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Monday, October 7, 2013

Unit IV Characteristics of Monopoly

- Single Seller • One firm controls the vast majority of a market • The firm IS
the industry

- *only one graph - Unique good w/ no close substitutes - “Price Maker” • Firm can manipulate the price by changing the quantity it produces (ie
shifting the supply curve left)

• ex) Cal electric companies - High Barriers to Entry • New firms CANNOT enter market • no immediate competitors • Firms can make profit in long run - Some “nonprice Competition” • Despite having no competition, monopolies still advertise their products
in an effort to increase demand
Geo Monopoly Natural Monopoly Tech Monopoly Government

- natural resources - cheaper for 1 company than having many economies of scale: big companies use resources better ex: trash, water

- location only

are in one area


supports one seller - ex) helium - ex) desert/vegas: every so often, 1 gas station has no competition in the middle of nowhere

- manufacutring - patent-17 years - copyright

- gov owned & - 3x) DMV - post office-to
help us out operated

Drawing Monopolies

- 1. Monopolies (and all imperfect competition firms) have downward sloping
demand curve

- 2. Which means to sell more, a firm must lower its price - This changes MR

! !


Monday, October 7, 2013 - Why? • D, taking the industry • MR <D because no longer connected • D decreases: revenu increases w/
each decreasing D Maximizing Profit

- Produce where MR = MC, take it up to D line - Dline above ATC, making a profit - Shut down when D below AVC - Elasic & Inelastic Range • Total Revenu test: if price falls & TR increases then demand is elastic • Total revenu test: If price falls & TR falls, then demand is inelastic - *Monopoly will only produce in elasticity
Are Monopolies Efficient?

- Inefficient because: • charge higher price • don’t produce enough - no allocative efficiency • produce at higher costs - no productive efficiency • have incentive to innovate - Why? Because there’s little external pressure to be efficient
Inefficiency of a Monopoly

Efficiency of perfect competition


Monday, October 7, 2013 - Inefficiency of Monopoly (first graph, left side ^) • Monopolies under produce & overcharge, decreasing consumer surplus and
increasing producer surplus

- Productive Efficiency at Price = ATC - Allocative efficiency: Price = MC - Monopoly is not efficient, producing above ATC - Monopoly is under producing
Regulating Monopolies

- Why regulating? inefficient & need to fix them - How regulate? in form of price ceiling - how should give place price ceiling? • Socially optimum price: P = MC (allocative efficiency) • Faire return Price: P = ATC (Normal Profit) - Lowers price for everyone & quantity increases - social profit but not economic profit - socially optimal, but no economic profit • fix with subsidy
Price Discrimination

- Practice of selling specific products to different buyers at different

- conditions: • firm mus thane monopoly power • Firm must be able to segregate the market • consumers must not be able to resell product - ex)airline tickets, movie tickets, all coupons, DHS soda machine • What is consumer willing to pay & we’ll charge them that price • Result of Price discrimination - Price = Marginal Revenue • nonprice discrimination, D shifts left - Price discriminating "3

Monday, October 7, 2013 • NO CONSUMER SURPLUS: • Price is whatever you want it to be, everything is producer surplus
Xbox Raise Price Play Raise Price Station Remain the same 45! 50! 52 51 60! 55! Remain Same 54 64

• xbox stately to remain same • play station
has dominant strategy… will follow xbox

• compare vertically in boxes first, in same plan of action • then compare horizontally without boxes indifferent boxes

- looks just like monopoly graph - characteristics of oligopolies: • few large producers (less than 10) • identical or diff products • high barriers to entry • control over Price (Price Makers) • mutual interdependence • Firms use strategic pricing • ex) OPEC, cereal companies, car product - How do oligopolies occur? • When few large firms start to control an industry • high bariers to keep others from entering • Types of barriers to entry - Economies of scale - high start up costs - Ownership of raw materials - Game theory helps predict human behavior - 3 types of oligopoly


Monday, October 7, 2013 • price leadership (no graph) • price = same everywhere • collusion is illegal • firms cannot set prices • pure leadership is a strategy used by fems to coord. prices without
outright collusion

• General Process - “Rom Firm” initiates a price change - other firms: follow leader - Cartel = colluding oligopoly • Cartel is a group of producers that create agreement to fix prices high • 1. set up & output at a higher cover • 2. Firms require identical or highly similar demand & onset • 3. Cartel must have ways to punish checkers • 4. Together, they act as monopoly • colluding oligopoly act as monopoly & share profit
Monopolistic Competition

- Characteristics • relatively large numbers of sellers • different products • some contrast over price • easy entry & exist (low bale) • A lot of non price competition (advertizing - Examples • fast food restaurants • furniture company • jewlery stores • hair salons • clothing manufactures


Monday, October 7, 2013
Monopoly + Competition

- Non quality • control our price of our good due of diff product • D>MR - Reflect change quality • large# of smaller firms • relatively easy entry - Diff Products • Goods not identical • firms seek to capture a piece of market by making unique goods • since products have subs firms use non price competition


- product where MR = MC - Longrun: firms will enter
during decrease demand for firms in market

- Longrun equilibrium • MR=MC=ATC - Short run profits • New firms enter - increase substitute,decrease

- Firms will leave and remaining will make upf for demand - Longrun: • not allocatively efficient because P!MC • Excess capacity; current resources firm can produce at lowest cost (min
ATC_, but denmenethe

- gap between the output of profit max output - not the am under prod