1. Monopoly and Other Forms of Imperfect Competition

2. Price Taker v. Price Setter
Perfectly Competitive Firm
A firm that must take the price in the market
A price taker
Imperfectly Competitive Firm
A firm with at least some latitude to set its own price
A price setter

3. Forms of Imperfect Competition
Pure monopolist
A firm that’s the only supplier of a unique product with no close substitutes
Oligopolist
A firm that produces a product for which only a few rival firms produce close substitutes
Monopolistically competitive firm
One of a large number of firms that produce slightly differentiated products that are reasonably close substitutes for one another

4. Essential Difference
A perfectly competitive firm faces a perfectly elastic demand curve for its product
Firms take the price in the market, where supply and demand curves intersect
Charging a higher price or a lower price does not help increase profits
An imperfectly competitive firm faces a downward-sloping demand curve
Charging a price different from competitors may be advantageous

5. Fig. 9.1 The Demand Curves Facing Perfectly and Imperfectly Competitive Firms

6. Market Power Market Power
A firm’s ability to raise the price of a good without losing all its sales
It does not mean that a firm can sell any quantity at any price it wishes. [If firms raise price, quantity demanded falls.]
i.e. they must remember the law of demand

7. Sources of Market Power
Market power arises from factors that limit competition = “barriers to entry”
Exclusive control over inputs
Economies of scale (lower average costs)
Patents
Grant exclusive rights for a specified time period
Promote monopoly but encourage innovation
Government licenses or franchises

8. Returns to Scale Constant returns to scale Increasing returns to scale
When all inputs are changed by a given proportion and output changes by the same proportion
Increasing returns to scale
When all inputs are changed by a given proportion and output changes by a higher proportion
Also know as Economies of Scale

9. Economies of Scale With Economies of Scale
Average cost of production falls as output increases
There are high start-up costs
There are low marginal costs

10. Fig. 9.2 Total and Average Costs for a Production Process with Economies of Scale

11. “Natural Monopoly”
In some markets, it makes more sense (is more efficient) to only have a single provider of the good.
Economies of scale are so great that the good or service can be provided at the lowest cost if only one firm provides it.
E.g. Utilities
How many sets of phone lines, water pipes, cable wires, electric lines … do we need?
Since monopoly power is dangerous (to consumers) what must we do with natural monopolies?

12. Profit Maximization Goal of all firms: Maximize profits Rule
Expand output when MR > MC
Decrease output when MC > MR
Sell the quantity of output where marginal revenue equals marginal cost, MR = MC

13. Fig. 9.3 The Profit-Maximizing Output Level for a Perfectly Competitive Watermelon Farmer

14. Monopolist’s Marginal Revenue
The change in a firm’s total revenue that results from a one-unit change in output
For a monopolist
marginal benefit of selling an additional unit is less than the market price
Note that a monopolist can only sell an add-itional unit if it cuts prices on all units it sells

15. Fig. 9.4 The Monopolist’s Benefit from Selling an Additional Unit

16. Fig. 9.5 Marginal Revenue in Graphical Form

17. Fig. 9.6 The Marginal Revenue Curve for a Monopolist with a Straight-Line Demand Curve

18. Profit-Maximizing Rule
Profit is maximized at the level of output for which MR = MC
A monopolist sets the price off of the demand curve at its profit-maximizing output

19. Fig. 9.9 The Monopolist’s Profit-Maximizing Output Level

20. Fig. 9.11 The Deadweight Loss from Monopoly

21. Monopoly and Efficiency
Recall, the socially efficient level of output is where MB = MC
The monopolist produces less than socially efficient level of output
Monopolists are not efficient
Inefficiency is measured by deadweight loss
Monopoly may be socially inefficient, but the alternatives, like legislation, are not perfect either

22. Price Discrimination Price Discrimination
The practice of charging different buyers different prices for essentially the same good or service
Discounts to senior citizens, children
Super-saver discounts on air travel
Rebate coupons on retail merchandise
Effective when the good or service cannot be resold

23. Types of Price Discrimination
Perfect price discrimination
A firm that charges each buyer exactly his or her reservation price
Hurdle method of price discrimination
The practice by which a seller offers a discount to all buyers who overcome some obstacle
A rebate that takes time and effort to mail in
Time spent waiting

24. Benefits of Price Discrimination
The number of trades increase
Brings output closer to the socially efficient level
Reduces deadweight loss and increases total economic surplus