Managing in Competitive, Monopolistic, and

Monopolistically Competitive Markets

MODULE 6
MANAGING IN COMPETITIVE,
MONOPOLISTIC AND
MONOPOLISTICALLY COMPETITIVE
MARKETS

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 Learning Objectives
1. Identify the conditions under which a firm operates as perfectly
competitive, monopolistically competitive, or a monopoly.
2. Identify sources of (and strategies for obtaining) monopoly power.
3. Apply the marginal principle to determine the profit-maximizing
price and output.
4. Show the relationship between the elasticity of demand for a firm’s
product and its marginal revenue.
5. Explain how long-run adjustments impact perfectly competitive,
monopoly, and monopolistically competitive firms; discuss the
ramifications of each of these market structures on social welfare.
6. Decide whether a firm making short-run losses should continue to
operate or shut down its operations.
7. Illustrate the relationship between marginal cost, a competitive
firm’s short-run supply curve, and the competitive industry supply;
explain why supply curves do not exist for firms that have market
power.
8. Calculate the optimal output of a firm that operates two plants and
the optimal level of advertising for a firm that enjoys market power.
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 Monopoly

Monopoly and Monopoly Power

• Monopoly: A market structure in which a single
firm serves an entire market for a good that has
no close substitutes.
• Sole seller of a good in a market gives that firm
greater market power than if it competed
against other firms.
– Implication:
• market demand curve is the monopolist’s demand curve.
– However, a monopolist does not have unlimited
market power.

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 Monopoly
The Monopolist’s Demand
Monopolist’s power is constrained
Price
by the demand curve.

0 Output

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 Monopoly

Sources of Monopoly Power

• Economies of scale: exist whenever long-run
average costs decline as output increases.
– Diseconomies of scale: exist whenever long-run
average costs increase as output increases.
• Economies of scope: exist when the total cost of
producing two products within the same firm is
lower than when the products are produced by
separate firms.
• Cost complementarity: exist when the marginal
cost of producing one output is reduced when the
output of another product is increased.
• Patents and other legal barriers

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 Elasticity of Demand and Monopoly

Total Revenues
Price Revenue

Elastic

Unitary
Unitary

Inelastic Elastic Inelastic

0 Q 0 Firm’s
MR output

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 Monopoly

Marginal Revenue and Elasticity

•

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 Monopoly

Marginal Revenue and Linear

Demand
•

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 Monopoly

Marginal Revenue In Action

•

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 Monopoly

Monopoly Output Rule

•

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 Monopoly

Costs, Revenues, and Profits Under

$
Monopoly

Maximum
profit

0 Output

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 Monopoly

Profit Maximization Under Monopoly

Price MC

ATC

Profits

Demand

Quantity
MR

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 Monopoly

Monopoly Pricing Rule

•

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 Monopoly

Monopoly In Action
•

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 Monopoly

The Absence of a Supply Curve

•

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 Monopoly

Multiplant Decisions
•

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 Monopoly
Multiplant Output Rule
•

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 Monopoly
Implications of Entry Barriers
• A monopolist may earn positive economic
profits, which in the presence of barriers to
entry prevents other firms from entering the
market to reap a portion of those profits.
– Implication: monopoly profits will continue over
time provided the monopoly maintains its market
power.
• Monopoly power, however, does not
guarantee positive profits.

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 Monopoly

A Monopolist Earning Zero Profits

Price MC
ATC

Demand

Quantity
MR

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 Monopoly

Deadweight Loss of Monopoly

• The consumer and producer surplus that is
lost due to the monopolist charging a price in
excess of marginal cost.

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 Monopoly

Deadweight Loss of Monopoly

Price

MC

Deadweight loss

Demand
MR

Quantity

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24
4.A

4D (PQ Combi-
Max REvenue)

25
4B

4E (Max REvenue
Computation)

26
4B

27
4C

4F
(Revenue-Maximi
zing Combi)

28
A.
Q when MC=MR,
Q(m)= 3
P(m)=70

B.
P and Q when MC=D,
Pe = 60
Qe = 4

C. DWL
½ (4-3)(70-60)
= 5 usd

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30
8A&B

31
9A&B

32
9C

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