 $5645$5 $4749$4 Results of Price Discrimination $10$9 $10$9$8 $10$9$8 $10$9$8$7 $6 $5$10$9$8$7$6 $10$9$8$7$6$5$4 67 Copyright ACDC Leadership 2015

$10 PQdTRMR $1100- $10110 $9219$9 $8327$8 $7434$7 $6540$6 $5645$5 $4749$4 $10$9 $10$9$8 $10$9$8 $10$9$8$7 $6 $5$10$9$8$7$6 $10$9$8$7$6$5$4 WHEN PRICE DISCIMINATING MR = D 68 Copyright ACDC Leadership 2015

Regular Monopoly vs. Price Discriminating Monopoly 69 D MR MC ATC Q P PmPm QmQm Copyright ACDC Leadership 2015

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand 70 D MR MC ATC Q P Copyright ACDC Leadership 2015

71 D=MR MC ATC Q P Q nm Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Copyright ACDC Leadership 2015

72 D=MR MC ATC Q P Q nm Identify the Price, Profit, CS, and DWL A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand Price Discrimination results in several prices, more profit, no CS, and a higher socially optimal quantity Copyright ACDC Leadership 2015