Monopoly

Case Study 1: Microsoft Corp

• Products sold included operating system, application software and hardware peripherals.

• By 1991, 80% of 22 million new PCs supported Microsoft’s operating system.

• Replaced IBM as single most important force in computer industry.

• Complaints from rivals grew about Microsoft exploiting its dominant position.

• In June 1990, four years after it went public, FTC informed Microsoft that it was the target of an anti-trust investigation (initial
concerns being collusion with IBM and later on focus shifted to pricing practices).

• Exclusionary licenses: In 1988, discounts offered to PC makers if they paid royalty fee (per processor fee) even if they did not
install the Microsoft software (MS DOS/Windows) in the machines. When a PC maker planned to ship DR-DOS, on about 10%
of its machines, Microsoft doubled that customer’s price on MS-DOS, which quickly forced the PC maker to drop the idea.

• RESTRICTIVE NON-DISCLOSURE AGREEMENTS: NDA’s restricted Independent software vendor’s ability to work with
competing PC operating systems as well as restrict their ability to develop the competing products. The NDA period was well
beyond the development life cycle of operating system, which was a predatory practice and hampered the ability of ISV’s.

• Microsoft was bundling its Windows Operating system with Internet Explorer Browser effectively making it impossible for other
companies such as Netscape to maintain market share.
 Case Study 2: Google
• Google has 90% market share in Internet search market in India, reflecting its dominance

• 2012—Google’s price comparison plan for flight search service

• Unfair trade practice with Bharat matrimony.com

• In February 2012, Consim Info Pvt. Ltd. filed a complaint against Google with the CCI. They alleged that when their trademark protected keyword
“Tamil Matrimony” is searched in the search engine, it displays its competitors link like Shaadi.com, Jeevansathi.com and SimplyMary.com under
the sponsored links next to the generic search result.
The highest bidder for each click per keyword appeared at the top of the sponsored list. Because of that competitors such as Shaadi.com got a higher
rank than Tamilmatrimony.com in the sponsored list when the keywords were searched. The company accused Google of selling its trade names
such as Bharat Matrimony and Tamil Matrimony to its competitors for triggering ads when consumers searches for Bharat Matrimony using Google
search.

• Google was also under investigation in EU for manipulating its unpaid or alogrithmic search results to penalize its competitors; forcing advertising
partners for exclusive contracts and barring the placement of ads from competing companies on a particular website; restricting the portability of
online advertising campaign dates on a competing platform; google’s acquisition of Motorola might result in the foreclosure of use of android by
other smartphone users; entry into fast growing markets through online shopping platforms such as shopzilla/Ugenie

• Google argued that consumers were in no way harmed; there were a large number of competitors on the internet and consumers could easily navigate
directly to other websites and being the owner of its own search page, google had the prerogative to display its own services
Perfect Competition versus Monopoly

• Under Perfect competition, there a large number of firms with no single firm having ability to influence prices and each
firm earning zero profits in the long run. The ability to influence prices increases with the degree of market power and
dominant firms may pursue anti-competitive practices to retain market power. The positive aspect is that there is incentive
for monopolies to invest profits in R&D and quality in the long run.

US Anti-trust Case and Microsoft Ruling by Federal Trade Commission

1. Microsoft was not broken up into two separate firms (one for operating system and one for applications)

2. But it had to change marketing practices and make it easier for other browsers to work with Windows

• In India, Competition Commission of India (CCI) formed in 2003 to examine anti-competitive agreements, abuse of
dominant positions and impact of mergers and acquisitions.
Why Monopolies Arise
• Monopoly resources
• A key resource required for production is owned by a single firm
• Higher price
• Government regulation
• Government gives a single firm the exclusive right to produce some good or service
• Government-created monopolies
• Patent and copyright laws
• Higher prices; Higher profits
• The production process: Economies of scale over the relevant range of output
• A single firm can produce output at a lower cost than can a larger number of
producers
• Natural monopoly: Arises because a single firm can supply a good or service to an
entire market at a smaller cost than could two or more firms

• Network Externalities:
• product value increase with number of users/consumers. Eg. Mobile phones, Ebay,
Facebook, Amazon, etc)
 Natural Monopoly: Average Total Cost is declining

Natural market power: Control of key resources (Alcoa controlling bauxite, used in production of aluminum;
Professional sports teams controlling talent )

Economies of scale

Natural monopolies arise because of economies of Scale over a long range of output. When a firm’s average-total-
cost curve continually declines, the firm has what is called a natural monopoly. In this case, when production is
divided among more firms, each firm produces less, and average total cost rises. As a result, a single firm can
produce any given amount at the smallest cost
Poll 1
•
Average total cost decreases with an increase in output because ________.
•
A) total variable cost decreases with an increase in output
•
B) average fixed cost decreases with an increase in output
•
C) the marginal cost of production increases with an increase in output
•
D) diminishing marginal returns set in after a particular level of production
Demand curves for competitive and monopoly firms
(a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve
Price Price

Demand

Demand

0 Quantity of output 0 Quantity of output

Because competitive firms are price takers, they in effect face horizontal
demand curves, as in panel (a). Because a monopoly firm is the sole
producer in its market, it faces the downward-sloping market demand
curve, as in panel (b). As a result, the monopoly has to accept a lower price
if it wants to sell more output.
Surplus Allocations: Perfect Competition Versus Monopoly

© 2015 Pearson Education, Ltd.

The Monopolist’s Demand Curve and the Quantity and Price effect on Revenue

Assume this monopolist is selling 200 units at a price of $5 each and wants to increase the quantity it sells to 400 units at a lower
price of $4. [At a price of $5 it can sell 200 m units and at a price of $4, it can sell 400 m units. Equation of line y=mx+C. Using the information
given slope =ΔY/ΔX = (1/200)=0.005. Demand curve is P= 6-0.005Q]

Good News: Selling 200 more units at $4 each =$800

Bad News: Charging $1 less on 200 units it was selling before = -$200

https://mediaplayer.pearsoncmg.com/assets/R1Iow9UBzu7VYRUB_j8ldpilA6AeuCSU
 The Monopolist’s Problem Revenue and Costs
MC is constant
Price and MR are NOT the same
(lower price, higher sales) Once drug is developed, the MC of producing
another pill is low and constant
 Exhibit 12.8 Marginal Revenue, Marginal Cost and Profit Maximization for Claritin

TR = P*Q = 6Q-0.005Q2
Profit = (P × Q) – (ATC × Q)= Q (P – ATC)= 500*($3.50 - $1.02)= $1,240,000,000
Marginal Revenue Curve can be derived:

TR/ Q= MR = 6-0.01Q

 Choosing the Optimal Quantity and Price
Does a Monopoly Have a Supply Curve?

A supply curve answers the question:

If the price is $x, how many units does the firm want to produce?
•
A monopolist is not a price taker, but a price maker; therefore, the supply relationship does not exist.
•

Monopolists do not vary their production based on market price because they set the price, but market
demand; it is not relevant to ask how much of a good a monopolist will produce at a given price.
•
Monopolist faces a downward sloping “elastic” demand curve and sets his price based on price elasticity
of demand.
Pricing Strategies
Monopoly Pricing: Three Degrees of Price
Discrimination

Price discrimination: Charging different customers different prices for the

same good or service when there are no cost differences

Three degrees of price discrimination

1. First-degree (perfect)

2. Second-degree

3. Third-degree
First Degree (Perfect) Price Discrimination

When each consumer is charged the maximum he/she is willing to pay. Examples:
Bidding over Ebay, last minute ticket sales, airtickets bought in advance cost less than
those bought on the same day

Exhibit 12.13 Surplus Allocations For a Monopoly: With and Without Perfect Price Discrimination
Third Degree Price Discrimination
• Consumers are charged different prices based on the characteristics of the customer
or location; Examples: senior citizen discounts, student discounts, theater matinee
discounts; Harry Potter books sold at different prices across two countries
• Firms will lower the price for subgroups that have a higher elasticity of demand so
that revenue increases for a price fall.
• Price discrimination allows a firm to increase revenue IF subgroups have different
elasticities of demand by lowering price for the elastic group and raising price for the
inelastic group.
• A successful price discriminator must find a way to keep members from crossing over
to the lower-price group.
 Second Degree Price Discrimination

•
What if firms don’t know what someone’s willingness to pay (elasticity) is?

•
Consumers are charged different prices based on the characteristics of the purchase;
Examples: when firms sell blocks of product at a lower price than advertised—last-
minute hotel rooms; utility company pricing for commercial vs. residential usage
• Firms choose a price schedule that provides incentives for demanders to separate
themselves depending on how much they wish to buy
• Quantity discounts, minimum purchase requirements or ‘‘cover’’ charges, and tie-
in sales
•
Linear two-part tariff
• Buyers must pay a fixed fee for the right to consume a good
• And a uniform price for each unit consumed
•
T(q) = a + pq
 Tied Sales

• Example: SCM Corporation was a leading manufacturer of copying machines. At first

SCM priced the machines at a mark-up of 25% and the special paper at a mark up of
300 %. Soon, other companies entered offering lower prices. SCM responded by first,
lowering prices on paper, but raising the price of copying machines. Second, customers
could buy replenisher only if they bought SCM’s paper. Third, after chemical companies
entered the replenisher market, SCM required customers to use SCM paper to get SCM
service. These practices were brought to an end by FTC.
• Another example of tied sales: The ink sales of inkjet printers is tied to the printer sales.
Eg. HP.
• Producer an also null the warranty for consumers who buy supplies from other
manufacturers.

19
 Bundling

•Practice of selling goods as a package

Willingness to pay

Consumer Number Spreadsheet Wordprocessor Both

Type
A 1000 200 0 200

B 1000 175 25 200

C 1000 100 100 200

D 1000 25 175 200
E 1000 0 200 200

If sold separately, 1000 consumers will buy S at p=200 and 2000 at 175 and so on. Profit for both products is maximized at a price
of 175 earning Rs.700000.
If sold as a bundle, a bundle can be sold to all consumers at 200, earning 1000000.
Individual sales: Revenue is maximized at P=175. If P=200, TR=200000; If P=175, TR=175*2000=350000
If sold as a combination at P=200, 5000 people will buy and TR= 5000*200
Exhibit 12.13 Surplus Allocations for a Monopoly: With and Without =
Perfect Price Discrimination

© 2015 Pearson Education, Ltd.