1. Econ 2610: Principles of Microeconomics
Yogesh Uppal

2. Monopoly, Oligopoly, and Monopolistic Competition
Chapter 9
In this chapter we look at markets when the conditions of perfect competition are violated. There is a strong central case to be built for monopoly, and two other cases, monopolistic competition and oligopoly are also explored briefly.
Our central theme throughout this chapter is how, in the absence of perfect competition, the market changes the total surplus and how we might more closely approximate the perfectly competitive outcome of efficiency and marginal cost = marginal benefit for the individual and for society.
Monopoly, Oligopoly, and Monopolistic Competition
Organization notes: This is a very dense chapter, so reducing it to 40 slides is quite challenging.
I spent 3 slides looking at the sources of market power because that is the foundation for understanding public policy toward monopolies.
To make up for that, I used some animated questions on Carla's editing business to make one slide do the work of 3 or 4 slides.
We could delete the sources of market power slides and expand the editing slides.

3. Imperfect Competition
Imperfectly competitive firms have some control of price
Long-run economic profits possible
Reduce economic surplus
Three types
Monopoly has only one seller, no close substitutes
Monopolistic competition has many firms with differentiated products
These products are all close substitutes
Oligopoly is a small number of firms producing close substitutes
The conditions that create perfect competition are demanding. They are
A large number of buyers and sellers, each of whom is too small to influence price by restricting output,
A standardized product so that there is no loyalty to any single supplier,
Resources that are fully mobile, and
Free entry and exit from businesses and industries.
You can easily take any one of those conditions and find real-world examples to the contrary:
No one disputes the power of Wal-Mart in retail distribution. A large part of Wal-Mart's success is its sheer size and its ability to negotiate low prices and even to influence the packaging of products. For example, Wal-Mart is working with Kraft to reduce the empty space in its packages of Kraft macaroni and cheese to save shipping costs and shelf space in Wal-Mart.
Each of us has thousands of brand impressions these days. A brand is a way to create some consumer loyalty and reduce the chances that a consumer will buy from a competitor.
A look at the economic problems of the rust belt of the US and the relative prosperity of the sun belt attests to the reluctance of people to be fully mobile.
In the first 30 years following airline deregulation (1978 – 2008), airlines lost more than $13 billion. ( Multi-year obligations for plane leases and airport gates, together with the capital intensity of airlines have prevented free exit.
Once we move away from perfect competition, we move away from the benefits the market mechanism delivers : zero economic profits in the long-run and maximum total surplus.
As we study imperfect competition, we look at three types of market organizations.
Monopoly is the polar extreme from perfect competition in that there is only one supplier of a product without close substitutes.
We briefly consider the cases of oligopoly (a few large sellers of a product that may be differentiated) and monopolistic competition (many firms with differentiated products which are close substitutes)

4. Monopolistic Competition
Perfect Competition
Monopolistic Competition
Number of Firms
Many firms
Price
Price taker
Limited flexibility
Entry and Exit
Free
Product
Standardized
Differentiated
Economic Profits
Zero in long run
Decisions
Q only
P, Q, product differentiation
We look first at the characteristics and consequences of monopolistic competition. Examples of monopolistically competitive industries are local gasoline stations and convenience stores.
The most consequential characteristic to note is that monopolistic competitors have some control over their price. They can raise their price without losing all of their customers.
They do this by differentiating their products to create some brand loyalty among customers. Brand loyalty creates tolerances for some differences in price between their product and close substitutes.
Firms are not direct competitors because of their product differentiation. Most of us have a favorite brand of toothpaste, for example, and would be reluctant to accept another brand unless the price difference passed some threshold.
Finally, in operating a monopolistic competitive firm, the management has some important decisions to make.
First, they must define their products and their product differentiation strategy.
Second, they choose a price-quantity combination on the demand curve to maximize the firm's profits.
This market structure has some similarities to perfect competition
There are many firms that may enter and exit the industry freely
There are no economic profits in the long run.
The telling differences are in the areas of product differentiation for monopolistic competitors and their ability to set price.

5. Oligopoly Perfect Competition Oligopoly Number of Firms Many firms
Few firms, each large
Price
Price taker
Some flexibility
Entry and Exit
Free
Large size firm
Product
Standardized
Differentiated or standardized
Economic Profits
Zero in long run
Possible
Decisions
Q only
P, Q, differentiation, advertising
Oligopoly is a market structure with a few, large firms. Automobiles and tobacco products are examples.
Products may or may not be differentiated
The large size of the firm is a barrier to entry on the basis of cost.
The most significant consequence of an oligopolistic market is that these firms can sustain economic profits.
Each firm has sufficient market power to make three important decisions:
Product differentiation strategy, much as we saw with monopolistic competitors,
Advertising and promotion to enhance the distinctions between sellers.
Finally, as with monopolistic competition, the firm chooses a price-quantity combination on its demand curve.
Oligopoly and perfect competition have little in common as you can see from the table.

6. The Essential Difference
Market power is the firm's ability to raise its price without losing all its sales
Any firm facing a downward sloping demand curve
Firm picks P and Q on the demand curve
Market power comes from factors that limit competition
Market power is an important concept in our discussions for the next four chapters. It refers to a firm that can choose a point – a combination of P and Q on its demand curve.
No firm can set Q AND P independent of demand.
Perfect competitors have NO market power – they are price takers and can only decide Q.
The key difference between perfect competition and imperfect competition is the slope of the demand curve.
Firms in industries that are imperfectly competitive can choose either P or Q or they can choose a P-Q combination on their demand curve.
The negative slope of demand for imperfect competitors comes from different sources, but its consequences are
The ability of the firm to choose a price-quantity combination on its demand curve,
The possibility of economic profits for the firm in the short run
Lower output and higher prices than a perfectly competitive market would yield.
Loss in total surplus for the society
Quantity
Price
Imperfectly Competitive Firm
Quantity
Price
Perfectly Competitive Firm D D

7. Five Sources of Market Power
Exclusive control over inputs
Patents and copyrights
Government licenses or franchises
Economies of scale (natural monopolies)
Network economies
There are five sources of market power, all of which come from a violation of the assumptions of a perfectly competitive market.
Exclusive control of a resource violates the assumption of the free mobility of resources. Whatever the resource, it is not free to go to its highest value use.
Patents and copyrights violate the assumption about all market participants having all relevant knowledge. If one firm patents a process or a formula, no one else can use that for a period of time.
Government licenses or franchises prohibit free entry into a potentially profitable business.
Natural monopolies violate the condition of many buyers and sellers. In the case of the natural monopoly, one supplier is the lowest cost way to serve the entire market.
Finally, network economies occur whenever the value of a good increases as the number of its users increase. Telephones, eBay, and social networking sites are examples of this. When networking economies exist, the greatest benefit is generated by a small number of suppliers, sometimes only one.
The most important of these five are natural monopolies and network economies. We'll consider each of those in more detail in a moment. Let's look at the first 3 causes
Exclusive control of resource
Geographic claims such as French champagne, Parmesan cheese (from Parma)
Diamonds (DeBeers)
Unique location
Patents and copyrights
Pharmaceuticals
Books
Software
Government licenses or franchises
Yosemite concessions
Cell phone operators
Cable TV

8. Market Power: Economies of Scale
Returns to scale refers to the percentage change in output from a given percentage change in ALL inputs
Long-run idea
Constant returns to scale: doubling all inputs doubles output
Increasing returns to scale: output increases by a greater percentage than the increase in inputs
Average costs decrease as output increases
Natural monopoly: a monopoly that results from economies of scale
Returns to scale is central to the idea of economies of scale and natural monopolies.
It's a long run concept that asks how much output increases when all inputs increase.
In order to remove sensitivity to units of measurement, we compute the change in output and the change in inputs in percentage terms.
So, returns to scale is % change in output / % change in all inputs.
In some cases, businesses experience constant returns to scale. No matter how big or small they get, the average cost stays constant.
Our lemonade stand example was like this. We could buy as much or as little of the inputs as we wanted without changing their price, and when we double the inputs, we get twice as much lemonade.
Constant returns to scale produce constant average costs.
Some firms have decreasing returns to scale, at least at some size.
Doubling the inputs produces less than double the outputs.
Usually caused by congestion, either of physical space or, more likely, information flows.
We are interested here in increasing returns to scale, also called economies of scale.
In this case, increasing inputs by a certain proportion increases output by a larger proportion.
Doubling inputs means doubling costs.
More than double the output, therefore produces declining average costs.
When economies of scale are present, average costs decline throughout the relevant part of the cost curves (around the size of the market).
In this case, one firm can supply all of demand at the lowest average total cost.
If government forces two firms to compete, each will have higher costs than if one firm served the market.
In this case, one firm expands and gets the benefits of lower costs. It can lower its price and attract customers from its competitor. In this way, one firm will expand until it serves the entire market and the other firm will exit the industry.

9. Market Power: Network Economies
Network economies occur when the value of the product increases as the number of users increases
VHS format for video tapes, Blu-ray for DVDs
Telephones
Windows operating system
eBay
Facebook and MySpace
Network economies confer large benefits on the successful firm. The idea here is that while the good or service is beneficial to one person, the benefits increase as the number of users increases.
Consider the case of the telephone. The first telephone line connected an executive's office at a bank in Boston with his home. The executive could pick up the phone and talk to someone at his home anytime he wanted.
While this telephone line produced a certain value for the executive and his household, it is a far cry from today's global network.
The World Fact Book published by the CIA ( In its 15 May 08 updated version reports that there are 1.27 billion landlines and 2.16 cellular phones in the world. That's a total of 3.43 billion phones for 6.67 billion people. That's nearly 1 phone for every 2 people on average.
As a result, most of us can call anywhere, anytime.
There are other good examples of network economies.
eBay dominates the on-line auction world. You can try to sell your goods elsewhere on line, but you will get fewer potential buyers and therefore a potentially lower price.
EBay's market position assures buyers a wider range of products and it assures sellers a wider range of potential customers than any other site could.

10. Economies of Scale and Start-Up Costs
New products can have a large fixed development cost
Average cost ($/unit)
Quantity F
TC = F + M Q
This is the graphical representation of the algebra we just worked.
The total cost curve has an intercept of F and a slope of M
TC increases as output increases
The marginal cost curve is horizontal because M is constant at all levels of output.
As we have just shown, ATC decreases as output increases and that is shown in the graph.
Notice that ATC gets smaller and smaller and smaller as output increases.
It approaches M as its limit.
In all cases ATC > M because ATC = M + something positive, namely F / Q
The idea that ATC > MC has important efficiency and policy implications, so be sure you understand and remember this idea.
ATC = F/Q + V/Q
Total cost ($/year) M
Quantity
However, the operational costs are not significant relative to the start-up costs.

11. Intel's Advantage Development cost of a new chip $2 billion
Marginal cost of making a chip Pennies
Dominating the market Priceless
Intel supplies more than 80% of the processors for PCs
The analysis we've just completed can help us understand how Intel has dominated the PC chip market.
There are very large costs to design a new PC chip.
The marginal costs of production are low.
These conditions opened the market for an aggressive move by Intel to increase volume and decrease price to gain the advantage over would-be competitors.
Along the way, Intel developed its own brand to further differentiate itself from its competitors.
"Intel Inside" is their ingredient brand strategy which is designed to make consumers less willing to accept chips from AMD or other manufacturers.
The net effect of high fixed costs, low marginal costs, and high volumes is that today, Intel supplies about 80% of the chips in PCs.

12. Monopolist
Pure monopoly: the only seller of a unique product which has no close substitutes
Like all other firms, a monopolist
Maximizes profits
Applies the Cost-Benefit Principle
Increase output if marginal benefit > marginal cost
Decrease output is marginal benefit < marginal cost
Marginal benefit for a monopolist is different than for a perfectly competitor
We turn now to look at what happens when there is only one seller of a product that has no close substitute. This is the case of pure monopoly.
There are some commonalities between the monopolist and the prefect competitor.
Both have a large number of buyers each of whom has no market power.
Both a monopolist and a competitor use the same rule to maximize profits.
Monopolists and competitors respond the same way when marginal costs and marginal benefits are out of balance.
The key difference is in the way a monopolist defines marginal benefit.
Since a competitor is a price taker with a horizontal demand curve, the marginal benefit of selling one more unit is the price.
Let's look at how monopolists define marginal benefits and how they maximize profits.

13. Profit Maximization for the Monopolist
For the monopolist, selling one more unit
Decreases market price
Reduces marginal revenue by more than the price
Lower price applied to all units
A monopolist faces a downward sloping demand curve.
If the monopolist wants to sell one more unit, the price must decrease – not just for that last unit but for all units.
This downward sloping demand and the simultaneous adjustment of price AND quantity mean that marginal revenue for the monopolist is something quite different from the price.
Price ($/unit)
Quantity (units/week) D 2 6 3 5

14. Monopolist's Marginal Revenue
Price & marginal revenue ($/unit) 8 D
Quantity (units/week) MR 3 2
We can read points off the demand curve and use them to calculate total revenue and marginal revenue.
When price decreases by $1, quantity demanded increases by one
Price times quantity gives us total revenue and we se that total revenue increases from $12 to $15 to $16 and then decreases back to $15.
If we lowered the price still farther, we would see that total revenue continues to decrease.
As we know, the monopolist does not make decisions based on total revenue, but on marginal revenue, so let's calculate that.
Remember that marginal revenue is the change in total revenue from selling one more unit.
Every time an increase in Q results in an increase in total revenue, we see that marginal revenue is positive.
When selling one more unit decreases total revenue, marginal revenue is negative.
We are now ready to plot the marginal revenue points on our graph and draw in the marginal revenue curve. 1 4 -1 5
Price
Quantity $6 2 $5 3 $4 4 $3 5
Total Revenue
$12
$15
$16
Marginal Revenue 3 1 -1

15. Monopoly Demand and Marginal Revenue
In general, the monopolist's marginal revenue curve
Has the same intercept as demand
Has twice the slope of demand
Lies below demand
Price
Quantity a D Q0
Q0/2
a/2 MR
We can make some generalizations about the monopolist's marginal revenue curve when the demand curve is a straight line.
First, the vertical intercept for the marginal revenue curve is the same as the vertical intercept for the demand curve.
Second, the horizontal intercept for the marginal revenue curve is half the horizontal intercept of the demand curve.
These two conditions mean that the slope of the marginal revenue curve
Lies below the demand curve, and
Is twice as steep as the demand curve.
Anytime you have a demand curve for a monopolist, you should be able to draw the marginal revenue curve.

16. Deciding Quantity
A monopolist knows his demand and marginal revenue curves
Marginal cost is also known
If he operates at P = $3 and Q = 12, MC > MR
Decrease output
If the firm operates at Q = 8, then MC = MR = 2
The demand curve sets the price, P = $4
At any output below 8, MC < MR 6 D 12 MR
Now that the monopolist knows about his demand and marginal revenue curves, he needs to understand the cost side of his business.
We'll assume that the marginal cost of the good increases as output increases, although this is not a requirement of a monopoly.
The monopolist tries to balance marginal cost and marginal benefit.
Marginal cost is on the marginal cost line.
Marginal benefit is on the marginal revenue line.
The monopolist operates where MC = MB, or MC = MR.
What if the monopolist made a mistake and tried to operate where P = $3 and Q = 12?
In this case, the marginal cost is $3 but the marginal revenue is $0.
The monopolist could reduce his level of output, decrease his marginal cost and increase his marginal revenue which would increase his profit.
This analysis shows that as long as MC > MR, the monopolist will reduce his output.
Similar analysis would show that whenever MC < MR, the monopolist should increase his output.
Equilibrium for the monopolist has to be at an output level where MC = MR. In this case, the monopolist chooses to produce 8 units.
We aren't done here.
Once a perfect competitor chooses Q, he's made all the decisions that he can make. The perfect competitor is a price taker so he does not have to be concerned about the price he charges.
The monopolist, however, is a price setter. He chooses a point on the demand curve, and so he must set a price that would allow him to sell all of his output.
That price is the point on the demand curve that corresponds to the monopolists profit-maximizing level of output.
Using the vertical interpretation of the demand curve, the monopolists sets price equal to $4. MC 4 8
Price ($/unit of output) 3 2
Quantity (units/week)

17. Monopoly Losses and Profits
Price ($/minute)
Minutes (millions/day) 24 20
0.08
0.10
ATC D
0.05 MC MR
Economic loss
= $400,000/day
Economic profit
= $400,000/day
0.12
This first graph shows a monopolist who is maximizing profit:
He sets Q at the output level where MC = MR and
He sets P along the demand curve.
However, he is losing money.
Because the ATC curve is above the demand curve for all levels of output, there is no way this monopolist can make a profit.
If the monopolist can lower his fixed costs, he will be able to apply the profit maximizing rule, decide Q, set P, AND earn a profit.
If he cannot do this, either the government will have to subsidize the monopoly for non-economic reasons OR the monopolist will stop operating.
ATC
0.10
Price ($/minute)
0.05 MC D MR 20 24
Minutes (millions/day)

18. The Invisible Hand Fails
The monopolist's optimal
amount occurs where
MC = MR, Q = 8 units and P = $4 24 D 3 12 6
Marginal Cost 2 MR 8 4
We know that perfectly competitive markets result in the individual buyer's marginal benefits being equal to the individual seller's marginal cost AND the marginal benefit to society being equal to the marginal cost to society.
That does not happen when the market is a monopoly.
In this case, the socially optimal level is at 12 units of output and a price of $3.
The monopolist, however, restricts output to 8 units and charges a price of $4.
Between 8 and 12, MB to society > MC to society
Cannot increase output because MR to the firms is less than MC
Society gets less of what it wants and it pays a higher price.
Since social and private outcomes are different, the monopolist creates a deadweight loss of welfare.
Because MR < P, the monopoly produces less than the socially optimal amount
The deadweight loss of the monopoly to society = (1/2)($2/unit)(4units/wk) = $4/wk.
The socially optimal
amount occurs where
MC = MB, Q = 12 units and P = $3
Price ($/unit of output)
Quantity (units/week)

19. Monopoly and Perfect Competition
MC = MR
P >MR
P > MC
Deadweight Loss
Perfect Competition
P = MR
P = MC
No Deadweight Loss
To recap,
Monopolists and perfect competitors each maximize profits by setting marginal cost equal to marginal revenue.
For the monopolist, this results in a price that is greater than marginal revenue and marginal cost.
The competitor operates where P = MR = MC
While the competitor maximizes efficiency, the monopolist creates a deadweight loss from restricting output and raising price.

20. Price Discrimination
Price discrimination means charging different buyers different prices for essentially the same good or service
Separate the groups
No side trades among buyers
Many forms of price discrimination
Hurdle method: discounts for identifiable groups (e. g., students, AARP)
Perfect discrimination: negotiate separate deals with each customer
Examples of Price Discrimination
Temporary sales
Book publishers and paperback books
Automobile producers offer various models each year
Commercial air carriers create so many different pricing options that they sometimes create resentment.
Is it fair that you paid 50% more than the person sitting next to you?
Algorithms for defining ticket prices and classes are closely guarded secrets
Movie producers who phase the introduction of a movie to prime theaters, other first-run theaters, second-run theatres, pay-per-view, DVD rentals, and DVD sales.
Since imperfectly competitive firms – called monopolists for short here – have the ability to set price, you would expect them to get quite clever about how they can set price.
Price discrimination is a case where the single price model of our previous graphs does not hole.
If a monopolist can separate groups of customers based on their willingness to pay AND make sure that those groups don't trade between themselves, then the firm has the opportunity to use price discrimination.
Airlines prohibit trades, for example, by requiring the correct passenger's name on the ticket.
Book publishers and movie producers use time as the differentiator . If you are willing to wait, you can pay a lower price.
We'll look at two types of price discrimination: the hurdle method and perfect discrimination.

21. What is the social optimum?
Carla the Editor
What's Carla's revenue?
What is the social optimum?
Opportunity cost of Carla's time is $29
Student
Reservation Price A
$40 B 38 C 36 D 34 E 32 F 30 G 28
Total Revenue
$40
$76
$108
$136
$160
$180
$196
To decide the social optimum, we set the marginal benefit of one more paper edited equal to Carla's marginal cost.
Since Carla's time is worth $29 per hour, she will edit 6 papers (A through F).
G's reservation price of $28 causes the marginal benefit ($28) to be less than the marginal cost ($29) so Carla stops at 6 papers.
Carla charges each student the market equilibrium price of $30
Carla earns $180 in revenue, $6 more than the opportunity cost of her time.

22. What if Carla maximizes her profit?
Carla the Editor
What if Carla maximizes her profit?
What's Carla's revenue?
Opportunity cost of Carla's time is $29
Student
Reservation Price A
$40 B 38 C 36 D 34 E 32 F 30 G 28
Total Revenue
$40
$76
$108
$136
$160
$180
$196 MR
$40
$36
$32
$28
$24
$20
$16
Carla is not likely to work at the socially optimal price since she is facing a downward sloping demand curve.
Carla has market power.
Carla decides to offer her services at a single market price.
She uses the marginal cost equals marginal revenue rule.
Her marginal cost is $29
Her marginal revenue is shown in the table.
Carla will edit just 3 papers at a price of $36
Her economic surplus will be ($36 – 29) (3) = ($7) (3) = $21.

23. What if Carla is perfect discriminator?
Carla the Editor
What if Carla is perfect discriminator?
What's Carla's revenue?
Opportunity cost of Carla's time is $29
Student
Reservation Price A
$40 B 38 C 36 D 34 E 32 F 30 G 28
Total Revenue
$40
$78
$114
$148
$180
$210
$238
This time we ask how Carla will act if she is able to be a perfect discriminator.
She charges each customer his reservation price.
She edits a paper as long as the opportunity cost of her time is less than or equal to the price she gets for the paper.
Carla will edit 6 papers as she did in the socially optimal case – BUT, Carla captures all of the economic surplus with this plan.
Her revenues are the sum of the reservation prices over $29, or $210.
The opportunity cost of Carla's time is (6) (29) = $174
Her economic profits in this case are $36.
Next we'll look at the effect of discounts on Carla's behavior.

24. Carla Offers a Rebate If reservation price < $36, mail in rebate
Student
Reservation Price
Total Revenue A
$40 B 38 76 C 36
108 MR
$40 36 32
Carla really understands her market – except for the reservation prices.
She knows that if she charges one price to all and offers a rebate, not all students will mail in the rebate coupon.
Anyone with a reservation price of $36 or higher will not mail the coupon in.
Everyone with a reservation price below $36 will certainly mail the coupon in.
Carla has some decisions to make.
First, she needs to set her price.
Then she needs to decide what discount to offer.
Once she knows that, the number of papers she will edit is easy to figure out.
Carla sets a list price of $36.
None of those customers will take advantage of the rebase, so her net revenue from each will be $36.
Next, Carla asks what rebate she should offer. The amount of the rebate must be subtracted from Carla's list price to get to her net revenue.
So, for example, if Carla offered a $2 rebate, anyone with a reservation price of $34 (= $36 – 2) would use her services and her net revenue from that customer would be $34.
Carla decides her rebate using her MC = MR rule.
The cost of Carla's time is constant at $29.
Carla decides to set her rebate so that her MC is less than her MR since she can't make them equal.
If she offers a $4 discount, D and E will have their papers edited and Carla's MR will be $1 greater than her MC.
In the end, Carla edits 5 papers: 3 at list price of $36 and 3 at the discounted net price of $32.
Her total revenue is ($36) (3) + (32) (2) = $ = $172.
The opportunity cost of Sarah's 5 hours of editing is ($29) (5) $145.
Her economic profits are $172 – 145 = $ 27.
$34 30 26
Discounted Price Submarket D
$34 E 32 64 F 30 90

25. Perfect Discriminator
Carla's Choices
Program
Social Optimum
Papers Edited 6
Price
$30
Total Revenue
$180
Carla's Time 
 $174
Economic Profit $6
Total Surplus
$26
Single Price 3
$36
$108
$87
$21
$27
Perfect Discriminator 6
Reservation
$210
$174 
$36
Hurdle
5 = (3 + 2)
$36, $4 rebate
$172
$145 
$27
$35
Let's recap the scenarios we've just developed.
We can see that total surplus is greatest when Carla acts as a perfect discriminator. In this case, there is no consumer surplus, so Carla captures all of the surplus herself.
The second highest surplus is generated when Carla offers her rebate. In this case, she captures $27 of the $35 in economic surplus.
At a single monopoly price, Carla does less well. She earns only $21 of economic profit and the total surplus is only $1 greater than the socially optimal level.
The main difference between the socially optimal level and the monopoly level is the distribution of the surplus.
The socially optimal outcome gives Carla only $6 of economic profits whereas in the monopoly case she earns $21 in excess profits.

26. Hurdle Method of Price Discrimination
The hurdle method of price discrimination is the practice of offering a discount to all buyers who overcome some obstacle.
Temporary Sales
Hard cover and paperback books
Multiple car models from one manufacturer
Commercial air carriers
Movie producers and phased releases
Scratch and Dent appliance sales
The Hurdle Method of Price Discrimination is the practice of offering a discount to all buyers who overcome some obstacle.
Example
Offering a rebate to those who mail in a coupon
New customer discounts for cable TV
AARP card or student ID
Single price monopolies are inefficient because P > MR.
The hurdle method of price discrimination reduces the inefficiency.
The more finely the seller can discriminate, the smaller the efficiency loss.
Hurdles are not perfect, therefore, there will be some efficiency loss.

27. Monopoly and Public Policy
Challenge: create the greatest increase in total surplus
Policy options
Government ownership and operation
Regulation
Competitive bids for natural monopoly services
Break up
Policies toward monopolies are fundamentally attempts to reduce the inefficiency of monopoly and to increase the total surplus for the society.
Another way to look at it is that policies attempt to bring the individual marginal cost in-line with society's marginal benefits and to do the same for marginal costs.
The government has a range of choices of how to deal with monopolies, each of which has their own advantages and disadvantages. We'll look at each in turn.

28. Anti-Trust Laws Two landmark laws
Sherman Act of 1890
Declared conspiracy to create a monopoly illegal
Clayton Act of 1914
Outlawed transactions that would "substantially lessen competition"
Applies to mergers and acquisitions today
IBM avoided break-up; AT&T did not
Microsoft survived
There are two main laws against monopolies, both quite well established.
The Sherman Anti-trust Act of 1890 banned monopolization and price-fixing agreements. It provided for both civil and criminal penalties. This act prohibits contracts, combinations, and conspiracies in restraint of trade.
The Clayton Antitrust Act of 1914 bans some forms of price discrimination, tie-in sales, and other actions, including mergers that reduce competition or encourage monopolization of the market.
The Federal Trade Commission Act of 1914 set up the FTC to investigate allegations of unfair trade practices.
Many mergers and acquisitions today are subject to FTC approval.