1. Chapter 25
Monopolies

2. FOUR MARKET MODELS

3. Name The Product Obey your Thirst Sprite Is it in you Gatorade
Two for me, none for you
Twix
Hungry, why wait?
Snickers
Give me a break
Kit Kat
Like a good neighbor…
State Farm
My heart to yours
Pillsbury
Name The Product

4. Name The Product There is no wrong way to eat a Reese’s I’m love’n it
McDonalds
Once you pop you can’t stop
Pringles
Choosy mothers choose _______.
Jiff
You can do it, we can help.
Home Depot
Zoom, zoom, zoom
Mazda
What is in your wallet?
Capital One
Name The Product

5. Name The Product It just keeps going and going and going… Energizer
Bet ya can’t eat just one.
Lays Potato Chips
Double your pleasure, double your fun
Doublemint Gum
Have it your way
Burger King
Don’t leave home without it.
American Express
The quicker picker upper.
Bounty
Name The Product

6. 5 Characteristics of a Monopoly
1. Single Seller
One Firm controls the vast majority of a market
The Firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
The firm can manipulate the price by changing the quantity it produces (ie. shifting the supply curve to the left).
Ex: California electric companies

7. 5 Characteristics of a Monopoly
4. High Barriers to Entry
New firms CANNOT enter market
No immediate competitors
Firm can make profit in the long-run
5. Some “Nonprice” Competition
Despite having no close competitors, monopolies still advertise their products in an effort to increase demand.

9. Copyright © 2008 Pearson Addison Wesley. All rights reserved.
Barriers to Entry
Question
How does a firm obtain monopoly power?
Answers
Barriers to entry that allow the firm to make long-run economic profits
Barriers to entry are restrictions on who can start as well as stay in business.
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10. Four Origins of Monopolies
Geography is the Barrier to Entry
Ex: Nowhere gas stations, De Beers Diamonds, Cable TV,
-Location or control of resources limits competition and leads to one supplier.
2. The Government is the Barrier to Entry
Ex: Water Company, Firefighters, The Army, Pharmaceutical drugs, rubix cubes…
-Government allows monopoly for public benefits or to stimulate innovation.
-The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years)

11. Four Origins of Monopolies
3. Technology or Common Use is the Barrier to Entry
Ex: Microsoft, Intel, Frisbee, Band-Aid…
-Patents and widespread availability of certain products lead to only one major firm controlling a market.
4. Mass Production and Low Costs are Barriers to Entry
Ex: Electric Companies
If there were three competing electric companies they would have higher costs.
Having only one electric company keeps prices low
Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost.

12. International Policy Example: Malaysia’s Drug-Labeling Monopoly
Sellers of drugs and medical products are required to affix holographic labels providing information on usage.
To obtain these labels, sellers have only one choice. They must buy the labels from a company called Mediharta.
This company is the only label manufacturer that Malaysia’s Registrar of Companies has approved to produce holographic labels.
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13. Barriers to Entry (cont'd)
Legal or governmental restrictions
Patents
Intellectual property
Tariffs
Taxes on imported goods
Regulation
Safety and quality
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14. Barriers to Entry (cont'd)
Cartels
An association of producers in an industry that agree to set common prices and output quotas to prevent competition
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15. The Demand Curve a Monopolist Faces
The monopolist faces the industry demand curve because the monopolist is the entire industry.
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16. The Demand Curve a Monopolist Faces (cont'd)
Recall that under perfect competition
Firm faces perfectly elastic demand curve, it is a price taker
The forces of supply and demand establish the price per unit
Marginal revenue, average revenue, and price are all the same
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17. Comparing Monopoly and Perfect Competition
Single seller
Faces entire industry demand
Must lower price to sell more
Not all units sold for same price
Many sellers
Faces perfectly elastic demand
Must produce more to sell more
All units sold for same price (P = MR)
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18. Elasticity and Monopoly
The monopolist faces a downward-sloping demand curve, and cannot charge any price.
Thus, depending on the price charged a different quantity will be demanded.
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19. Cost and Monopoly Profit Maximization
We assume profit maximization is the goal of the pure monopolist, just as it is for the prefect competitor.
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20. Cost and Monopoly Profit Maximization (cont'd)
Perfect competitor has only to decide on the profit-maximizing output rate because price is given.
For the pure monopolist, we must seek a profit-maximizing price output combination.
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21. Cost and Monopoly Profit Maximization (cont'd)
Price Searcher
A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloping demand curve
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22. Cost and Monopoly Profit Maximization (cont'd)
We can determine the profit-maximizing price-output combination with either of two equivalent approaches.
By looking at total revenues and total costs or by looking at marginal revenues and marginal costs.
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23. Cost and Monopoly Profit Maximization (cont'd)
Total revenues-total costs approach
Maximize the positive difference between total revenues and total costs
Marginal revenue-marginal cost approach
Profit maximization will also occur where marginal revenue equals marginal cost.
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24. When graphing monopolies…
Only one graph because the firm IS the industry.
The cost curves are the same
The MR= MC rule still applies
Shut down rule still applies

25. THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE!
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!

26. This is what a monopoly looks like when graphed…always!MC
ATC
Costs (dollars) D MR
Quantity

27. Remember…Perfect Competition
$20 15 10 5 MC
MR=P 14
ATC
Cost and Revenue
AVC 6

28. Calculating Monopoly Profit
Monopoly profit is given by the shaded area, which is equal to total revenues (P  Q) minus total costs (ATC  Q).
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29. Figure 25-6 Monopoly Profit
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30. Calculating Monopoly Profit (cont'd)
No guarantee of profit
The term monopoly conjures up the notion of a greedy firm ripping off the public…Not always true!
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31. Figure 25-7 Monopolies: Not Always Profitable
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32. Price, costs, and revenue
Conclusion: A monopolists produces where MR=MC, buts charges the price consumer are willing to pay identified by the demand curve. Q
200
175
150
125
100 75 50 25
Price, costs, and revenue $9 8 7 6 5 4 3 2 MC
ATC D MR

33. Calculating Marginal Revenue

34. Calculate TR and Marginal Revenue
Quantity
Price TR MR
$16 1 15 2 14 3 13 4 12 5 11 6 10 7 9 8

35. Calculate TR and Marginal Revenue
Quantity
Price TR MR
$16 1 15 2 14 28 3 13 39 4 12 48 5 11 55 6 10 60 7 9 63 8 64

36. Calculate TR and Marginal Revenue
Quantity
Price TR MR
$16 - 1 15 2 14 28 13 3 39 11 4 12 48 9 5 55 7 6 10 60 63 8 64 -1 -3

37. On Making Higher Profits: Price Discrimination
Selling a given product at more than one price, with the difference being unrelated to differences in cost
Senior discounts
Military discounts
Student discounts
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38. On Making Higher Profits: Price Discrimination (cont'd)
Price Differentiation
Establishing different prices for similar products to reflect differences in marginal cost in providing those commodities to different groups of buyers
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39. The Social Cost of Monopolies
Comparing monopoly with perfect competition
Let’s assume a monopolist comes in and buys up every single perfect competitor.
Notice the monopolist produces a smaller quantity and sells at a higher price.
Monopolists raise the price and restrict production compared to a perfectly competitive situation.
Consumers pay a price that exceeds the marginal cost of production and resources are misallocated in such a situation.
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40. Because there is little external pressure to be efficient
Monopolies are inefficient because they…
Charge a higher price
Don’t produce enough
No allocative efficiency
Produce at higher costs
No productive efficiency
Have little incentive to innovate
Why?
Because there is little external pressure to be efficient

41. Regulating Monopolies

42. Rate Regulation in the form of price ceilings
Why Regulate?
Since monopolies are inefficient if unregulated, the government seeks to make them efficient
How do they regulate?
Rate Regulation in the form of price ceilings

43. End of Chapter 25
Monopoly