Don’t Write On Desks

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Monopoly- more than just a game

• 1)What is a monopoly

• 2) How do monopolies affect the marketplace?

• 3) How do monopolies affect you, the consumer?

• 4) What are examples of Monopolies that you know of?

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• One company has entire market share

• No other options for consumers

• Create the supply

• Control the product

• Higher Prices

• Less Quantity

• Creates inefficiency

• US Postal Service, Parking Meter, Tap Water, Exxon-Mobile, Com Ed, GE, CTA

Monopoly- more than just a game

• Monopolies are a source of inefficiency in the marketplace

• Monopolies can be argued to be a source of inequity

• Monopolies cause higher prices for consumers

• Examples-Diamonds, Cell Phones

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Demand for Class

• How many of you would pay?

• In perfect competition what is demand for the firm?

• But I was a monopolist, what is the demand for me?

• Demand for a monopolist is the industry market demand

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7

Comparing the Demand Curves of a Perfectly Competitive Firm and a Monopolist

Imperfect Competition

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Characteristics of Monopolies

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Take five minutes to come up with answers to these questions- have

someone record for your table• 1) What are the characteristic of a monopoly?

• 2) What are examples of monopolies that you know of?

• 3) How can a company become a monopoly?

• 4) How do monopolies affect you? Society? Are they good? Bad?

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5 Characteristics of a 5 Characteristics of a Monopoly

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1. Single Seller• One Firm controls the vast

majority of a market

• The Firm IS the Industry

• This doesn’t happen often, a true monopoly is rare

• 2. Unique good with no close substitutes

5 Characteristics of a 5 Characteristics of a Monopoly

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• 3. “Price Maker”• The firm can manipulate

the price by changing the quantity it produces (ie. shifting the supply curve to the left).

• Ex: DeBeers Diamonds

4. High Barriers to Entry

• No immediate competitors

5 Characteristics of a Monopoly5 Characteristics of a Monopoly

• New firms CANNOT •enter market

• Firm can make profit in the long-run

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5. Some “Nonprice” Competition• Despite having no close competitors, monopolies still advertise their products in an effort to increase demand.

5 Characteristics of a Monopoly5 Characteristics of a Monopoly

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AT&T Commercial

Examples of Examples of MonopoliesMonopolies

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Four Origins of MonopoliesFour Origins of Monopolies1. Geography is the Barrier to EntryEx: Nowhere gas stations, De Beers Diamonds, Chicago

Bulls, Cable TV, -Location or control of resources limits competition and

leads to one supplier.

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Four Origins of MonopoliesFour Origins of Monopolies2. The Government is the Barrier to EntryEx: Water Company, Firefighters, The Army,

Pharmaceutical drugs, rubix cubes… -Government allows monopoly for public benefits

(water company) or to stimulate innovation (patents).

-The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years)

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Four Origins of MonopoliesFour Origins of Monopolies3. Technology or Common Use is the Barrier to EntryEx: Microsoft, Frisbee, Itunes, Band-Aide…-Patents and widespread availability of certain products

lead to only one major firm controlling a market.

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Four Origins of MonopoliesFour Origins of Monopolies4. Mass Production and Low Costs are Barriers to EntryEx: Electric Companies

• If there were three competing electric companies they would have higher costs.

• Having only one electric company keeps prices low-Economies of scale make it impractical to have

smaller firms. Natural Monopoly- It is NATURAL for only one firm to

produce because they can produce at the lowest cost.

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Drawing Drawing MonopoliesMonopolies

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Good news…1.Only one graph because the

firm IS the industry.2.The cost curves are the same3.The MR= MC rule still applies4.Shut down rule still applies

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The Main Difference• Monopolies (and all Imperfectly

competitive firms) have downward sloping demand curve.

• Which means, to sell more a firm must lower its price.

• This changes MR…

THE MARGINAL REVENUE DOESN’T EQUAL THE PRICE!

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P Qd TR MR

$11 0 0 -

Why is MR less than Demand?

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

Why is MR less than Demand?

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 18 8

Why is MR less than Demand?

$9 $9

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 18 8

$8 3 24 6

Why is MR less than Demand?

$9 $9

$8 $8 $8

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7 $7

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

$4 7 28 -2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $431

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

$4 7 28 -2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $432

$10

P Qd TR MR

$11 0 - -

$10 1 10 10

$9 2 18 8

$8 3 24 6

$7 4 28 4

$6 5 30 2

$5 6 30 0

$4 7 28 -2

Why is MR less than Demand?

$9 $9

$8 $8 $8

$7 $7 $7

$6 $6 $6 $6

$7

$6

$5$5 $5 $5 $5 $5

$4 $4 $4 $4 $4 $4 $4

MR IS LESS THAN PRICE

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Calculating Marginal Revenue

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To sell more a firm must lower its price. What happens to Marginal Revenue?

Price Quantity

Demanded

Total Revenue

Marginal Revenue

$6 0

$5 1

$4 2

$3 3

$2 4

$1 5

Does the Marginal Revenue equal the price?35

To sell more a firm must lower its price. What happens to Marginal Revenue?

Price Quantity

Demanded

Total Revenue

Marginal Revenue

$6 0 0

$5 1 5

$4 2 8

$3 3 9

$2 4 8

$1 5 5

Does the Marginal Revenue equal the price?36

To sell more a firm must lower its price. What happens to Marginal Revenue?

Price Quantity

Demanded

Total Revenue

Marginal Revenue

$6 0 0 -

$5 1 5 5

$4 2 8 3

$3 3 9 1

$2 4 8 -1

$1 5 5 -3

Draw Demand and Marginal Revenue Curves

MR DOESN’T EQUAL PRICE

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Plot the Demand, Marginal Revenue, and Total Revenue Curves

38Q

$15

10

5

$64

40

20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TR

P

Q

$15

10

5

$64

40

20

TR

D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

MR

Demand and Marginal Revenue CurvesWhat happens to TR when MR hits zero?

Total Revenue is at it’s peak when

MR hits zero

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P

TR

Elastic vs. Inelastic Range of Demand Curve

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Elastic and Inelastic Range

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$15

10

5

$64

40

20

TR

D1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Q

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

MR

P

TR

Total Revenue TestIf price falls and TR

increases then demand is elastic.

Elastic

Total Revenue TestIf price falls and

TR falls then demand is inelastic.

Total Revenue is maximized when Marginal Revenue is Zero

Inelastic

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A monopoly will only produce in the elastic range

Maximizing Profit1)How much should

a monopolist produce?

2) What does a monopolist charge?

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D

MR

$9

8

7

6

5

4

3

2

MCATC

44 1 2 3 4 5 6 7 8 9 10 Q

P

What output should this monopoly produce?MR = MC

How much is the TR, TC and Profit or Loss?

Profit =$5

D

$9

8

7

6

5

4

3

2

Conclusion: A monopolists produces where MR=MC, buts charges the price consumer are willing to pay identified by the demand curve.

MCATC

45 1 2 3 4 5 6 7 8 9 10 Q

P

MR

D

MR

$10

9

8

7

6

5

4

3

MCATC

466 7 8 9 10 Q

P

TR= $90TC= $100Loss=$10

AVC

What if cost are higher? How much is the TR, TC, and Profit or Loss?

D

MC

MR

TR=TC=

Profit/Loss=Profit/Loss per Unit=

Identify and Calculate: $70

$14$56

ATC

$2

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$10

9

8

7

6

5

4 1 2 3 4 5 6 7 8 9 10 Q

P

Are Monopolies Efficient?

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Q

P

D

S = MC

Ppc

Qpc

CS

PS

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In perfect competition, CS and PS are

maximized.

Monopolies vs. Perfect Competition

At MR=MC,A monopolist willproduce less and

charge a higher price

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Monopolies vs. Perfect Competition

Q

P

D

S = MC

Ppc

Qpc

MR

Pm

Qm

Where is CS and PS for a monopoly?

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Monopolies vs. Perfect Competition

Q

P

D

S = MC

MR

Pm

Qm

CS

PS

Total surplus falls. Now there is

DEADWEIGHT LOSS

Monopolies underproduce and over charge, decreasing CS and increasing PS.

Are Monopolies Productively Efficient?

Does Price = Min ATC? No. They are not producing at the lowest

cost (min ATC)

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D

$9

8

7

6

5

4

3

2

MCATC

1 2 3 4 5 6 7 8 9 10 Q

P

MR

Are Monopolies Allocatively Efficiency?

Does Price = MC? No. Price is greater. The monopoly is under

producing.

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D

$9

8

7

6

5

4

3

2

MCATC

1 2 3 4 5 6 7 8 9 10 Q

P

MR

Monopolies are NOT efficient!

Monopolies are inefficient because they…1. Charge a higher price2. Don’t produce enough

• Not allocatively efficiency3. Produce at higher costs

• Not productively efficiency4. Have little incentive to innovate

Why?Because there is little external pressure to

be efficient 56

Regulating Monopolies

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What should be regulated?

• 1) Local Cable• 2) Local Electric• 3) Local Trash Service• 4) Diamonds• 5) The nearest theme

park • 6) Phone Service

• Consider which are natural monopolies?

• Would regulation give incentive to the firm to innovate?

• Would regulation protect consumers?

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How do they regulate?•Use Price controls: Price Ceilings•Why don’t taxes work?

•Taxes limit supply and that’s the problem

Why Regulate?Why would the government regulate

an monopoly? 1. To keep prices low 2. To make monopolies efficient

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1.Socially Optimal PriceP = MC (Allocative Efficiency)

Where should the government place the price ceiling?

2. Fair-Return Price (Break–Even)

P = ATC (Normal Profit)

OR

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D

MR

MC

ATC

61Q

P

Regulating MonopoliesWhere does the firm produce if it is

unregulated?

Pm

Qm

D

MR

MC

ATC

62Q

P

Regulating MonopoliesPrice Ceiling at Socially Optimal

Pm

Qm

Pso

Qso

Socially Optimal = Allocative Efficiency

D

MR

MC

ATC

63Q

P

Regulating MonopoliesPrice Ceiling at Fair Return

Pm

Qm

Pso

Qso

Fair Return means no economic profit

Pfr

Qfr

D

MR

MC

ATC

64Q

P

Regulating Monopolies

Pm

Qm

Pso

Qso

Unregulated

Pfr

Qfr

Socially Optimal

Fair Return

QDMR

MC

ATC

P

Natural Monopoly

65Qsocially optimal

One firm can produce the socially optimal quantity at the lowest cost due to economies scale.

It is better to have only one firm because ATC

is falling at socially optimal quantity

QDMR

MC

ATC

P

Regulating a Natural Monopoly

66Qsocially optimal

What happens if the government sets a price ceiling to get the socially optimal quantity?

The firm would make a loss and would require

a subsidy

Pso

Price Discrimination

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Price DiscriminationDefinition:Practice of selling the same products to different buyers at different prices

•Airline Tickets (vacation vs. business, purchasing in advance vs. the day before)•Movie Theaters (child vs. adult) •All Coupons (spenders vs. savers)

Examples:

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PRICE DISCRIMINATION•Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.•Those with inelastic demand are charged more than those with elastic

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PRICE DISCRIMINATIONRequires the following conditions:1. Must have some form of monopoly power2. Must be able to segregate the market 3. Consumers must NOT be able to resell

product (Cannot always be controlled i.e. scalping

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P Qd TR MR

$11 0 0 -

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 9$10 $9

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 9

$8 3 27 8$10 $9

$10 $9 $8

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 9

$8 3 27 8

$7 4 34 7

$10 $9

$10 $9 $8

$10 $9 $8 $7

Results of Price Discrimination

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$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 $9

$8 3 27 $8

$7 4 34 $7

$6 5 40 $6

$5 6 45 $5

$4 7 49 $4

Results of Price Discrimination

$10 $9

$10 $9 $8

$10 $9 $8

$10 $9 $8 $7

$7

$6

$5$10 $9 $8 $7 $6

$10 $9 $8 $7 $6 $5 $476

$10

P Qd TR MR

$11 0 0 -

$10 1 10 10

$9 2 19 $9

$8 3 27 $8

$7 4 34 $7

$6 5 40 $6

$5 6 45 $5

$4 7 49 $4

$10 $9

$10 $9 $8

$10 $9 $8

$10 $9 $8 $7

$7

$6

$5$10 $9 $8 $7 $6

$10 $9 $8 $7 $6 $5 $4

WHEN PRICE DISCIMINATING

MR = D

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Regular Monopoly vs. Price Discriminating Monopoly

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D

MR

MC

ATC

Q

P

Pm

Qm

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

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D

MR

MC

ATC

Q

P

80

D=MR

MC

ATC

Q

P

Qnm

Identify the Price, Profit, CS, and DWL

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

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D=MR

MC

ATC

Q

P

Qnm

Identify the Price, Profit, CS, and DWL

A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand

Price Discrimination results in several prices, more profit, no CS, and a higher

socially optimal quantity

• Why charge a higher rate for popcorn?

• Which is better for the movie theater? – Ticket $15, Popcorn $5– Ticket- $11, Popcorn $9– Both equal $20 total

• Is this price discrimination, or just a close pricing scheme?

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• What knowledge does a monopolist require to Price Discrimination?

• How would you Price Discriminate? • 1) High School Sporting Events• 2) Student Fundraisers (Art Sale, Bake Sale, Pizza Sale) • 3) School Parking Lot (Premium Spaces, Remote Spaces) • 4) Online Gaming/Television subscriptions• 5) Iphone/Android Games with in-app purchases- Candy Crush/ Jetpack Joy

Ride/ Angry Birds • 6) Think of your own good or service where price discrimination is beneficial.

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