1. Monopoly

3. Monopolies Pure Monopolies (rare) Near Monopolies Public Utilities
Cable TV (in some locations)
Sports Teams?
Near Monopolies
Intel (81%)
Wham-O (90%)
De Beers (55%)

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

5. Barriers To Entry Legal Patents (20 years) Licenses FCC Taxis
Liquor Licenses
Marijuana Dispensary

6. Barriers To Entry Ownership/Control of Resources Natural Resources
Inco (90% of known nickel)
Local Control

7. Barriers to Entry Pricing Advertising and Other Practices Predatory
Package discounts
Advertising and Other Practices

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

9. Competitive Price and Output

10. Competitive Consumer/Producer Surplus

11. Monopolist Consumer/Producer Surplus/DWL

12. Productive Efficiency?

13. Allocative Efficiency?

14. Conclusions About Monopolist’s P and Q

18. Monopolist’s Costs- Higher or Lower

19. Monopolist’s Costs- Higher or Lower
Economies of Scale/Natural Monopoly
Multiple firms would lead to increased LRATC
Examples:
Utilities
Nonrivalrous Consumption- Microsoft Windows
Wireless Service
Network Effect- MySpace, Facebook

20. Monopolist’s Costs- Higher or Lower
X-inefficiency: Reality that lack of competition may lead to costs higher than those assumed by economic theory

21. Monopolist’s Costs- Higher or Lower
X-inefficiency: Reality that lack of competition may lead to costs higher than those assumed by economic theory

22. Monopolist’s Costs- Higher or Lower
Rent Seeking
Money spent on lobbying and other activities to maintain monopoly through government legislation/licensing

23. Monopolist’s Costs- Higher or Lower
Advertising
De Beers Commercials

24. Monopolist’s Costs- Higher or Lower
Research and Development (LRATC)
Historic View: Think X-Inefficiency
Caveat: Think Google

25. Price Discrimination Conditions
Monopoly/Market Power
Market Segregation
No Resale

26. Price Discrimination Senior Discount Challenge
Pick a market that employs senior discounts for profit maximization
Draw two sets of C and R curves
Which look the same?
Which look different?
Indicate Profit on Senior and Regular Diagrams

27. Welcome to Market Failure

28. Natural Monopoly Regulatory Options

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

30. Natural Monopoly Regulatory Options

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

32. PER UNIT TAX

33. LUMP SUM TAX

34. PER UNIT SUBSIDY

35. LUMP SUM SUBSIDY

36. PER UNIT V. LUMP SUM PER UNIT LUMP SUM SHIFTS MC
Changes profit-max. Q and P
Variable cost
LUMP SUM
SHIFTS FC/ATC, THEREFORE, NOT Q
Fixed cost
P and Q same; Profit/Loss Changes

38. Monopolistic Competition

39. Product Differentiation
Physical Differences
Perceived Differences
Support Services

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

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

42. Fair Return and Socially Optimal?

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

44. 4 Firm Concentration Ratio
Sum of 4 largest firms’ market share
> 40% = Oligopoly
< 40% = Monopolistic Competition

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

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

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

48. Oligopoly- Kinked Demand

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

50. Vertical Merger
Two companies in complimentary industries

51. Potential Competition Merger

52. FTC

53. Denied

55. 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

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

57. 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

58. 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