1. Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

2. Long Run Adjustments? None, unless the source of monopoly power is eliminated.

3. Why Government Dislikes Monopoly? P > MC n Too little output, at too high a price. Deadweight loss of monopoly.

4. $ Q ATC MC D MR QMQM PMPM MC Deadweight Loss of Monopoly

5. Arguments for Monopoly The beneficial effects of economies of scale, economies of scope, and cost complementarities on price and output may outweigh the negative effects of market power. Encourages innovation.

6. Can we do it?? Number 4 You are the manager of a monopoly, and your demand and cost functions are give by P=200-2Q and C(Q)=2000+3Q 2, respectively. n What price-quantity combination maximizes your firm’s profits? n Calculate the maximum profits n Is demand elastic, inelastic, or unit elastic at the profit- maximizing price and quantity? n What price-quantity combination maximizes revenue? n Calculate the maximum revenues n Is demand elastic, inelastic, or unit elastic at the revenue- maximizing price-quantity combination?

7. Monopoly Multi-Plant Decisions Consider a monopoly that produces identical output at two production facilities (think of a firm that generates and distributes electricity from two facilities). n Let C 1 (Q 2 ) be the production cost at facility 1. n Let C 2 (Q 2 ) be the production cost at facility 2. Decision Rule: Produce output where MR(Q) = MC 1 (Q 1 ) and MR(Q) = MC 2 (Q 2 ) n Set price equal to P(Q), where Q = Q 1 + Q 2.

8. Managing a Monopolistic Firm (or Price-Making Business)

9. Monopolistic Competition: Environment and Implications Numerous buyers and sellers Differentiated products n Implication: Since products are differentiated, each firm faces a downward sloping demand curve. Consumers view differentiated products as close substitutes: there exists some willingness to substitute. Free entry and exit n Implication: Firms will earn zero profits in the long run IF they don’t differentiate their products enough

10. Can “we” change our market power??? Why do we advertise? n Tell you how we are different n If successful No substitutes  in your mind n If not successful Free entry will reduce profits

11. Does advertising work?? Keeps going and going and going n Energizer Batteries We bring good things to life n GE M’m! M’m! Good n Campbell’s Soup Once you pop the fun doesn’t stop n Pringles Tastes Great. Less Filling n Miller Lite WASSSSSUP? n Budweiser

12. Celebrate the Moments of your life n General Foods International Coffee Obey your thirst n Sprite I’m a pepper, you’re a pepper, …, wouldn’t you like to be a pepper too? n Dr. Pepper Gotta have my pops n Corn Pops Snap, Crackle, and Pop n Rice Krispies I’m lovin’ it n McDonalds So….does it work???