Monopoly types AP + Graphs

1. How would your life change if there was
only one firm who:
•Sold groceries
•Provided university education
•Fixed cars
Bellringer Mankiw Ch 15

2. Competition experiment
•3 groups
•1 volunteer
•Group of 3-4, can talk
•Everyone else
•Think about price &
quality
I will buy one
for up to $1
Widget:
W
Price: $
Your name:

3. Perfect Competition
•P = MR = Demand
•Good for consumers?
•Good for firms?

4. Economic Competition
Today the lack thereof
•4 basic market types:
–Perfect Competition
–Monopolistic Competition
–Oligopoly
–Monopoly
•Measures price/nonprice competition, and
product differentiation

5. Monopoly Market ModelMonopoly Market Model
A market for a good/service A market for a good/service
with with oneone dominate seller dominate seller
Firm has Firm has totaltotal “pricing power” “pricing power”
The Ultimate Price MAKER!The Ultimate Price MAKER!
““barriers to entry”barriers to entry”
3 Causes:3 Causes:
1.1.Private property or Private property or
resourceresource
2.2.Government Government
3.3.Lower cost productionLower cost production

6. Types of MonopolyTypes of Monopoly
•GeographicGeographic
•““fences”fences”
•Only firm in a Only firm in a
certain areacertain area
•Small townsSmall towns
•Mexican food?Mexican food?
•Other Other
example?example?

7. Types of MonopolyTypes of Monopoly
•GovernmentGovernment
•Granted by the Granted by the
governmentgovernment
•Quality issuesQuality issues

10. Types of MonopolyTypes of Monopoly
•TechnologicalTechnological
•(Patents)(Patents)
•(Copyrights)(Copyrights)
•(Trade secrets)(Trade secrets)
•Due to technologyDue to technology
•Software, Software,
biotechnology, biotechnology,
artisticartistic
•examplesexamples Root computing

11. On your white boards On your white boards
Name the type of monopolyName the type of monopoly
1. Popcorn at Harkins movie theater1. Popcorn at Harkins movie theater
2. Interstate Highways like I-102. Interstate Highways like I-10
3. The only mechanic in a small town3. The only mechanic in a small town
4. School lunches at Pueblo4. School lunches at Pueblo
5. Snacks in certain Pueblo classrooms5. Snacks in certain Pueblo classrooms
6. Secret Formula for Coca-Cola6. Secret Formula for Coca-Cola
7. US military7. US military
8. Sun Tran transportation 8. Sun Tran transportation
9. Facebook (?)9. Facebook (?)

12. A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11
A monopoly’s revenueA monopoly’s revenue
12
Q PTRARMR
0
$4.5
0
14.00
23.50
33.00
42.50
52.00
61.50
n.a.
Common Grounds
is the only seller of
cappuccinos in town.
The table shows the
market demand for
cappuccinos.
Fill in the missing
spaces of the table.
What is the relation
between P and AR?
Between P and MR?

13. A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11
AnswersAnswers
13
Here, P = AR,
same as for a
competitive firm.
Here, MR < P,
whereas MR = P
for a competitive
firm.
1.506
2.005
2.504
3.003
3.502
1.50
2.00
2.50
3.00
3.50
$4.004.001
n.a.
9
10
10
9
7
4
$ 0$4.500
MRARTRPQ
–1
0
1
2
3
$4

14. Common Grounds’ D and MR Curves
-3
-2
-1
0
1
2
3
4
5
01234567Q
P, MR
MR
$
Demand curve (P)
1.506
2.005
2.504
3.003
3.502
4.001
$4.500
MRPQ
–1
0
1
2
3
$4

15. MONOPOLY 15
Understanding the Monopolist’s
MR
•Increasing Q has two effects on revenue:
–Output effect: higher output raises revenue
–Price effect: lower price reduces revenue
•To sell a larger Q, the monopolist must
reduce the price on all the units it sells.
•Hence, MR < P
•MR could even be negative if the price effect
exceeds the output effect (e.g., when
Common Grounds increases Q from 5 to 6).

16. MONOPOLY 16
Profit-Maximization
•Like a competitive firm, a monopolist
maximizes profit by producing the quantity
where MR = MC.
•Once the monopolist identifies this
quantity,
it sets the highest price consumers are
willing to pay for that quantity.
•It finds this price from the D curve.

17. MONOPOLY 17
Profit-Maximization
1.The profit-
maximizing Q
is where
MR = MC.
2.Find P from
the demand
curve at this
Q.
Quantity
Costs and
Revenue
MR
D
MC
Profit-maximizing output
P2
Q
P1

18. MONOPOLY 18
The Monopolist’s Profit
As with a
competitive
firm,
the
monopolist’s
profit equals
(P – ATC) x Q
Quantity
Costs and
Revenue
ATC
D
MR
MC
Q
P
ATC

19. A Monopoly Does Not Have an S Curve
A competitive firm
–takes P as given
–has a supply curve that shows how its Q
depends on P.
A monopoly firm
–is a “price-maker,” not a “price-taker”
–Q does not depend on P;
rather, Q and P are jointly determined by
MC, MR, and the demand curve.
So there is no supply curve for monopoly.

20. MONOPOLY 20
The Welfare Cost of Monopoly
•Recall: In a competitive market
equilibrium,
P = MC and total surplus is maximized.
•In the monopoly eq’m, P > MR = MC
–The value to buyers of an additional unit (P)
exceeds the cost of the resources needed to
produce that unit (MC).
–The monopoly Q is too low –
could increase total surplus with a larger Q.
–Thus, monopoly results in a deadweight loss.

21. MONOPOLY 21
P = MC
Deadweight
loss
P
MC
The Welfare Cost of Monopoly
Competitive eq’m:
quantity = Q
C
P = MC
total surplus is
maximized
Monopoly eq’m:
quantity = Q
M
P > MC
deadweight loss
Quantity
Price
D
MR
MC
Q
M
Q
C

22. MONOPOLY 22
Public Policy Toward Monopolies
•Increasing competition with antitrust laws
–Ban some anticompetitive practices,
allow govt to break up monopolies.
–E.g., Sherman Antitrust Act (1890),
Clayton Act (1914)
•Regulation
–Govt agencies set the monopolist’s price.
–For natural monopolies, MC < ATC at all Q,
so marginal cost pricing would result in losses.
–If so, regulators might subsidize the monopolist or
set P = ATC for zero economic profit.

24. MONOPOLY 24
Public Policy Toward Monopolies
•Public ownership
–Example: U.S. Postal Service
–Problem: Public ownership is usually less
efficient since no profit motive to minimize costs
•Doing nothing
–The foregoing policies all have drawbacks,
so the best policy may be no policy.