1. Unit 3b- Imperfect Competition
Monopolies
Monopolistic Competition
Oligopolies

2. Monopoly
MR twice slope of D
D=AR
MR = TR maximizing Q

3. Using MR to determine the price elasticity of demand

4. Answer Key

6. Answer Key

7. Important! Average x Q = Total & Total /Q = Average Total = Marginal
Variable Cost + Fixed Cost = Total Cost
Revenue – Cost = Profit

8. Answer Key

9. Max. Profit @ Q where MR = MC

10. Monopolies Pure Monopolies (rare and likely not “pure”)
Public Utilities
Cable TV (in some locations)
Sports Teams?
Near Monopolies
Intel (81%)
Wham-O (90%)
De Beers (55%)

11. Barriers To Entry Economies of Scale “Natural Monopoly”
Demand intersects LRATC where LRATC is still declining
LRATC continues to decrease at high levels of output

12. Constructing the LRATC

13. LONG RUN ONLY! The terms Economies/Diseconomies of Scale do NOT apply to the short run ATC

15. Minimum Efficient Scale (MES)

16. Minimum Efficient Scale (MES)
Minimum output at which lowest LRATC is achieved

17. Minimum Efficient Scale (MES)
If there is a natural monopoly, one firm can produce enough to satisfy market demand before achieving MES

18. Minimum Efficient Scale (MES)
In perfect competition, is MES at a low Q?
This allows MANY small firms to produce at competitive output levels

19. Minimum Efficient Scale (MES)
In a natural monopoly, is MES at a very high Q?
One firm achieves a lower cost of production than multiple firms would and MES is not reached.

20. Natural Monopoly- LRATC is downward sloping at intersection with D

21. Barriers To Entry Legal Patents/Copyrights Licenses FCC Taxis
Liquor Licenses
Marijuana Dispensary

22. Barriers To Entry Ownership/Control of Resources Geographic
Natural Resources
Inco (90% of known nickel)
Geographic
Diner in a small desert town
Consumer Loyalty
Capital Costs

23. Barriers to Entry Pricing Advertising and Other Practices Predatory
Economies of Scale
Advertising and Other Practices
Influence consumer tastes
Creates perception of quality

25. Competitive v. Monopolist Price and Output

26. Competitive Consumer/Producer Surplus

27. Monopolist Consumer/Producer Surplus/DWL

28. Is a Monopoly Productively Efficient?

29. Is a Monopoly Allocatively Efficient?

30. Conclusions About Monopolist’s P and Q

31. Welcome to Market Failure

32. Natural Monopoly Regulatory Options What happens if the monopoly is broken?

33. Natural Monopoly- LRATC is downward sloping at intersection with D

34. Natural Monopoly Regulatory Options

35. Natural Monopoly Regulatory Options

36. Natural Monopoly Regulatory Options
Unregulated:
Price on D above MR = MC
2. Fair Return: P = ATC
3. Social Optimal (Allocatively Efficient)
P = MC

37. Monopoly
Monopolists do not face a supply curve
It is the Price Maker

38. Minimum Efficient Scale (MES)
In a natural monopoly, is MES at a low or high Q?

39. Natural Monopoly- LRATC is downward sloping at intersection with D

40. Welcome to Market Failure

41. Natural Monopoly Regulatory Options

42. Natural Monopoly Regulatory Options What happens if the monopoly is broken?

43. Natural Monopoly Regulatory Options

44. Natural Monopoly Regulatory Options
Unregulated:
Price on D above MR = MC
2. Fair Return: P = ATC
3. Social Optimal (Allocatively Efficient)
P = MC

45. PER UNIT V. LUMP SUM *Applies to Tax or Subsidy
SHIFTS MC
Changes profit-max. Q and P
Variable cost
LUMP SUM
SHIFTS only FC/ATC, THEREFORE, NOT Q
Fixed cost
P and Q same; Profit/Loss Changes

46. Natural Monopoly Regulatory Options

47. Price Discrimination Conditions
Market Power
Market Segregation
No Resale

48. Price Discrimination Types
1st Degree (Perfect)
-Each consumer charged maximum willing price
-Consumer surplus = 0
2. 2nd Degree
-Different Quantities, Different Prices
-Reduces, but doesn’t eliminate consumer surplus
3rd Degree
- Different groups/times

49. Deadweight Loss Under allocation Output less than socially optimal
Area of underproduction where MB > MC
Unregulated monopoly

50. Deadweight Loss Over allocation Output greater than socially optimal
Area of overproduction where MC > MB

51. Monopolistic Competition

52. Which go together? Allocatively Efficient Productively Efficient
Profit-Max.
Fair Return
Socially Optimal
Min. ATC
MR = MC
P = ATC
P = MC

53. Product Differentiation
Physical Differences
Perceived Differences
Support Services

54. Monopoly v. Monopolistic Competition
Why is it called monopolistic competition?
How will the demand curve differ?
Long Run? (remember- no barriers)

56. Excess Capacity
Q Gap between profit max. and min. ATC

57. Distinguishing Between Monopolistic Competition and Oligopolistic Structures
4 Firm Concentration
HHI
The Real Test

58. 4 Firm Concentration Ratio
Sum of 4 largest firms’ market share
> 40% = Oligopoly
< 40% = Monopolistic Competition

59. Herfindahl-Hirschman Index
Sum of squared market shares of all firms
s12 + s22 + …
Range of ,000

60. Herfindahl-Hirschman Index
Sum of squared market shares of all firms
(% Share of Firm 1)2 + (% Share of Firm 2)2 …
Range of ,000

61. Natural Oligopoly 25,000 Units per Month 100,000 80 $200 Dollars80
$200
Dollars
LRATCTypical Firm H F E
DMarket

62. Oligopoly- Kinked Demand

63. Horizontal Merger Two companies in same industry
Red Flag: HHI increase of 100 or more

64. Vertical Merger
Two companies in complimentary industries

65. Potential Competition Merger

66. FTC

67. Denied

69. Antitrust Laws Sherman Antitrust Act (1890)
Banned predatory and unfair business practices
Clayton Antitrust Act (1914)
Specified unfair practices
Interlocking Directories
Price Discrimination
Exclusive Dealings and Tying
Horizontal Mergers that Destroy Competition
Federal Trade Commission (FTC)
Approves mergers and enforces trade regulations

70. Homework List Legibly Applied to Our Simulation
Players, Strategies, Payoffs
Dominate Strategy
Nash Equilibrium
Explicit Collusion
Tacit Collusion
Tit for Tat
Cheating
Cartel

71. Game Theory Players, Strategies, and Payoffs Dominate Strategy
A player has a single best strategy regardless of opponent’s strategy decision
Nash Equilibrium
No player can benefit from a unilateral move
Dominate Strategy Equilibrium
Nash Equilibrium AND both players are playing a dominate strategy

72. Circle Method Dominate Strategy Nash Equilibrium
Player on Left
Two circles in same row
Player on Top
Two circles in same column
Nash Equilibrium
Two circles in same box
Dominate Strategy Equilibrium
Two Circles in same box and both players have dominate strategy

73. FRQs
#1- Monopoly Graph
#2- Payoff Matrix