1. Monopolies

2. Market Structures 4 Primary Types 2 factors determine type of market
What are they?
2 factors determine type of market
# of firms in the market
Are goods offered identical or differentiated?
Perfect Competition factors……..
Monopoly factors……..

3. Monopoly vs. Perfectly Competitive Industries
Perfectly competitive industries have free entry & exit into the market.
Monopolist Industry has barriers to entry
Control of scarce resource
Economies of scale (Natural monopoly)
Technological superiority
Government created barriers
Patents and copyrights
Have control of a scarce resource or input
Economies of Scale = larger firms are more profitable and can drive out smaller firms in the market. Established firms have a cost advantage. Large fixed costs that are spread across all outputs of production
Technological superiority =

4. Demand Curves
Perfectly Competitive Industry has a demand curve that is………
Perfectly Competitive Firm has a demand curve that is……….
Optimal Output in Perfectly Competitive Firm is where………..
Monopolist industry has a demand curve that is……
Why?
Perfectly competitive industry has downward sloping demand curve
Perfectly competitive firm has horizontal demand curve that is P=MR=D
Optimal Output for PC firm is where MC=Market Price
Optimal output rule is MR=MC aka Profit maximization

5. Laws of Demand & Supply Law of Demand – Law of Supply –
Other things being equal, as price falls…….
As price rises…….
Inverse relationship
Law of Supply –
How do the laws of demand & supply apply to a monopolistic industry?
Demand – price down, demand up. Price up, demand down.
Supply – price down, supply down. Price up, supply up.
Explains why demand curve is downward sloping. In a monopoly there is only a single firm

6. Monopolies and the Marginal Revenue Curve
Monopolist is the only supplier
Their demand curve is the market demand
Laws of Supply and Demand kick in
firm produces more (S), price goes down (P)
In order to sell all that it is producing, company has to drop its price
Each drop in price causes marginal revenue (MR) to drop as well
Total revenue (TR) will continue to increase until MR……
Do DeBeers example, p. 255 Krugman’s
Graph MR and TR. NOTE TR is the Demand curve

7. -400 is the bottom horizontal line. Mark 0 heavily
What do you notice about the MR curve?
In perfectly competitive the Demand = Price = MR. Not so in a monopoly.

8. Explanation of the Wedge
Increase in production has 2 effects on a monopoly
Quantity effect – one more unit is sold, increasing total revenue (TR) by the price at which the unit is sold.
Price effect – in order to sell the last unit, firm has to lower price. New lower price applies to ALL units sold. This decreases total revenue (TR).
Ex: 5th diamond sells for $750. Total revenue is $3,750. (5x750)
In order to sell the 6th diamond, firm lowers price to $700. Total revenue is $4,200. (6x700)
Effects create a “wedge” between price of good and marginal revenue of the good
Price & Quantity effects can be graphed and given a specific value
Graph Price and Quantity on DeBeers graph. USE NOTES

9. Total Revenue Curve
Total revenue curve (TR) of a monopoly can be graphed. Slope is ΔTR/ΔQ
MR=ΔTR/ΔQ, therefore MR=slope of TR
REFER TO NOTES
At Low-levels of output, Quantity effect dominates. ADD THIS TO GRAPH.
At High-level of output, Price effect dominates. ADD THIS TO GRAPH
Mid-point is the last unit sold that increased TR. Each additional unit after this point decreases TR. Refer to DeBeers chart

10. When do we get a wedgie?
Wedges exist for any firm that has market power
What is market power?
There will always be a price effect and quantity effect for these firms
Ex: Monopolies and Oligopolies
MR curve will ALWAYS be below the demand curve
What is the shape of a perfectly competitive firm’s marginal revenue curve?
Market Power – able to impact the price or direction of the market.
P.F. MR is horizontal line

11. Profit Maximization by a Monopoly
Profit-maximizing still occurs at MR=MC
Aka: Optimal Output Rule
Optimal output level (Q*) is the one where MR=MC
Not P=MC, that’s a perfectly competitive firm
Optimal price (P*) is found on the demand curve at output Q*
Firm should shut down if at Q*, TR < TVC
Activity 3-11, part A

12. Ways to measure profit Total Profit = Total revenue – Total cost
TΠ=TR-TC
Total Profit = Average profit x Quantity sold
TΠ=AΠ(Q)
AΠ=AR – ATC
Total Profit = (Price – ATC)(Q)

13. Price Discrimination Single-price Monopolist
Price Discrimination – selling the same good to different customers for different prices
Example:
Airline Companies
Do they charge different prices for the same service?
Why?
Hint: Think elasticity of demand.
Selling the same good to everyone at the same price
Do Air Sunshine Airline example, page 269.

14. Price Discrimination Continued
Are airlines monopolies?
Price discrimination exists in oligopolies, monopolistic competition and monopolistic markets
Why not just announce different prices for different classifications of passengers?
US sets some limits on blatant price discrimination
Hard policy to enforce

15. So how do they do it? Impose rules Look at Air Sunshine example
Saturday layovers
21 day advance fares vs 7 day advance fares
Roundtrip prices lower than one-way
No ticket resale is possible
Look at Air Sunshine example
Are they doing everything they can to maximize their profit?

16. Perfect Price Discrimination
Producer is able to capture ENTIRE consumer surplus as profit!!
The greater the number of different prices charged the closer to perfect price discrimination
Is there deadweight loss when perfect price discrimination is achieved?
NO INEFFICIENCY!!! No welfare loss to the society.
Use example on page 272

17. 3 Techniques of price discrimination
Advance purchase restrictions
Volume Discounts
Two Part Tariffs
Annual fee in addition to the price of the product
Government involvement focuses on preventing deadweight loss
Not on preventing price discrimination
Activity 3-13

18. Monopolies and Public Policy
How to we treat them?
Are they bad for society?
If so, why are they bad?
Government Intervention
Anti-trust policies
What if it’s a natural monopoly?
Look at quick example and comparison of the monopolies

19. Natural monopolies Definition
Monopoly that exists when increasing returns to scale provide a large cost advantage to having all output produced by a single firm.
Have lower ATC which saves consumers $$
But…..still charge consumers a P above MR=MC, deadweight loss
ATC is added to the graph
Downward sloping but NOT a U shape
Increasing returns to scale- long-run average total cost declines as output increases. (also referred to as economies of scale)

20. 2 options to resolve Public Ownership Regulation But……
No profit-maximizing behaviors, lose efficiency
No incentive to innovate
Regulation
Privately owned but subject to government regulation
Price regulation
Price regulation = price ceilings

21. 3 Pricing plans Monopoly pricing Fair return pricing
Firm does as it wishes
Produce at MR=MC, price at…..
Fair return pricing
Regulation eliminates profit
P=ATC, output where…..
Socially optimal pricing (efficiency pricing)
Regulation forces firm to produce at socially optimal quantity
P=MC, output where……
Activity 3-14 & 3-15
P. 264