1. 9 Monopoly SLIDES CREATED BY ERIC CHIANG CHAPTER 9 SLIDE 1
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CHAPTER SLIDE 1

2. CHAPTER OBJECTIVES
Describe the characteristics of a monopoly and market power.
Describe the ways in which firms maximize market power using barriers to entry.
Use monopoly market analysis to determine the equilibrium level of output and price for a monopoly.
Describe the differences between monopoly and competition. 
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3. CHAPTER OBJECTIVES
Describe the different forms of price discrimination.
Describe the different approaches to regulating a natural monopoly.
Relate the history and purpose of antitrust legislation to monopoly analysis.
Apply concentration ratios and the Herfindahl-Hirschman index to analyze the likelihood of regulation in a given market.
Describe the conditions of a contestable market and its significance.
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4. OKSANA DUBOSHINA | DREAMSTIME.COM
MARKET
POWER
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5. Characteristics of monopoly include:
MONOPOLY MARKETS
Characteristics of monopoly include:
one firm.
no close substitutes for product.
significant barriers to entry.
potential long-run economic profit.
substantial market power and control over price (monopolists are price makers).
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6. Y R T N E BARRIERS TO SOURCES OF MARKET POWER CHAPTER 9 SLIDE 6
JEZPER | DREAMSTIME.COM Y R T N E
SOURCES OF MARKET POWER
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7.  CONTROL OF A KEY INPUT OF PRODUCTION CHAPTER 9 SLIDE 7
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CONTROL OF A KEY INPUT OF PRODUCTION
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8.  ECONOMIES OF SCALE: LARGE FIXED COSTS CHAPTER 9 SLIDE 8
MOOD/BOARD/CORBIS 
ECONOMIES OF SCALE: LARGE FIXED COSTS
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9.  GOVERNMENT PROTECTION WITH PATENTS AND COPYRIGHTS CHAPTER 9 SLIDE 9
AP PHOTO/CHRIS PIZZELLO 
GOVERNMENT PROTECTION WITH PATENTS AND COPYRIGHTS
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10. PROFIT MAXIMIZATION
Monopolies maximize profit the same way that competitive firms do, by using the profit-maximization rule:
PROFIT IS MAXIMIZED AT THE QUANTITY AT WHICH MR = MC.
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11. MARGINAL REVENUE = ΔTR / ΔQ
MONOPOLY AND MARGINAL REVENUE
A monopoly’s demand curve is the market demand curve. To sell more quantity, it must lower the price on all units.
MARGINAL REVENUE = ΔTR / ΔQ
EXAMPLE: P = $40, Q = 10; TR = $400
P = $38, Q = 11; TR = $418
MR of the 11th unit is $18.
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12. MR < P FOR MONOPOLY COMPETITIVE MARKET MONOPOLY MR < P PRICE ($)
LOSS OF $20
$40
MR = P 38
GAIN OF $38 Pc D 18 MR D 10 11 10 11
OUTPUT
OUTPUT
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13. Profit = (P − ATC) × quantity
MONOPOLY PROFITS MC
ATC 30
PROFITS
Profit = (P − ATC) × quantity
(30 − 20) × 50 = $500
PRICE AND COST 20 D MR 50
OUTPUT
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14. FIVE STEPS TO MAXIMIZING PROFIT
Step 1: Find MR = MC MC
ATC
Step 2: Find optimal Q 30 3 3
PROFITS 5
PRICE AND COST
Step 3: Find optimal P 20 4 4 1
Step 4: Find ATC D MR
Step 5: Find profit 2 50
OUTPUT
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15. A MONOPOLY CAN HAVE LOSSES
ATC MC
Profit = (35 − 40) × 50 = −$250.
Firm has negative profit. 40
LOSSES 35
PRICE AND COST D MR 50
OUTPUT
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16. ETEIMAGING | DREAMSTIME.COM
COSTS OF
MONOPOLY
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17. This creates inefficiency in the market known as deadweight loss.
COMPARING MONOPOLY
AND COMPETITION
Under conditions of monopoly, the price will be higher and output will be lower than under conditions of competition.
This creates inefficiency in the market known as deadweight loss.
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18. MONOPOLY INEFFICIENCY
COMPETITIVE MARKET
MONOPOLY S S
DEADWEIGHT LOSS
PRICE ($)
PRICE ($) PM Pc MR D D Qc QM
OUTPUT
OUTPUT
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19. INEFFICIENCES OF MONOPOLY
RENT SEEKING
X-INEFFICIENCY
COSTLY ACTIONS (SUCH AS LOBBYING) TAKEN TO AVOID OR LIMIT COMPETITION
OCCURS WHEN MONOPOLIES SQUANDER (SUCH AS LAVISH RETREATS AND PERKS)
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20. AJV123AJV/DREAMSTIME.COM
HONG CHAN/DREAMSTIME.COM
MONOPOLIES CREATE BENEFITS IN TERMS OF INNOVATION: NEW PRODUCTS AND TECHNOLOGIES
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21. PRICE DIFFERENT PRICES DIFFERENT CUSTOMERS CHARGING TO DISCRIMINATION
ROBBIVERTE | DREAMSTIME.COM
PRICE
DISCRIMINATION
DIFFERENT PRICES
DIFFERENT CUSTOMERS
CHARGING TO
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22.    TO PRICE DISCRIMINATE, FIRMS:
CONDITIONS FOR PRICE DISCRIMINATION
TO PRICE DISCRIMINATE, FIRMS:
MUST HAVE SOME CONTROL OVER PRICE.
MUST BE ABLE TO SEPARATE THE MARKET INTO GROUPS BASED ON ELASTICITIES OF DEMAND.
MUST BE ABLE TO PREVENT ARBITRAGE.   
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23. ERIC CHIANG
TYPES
OF PRICE DISCRIMINATION 
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24. 1ST DEGREE PRICE DISCRIMINATION
FIRMS CAPTURE ALL OF CONSUMER SURPLUS BY CHARGING EACH CONSUMER HIS OR HER MAXIMIUM WILLINGNESS-TO-PAY.
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25. FRANCIS DEAN/CORBIS
2ND
DEGREE
PRICE DISCRIMINATION CHARGING DIFFERENT PRICES BASED ON THE QUANTITY PURCHASED (E.G., BLOCK PRICING)
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26. SECOND-DEGREE PRICE DISCRIMINATION
Using multiple prices captures more consumer surplus. P0
ADDITIONAL PROFIT PM
PROFITS FOR SINGLE MONOPOLIST P1
PRICE AND COST PC D MR 50
OUTPUT
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27. ALPHASPIRIT | DREAMSTIME.COM
3RD
DEGREE
PRICE DISCRIMINATION: CHARGING DIFFERENT PRICES TO DIFFERENT GROUPS OF CONSUMERS WITH VARYING ELASTICITIES
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28. NATURAL MONOPOLY:
A MONOPOLY WITH LARGE ECONOMIES OF SCALE, OFTEN PROTECTED BY THE GOVERNMENT, SUCH AS THE U.S. POSTAL SERVICE
ERIC CHIANG
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29. REGULATING NATURAL MONOPOLIES
A natural monopoly has significant economies of scale, such that one firm is more cost efficient than two or more.
To prevent a natural monopolist from exploiting its market power, government uses regulation such as:
Average cost pricing.
rate of return regulation.
price cap regulation.
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30. AVERAGE COST PRICING RULE
Natural monopolies are often forced to charge a price equal to ATC, which is more than the competitive price but less than the monopoly price. PM
PRICE AND COST PR
ATC PC MC D MR QM QR QC
OUTPUT
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31. REGULATION IN PRACTICE
RATE OF RETURN
PRICE CAPS
MAXIMUM PRICES THAT FIRMS CAN CHARGE, ADJUSTED TO COST CONDITIONS
PRICING THAT ALLOWS THE FIRM TO EARN A NORMAL RETURN ON INVESTMENT
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32. ANTITRUST POLICY
THE GOAL OF ANTITRUST POLICIES AND LAWS IS TO PRESERVE COMPETITION AND PREVENT MONOPOLIES WITH THEIR MAXIMUM MARKET POWER FROM ARISING IN THE FIRST PLACE.
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33. GEORGE STIGLER (1911–1991)
Contributed in the areas of industrial structure, market functioning, effects of regulation, and information theory.
Won the Nobel Prize in Economics in 1982.
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34. MAJOR ANTITRUST LAWS THE SHERMAN ACT (1890) THE CLAYTON ACT (1914)
PROVIDES CRIMINAL PENALTIES FOR ATTEMPTS TO MONOPOLIZE
THE CLAYTON ACT (1914)
FORBIDS CONTRACTS AND OTHER ARRANGEMENTS THAT LIMIT COMPETITION
THE FEDERAL TRADE COMMISSION ACT (1914)
PROTECTS CONSUMERS FROM UNFAIR OR DECEPTIVE PRACTICES
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35. MONOPOLY POWER INCREASES AS IT BECOMES MORE CONCENTRATED
DEFINING THE RELEVANT MARKET
MONOPOLY POWER INCREASES AS IT BECOMES MORE CONCENTRATED
FOUR-FIRM CONCENTRATION RATIO IS THE SHARE OF INDUSTRY SALES ACCOUNTED BY THE FOUR LARGEST FIRMS.
TERMINATOR3D | DREAMSTIME.COM
COMPANY A
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36. HERFINDAHL-HIRSCHMAN INDEX
THE MAIN MEASURE OF MARKET CONCENTRATION USED TO EVALUATE MERGERS AND JUDGE MONOPOLY POWER
HHI IS THE SUM OF THE SQUARES OF MARKET SHARE HELD BY EACH FIRM. HHI RANGES FROM 0 TO 10,000.
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37. CATEGORIZING HHI RESULTS
HHI < 1,500: INDUSTRY IS UNCONCENTRATED.
1,500 < HHI < 2,500: INDUSTRY IS MODERATELY CONCENTRATED.
HHI > 2,500: INDUSTRY IS HIGHLY CONCENTRATED.
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38. JAMES LEYNSE/CORBIS
CONTESTABLE MARKETS: INDUSTRIES IN WHICH THE THREAT OF COMPETITION KEEPS PRICES LOW
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39. KEY CONCEPTS Monopoly Average cost pricing rule Monopoly power
Rate of return regulation
Barriers to entry
Price caps
Economies of scale
Antitrust law
Rent seeking
Concentration ratio
X-inefficiency
Herfindahl–Hirschman index
Price discrimination
Contestable market
Perfect (first-degree) price discrimination
Second-degree price discrimination
Third-degree price discrimination
Natural monopoly
Marginal cost pricing rule
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40. WHICH OF THE FOLLOWING IS NOT A MAJOR BARRIER TO ENTRY FOR A MONOPOLIST?
CONTROL OVER A KEY INPUT A
PATENT PROTECTION B
ECONOMIES OF SCALE C
Answer: E
COPYRIGHT PROTECTION D
PRODUCT DIFFERENTIATION E
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41. ERIC CHIANG
PRACTICE QUESTION
WHAT IS THE MAIN CHARACTERISTIC THAT MAKES THE NATURAL GAS FOR VEHICLES INDUSTRY A NATURAL MONOPOLY?
Answer: The natural gas industry has very large fixed costs with large economies of scale. This makes one firm more cost efficient than two firms.
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42. IF SEAN CAN SELL 10 SKATEBOARDS AT $100 EACH OR 11 SKATEBOARDS AT $95 EACH, WHAT IS THE MARGINAL REVENUE OF THE 11TH SKAKEBOARD?
$45 A
$95 B
Answer: A
$100 C
$1,045 D
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43. PRACTICE QUESTION
IMAGE SOURCE/GETTY IMAGES
Answer: Shoppers who use coupons pay a lower price for the same products than shoppers who do not use coupons. This is an example of third degree price discrimination, which segments shoppers based on their willingness to spend time clipping coupons.
WHEN A SHOPPER USES MANY COUPONS AT A GROCERY STORE, WHAT TYPE OF PRICE DISCRIMINATION IS TAKING PLACE, AND WHY?
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44. IF AN INDUSTRY CONTAINS EIGHT FIRMS WITH MARKET SHARES OF 25, 18, 15, 12, 10, 10, 6, AND 4, WHAT IS THE FOUR-FIRM CONCENTRATION RATIO? 50 A 70 B
Answer: B
100 C
1,318 D
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45. 9 END OF CHAPTER SLIDES CREATED BY ERIC CHIANG CHAPTER 9 SLIDE 45
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