UNIT 4.1:IMPERFECT COMPETITION

Monopoly

1. Define a monopoly

2. Marginal Revenue and Demand relationship

3. Identify a monopoly graphically

4. Distinguish between single-price vs. price discriminating monopoly

5. Productive vs allocative efficiency for a monopolist.

6. Compare perfect competition vs monopoly

7. Regulation of monopolies: taxes & ceilings

In this section we will examine:

Comparison of Market Structures

Are Microsoft’s prices too high?

What do you already know about monopolies?True or False?

1. All monopolies make a profit.2. Monopolies are usually efficient.3. All monopolies are bad for the economy.4. All monopolies are illegal.5. Monopolies charge the highest price

possible6. The government never prevents

monopolies from forming.

Conditions of Monopoly

1) There is a single seller.

2) A price-maker: (set their own price)

3) Barriers to Entry: impossible (other sellers cannot enter the market)

4) Highly wasteful and inefficient.

Exact Opposite of Pure Competition.

Graphing a Monopoly Firm

Graphing a Monopoly: MR

A monopolist’s MR curve is below the D curve because the monopoly must lower price to sell more.

WHY?

Graphing a Monopoly: MRA monopolist’s is

STILL subject to the limitations of the consumer.

Notice the shape of the total revenue curve along the left side of the demand curve verses the right side of the demand curve.

As quantity increases, TR increases (Ed > 1)

As quantity increases, TR decreases (Ed < 1)

Graphing a Monopoly: MRNotice that as

you go down the demand curve, marginal revenue is twice the slope of demand.

This is due to the fact that the total revenue (TR) curve slope becomes less as they sell more products at decreasing prices.

InelasticAs quantity increases,

TR decreases

Elastic As quantity increases,

TR increases

The monopoly will only produce in the elastic

range

Types of Monopolies

Types of Monopolies

1. Geographic Monopoly: The only business in a geographic region. Some of these are decreasing in the U.S. because of

mobility of consumers.

EXAMPLE:

Only person selling water in the desert.

EXAMPLE: Turner Field

2. Technological Monopoly: Firm has discovered a new process or product.

Constitution has given government the right to grant technological monopolies (protect property rights)

Patent: 20 years exclusive rights to a developed technology.

Trademark ™ or Copyright ©: Life plus 70 years. (Artists and writers)

Types of Monopolies

3. Government Monopoly:

Types of Monopolies

Sale of alcohol license in some counties

Sales of driver’s license

Sales of healthcare (just kidding)

Types of Monopolies

4. Natural Monopoly: Where costs are minimized by having a single producer of the product.

Sometimes government creates natural monopolies in the natural gas, water & electricity industry by franchising these utilities.

Economies of Scale: the firm’s long-run average cost curve slopes downward, thus one firm can simply produce the product cheaper than all other firms

TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion turbine plants.

The corporation transmits electricity to 8.7 million consumers.

Types of MonopoliesNatural Monopolies

Arizona Public Service Company

Example of a Monopolist’s power

Visualizing Natural Monopolies

This figure shows a natural monopoly.

1. Economies of scale exist over the entire LRAC curve.

2. One firm can distribute 4 million kilowatt hours at a cost of 5 cents a kilowatt-hour.

Visualizing Natural Monopolies

4. and 15 cents a kilowatt-hour with four firms.

3. This same total output costs 10 cents a kilowatt-hour with two firms,

One firm can meet the market demand at a lower cost than two or more firms can. .

This is a natural

monopoly

Efficiency for a Monopolist

Welfare Loss to Society from a Monopolist

MC

Q

P

D

QM

PM

• The welfare loss from a monopoly is represented by the triangles B and D

• The rectangle C is a transfer of surplus from the consumer to the monopolist

• The area A represents the opportunity cost of diverted resources, which is a loss to society. MR

PPC

QPC

A

B

D

C

Thus a monopoly does not produce at an allocativily efficient point.

Deadweight Loss (D+B)

A monopolist is not productively efficient nor is it allocativily efficient.

A Monopolist Profit and Price Discrimination

What is Price Discrimination?

What impact does this have on the consumer’s surplus?

Charging different price to different consumers for the same product.Examples:

Charging different prices for senior citizens vs. college students at a restaurant.

Airline Tickets (coach vs business class)

Movie Tickets (child vs. adult)

SHS Football Tickets (students vs parents)

DMR

MC

ATC

g h

b

c

0

i

m

Profit and Price Discrimination

Profit resulting from price

discrimination (loss to C.S.)

Normal Profit resulting from monopolist’s

normal price

Consumer surplus remaining

after price discrimination

REMEMBER the firm will always

produce at MC=MR. They are just

choosing to sell a certain number of units at a higher

price.

A Monopoly in the Long-run

Monopoly in the Long-runSince a monopoly is the only player in the market. It’s short-run graph is the same in the long-run.

WHY?Since the barriers to entry are high, no other firm can enter the market and dissolve the short-term profits.

PROFIT

Still making the cash!!

Finally,

something easy

to remember!!!

Government Regulation on a

Monopolist

Regulation of a Monopolist: Price Ceiling

Why would the gov. regulate a monopoly?

1. To keep prices low

2. To make monopolies efficient

How do they regulate?

1. Price Ceilings

2. Taxes don’t work(taxes limit supply and that’s a problem)

Regulation of a Monopolist: Price Ceiling

Where should the gov. place the price ceiling?

1. Socially Optimal Price

P = MC (Allocative Efficiency)

OR

2. Fair-Return Price (Break-even)

P = ATC (Normal Profit)

Regulation of a Monopolist: Price Ceiling

EXAMPLE:

Price ceiling set at the Socially

Optimal Price

P = MC

Price CeilingPc

Regulation of a Monopolist: Price Ceiling

EXAMPLE:

Price ceiling set at the Fair Returns

P = ATC(No economic profit)

Price CeilingPc

P = ATC

Regulation of a Monopolist: Price Ceiling

What happens if the socially optimal price is below the ATC?

Two Options:1. The fair-return price

will be chosen (m)

OR2. The firm will receive

a subsidy to shift down its ATC so that the optimal price is at the fair-return price (P=ATC).

P < ATC

P = ATC

ATC after

subsidy

Regulation of a Monopolist: Price Ceiling

Summary

Pc

Fair Return

Socially Optimal

Unregulated

Regulation of a Monopolist: Consumer Surplus

Pc

Consumer surplus with an Unregulated Monopoly

Consumer surplus with an Regulated Monopoly