1. Monopoly - A Single Seller
Microeconomics - Dr. D. Foster
Monopoly - A Single Seller MR P D Q

2. Monopoly Characteristics
A single seller with no “close” substitutes means that the market demand is the firm’s demand.
Barriers to entry means that they can earn LR econ. profit.
legal restrictions
patents
control of resources
economies of scale

3. Monopoly - Finding Profit Max.
Find where MR=MC . . .
MR = Gain - Loss Q P D
If P1=$10, P2=$9.95, Q1=100, Q2=101, what is MR?
loss P1 Q1 P2 Q2
gain
Gain = $9.95 Loss = $5.00 MR = $4.95 < Price

4. Monopoly - Finding Profit Max.
Find where MR=MC . . .
Set output at MR=MC. Q P D MR MC
Find the price to charge from the Demand. P* Q*
Will the firm earn an economic profit? How can we tell?

5. Monopoly - Finding Profit Max.
Economic profit = TR - TC . . . Q* Q P D MR MC P*
TR = P•Q
ATC
TC = ATC•Q
Can a monopoly firm earn “negative” economic profit and stay in business in the short run?

6. Can a monopoly earn just a zero economic profit?
Can a firm can earn negative profit in the SR?
ATC Q* Q P D MR MC P*
AVC
Yes! As long as P > AVC, the firm will sustain losses in the short run.
Can a monopoly earn just a zero economic profit?

7. Monopoly - Earning zero profit
Zero Economic profit if TR = TC
P = ATC
Under what circumstances might we expect this to happen? Q* Q P D MR MC P*
ATC
When owners of a monopoly sell it to a new owner they should attempt to extract this econ. profit.

8. Monopoly Example I What is the profit maximizing level of output?
$100
$90
$75
$70
$50
$45
$30 MR Q D
ATC MC P
What is the profit maximizing level of output?
What price will the monopolist charge?
What is the amount of economic profit?
What is the amount of accounting profit?

9. Monopoly and Inefficiency
Allocative efficiency occurs when P=MC. Q* Q P D MR MC P*
ATC
Monopolies are allocatively inefficient, as they price above the MC.
They produce too little. Our loss is call the “social loss” (or, deadweight cost) and measured as shown.

10. Monopoly and Inefficiency
Productive efficiency occurs when at min ATC. -- Monopolies are likely to be inefficient.
“Social waste of resources” - up to the value of the firm’s economic profit if spent in “rent seeking” activities.
“X-inefficiency” - arises from a cost structure that is higher than would be true for perfectly competitive firms.

11. Monopoly Example II What output level is allocatively efficient?
$100
$90
$75
$70
$50
$45
$30 MR Q D
ATC MC P
What output level is allocatively efficient?
What is the social loss?
What output level is productively efficient?

12. Regulating Monopoly Using price controls can promote efficiency! PQ* Q P D MR MC P*
ATC
By instituting a price ceiling, the “demand” is altered, insofar as the firm’s actions are concerned. Pc

13. The monopolist can be induced to produce more (Q’) at a lower price!!
Regulating Monopoly
Using price controls can promote efficiency! Q* Q P D MR MC P*
ATC
The monopolist can be induced to produce more (Q’) at a lower price!!
The firm is still inefficient, but we could set prices to achieve either allocative or productive efficiency. Pc Q’

14. Monopoly Example III
$100
$90
$75
$70
$50
$45
$30 MR Q D
ATC MC P
1. What would be the effect on output, price, economic profit and social cost if the government establishes a price ceiling of . . .
a. $45?
b. $50?
c. $70?
d. $75?
e. $90?
f. $100?

15. Monopoly Fundamentals
A single seller with no “close” substitutes.
Barriers to entry.
Sets output at MR=MC.
Prices output based on demand.
Will be allocatively inefficient as P>MC.
Will likely be productively inefficient.
Also suffers from “social waste” and “X-inefficiency.”
Price controls can promote efficient outcomes.

16. Regulating Monopoly Do regulations work?
Inflating the cost structure (X-inefficiency).
The “capture” hypothesis.
Antitrust legislation may promote inefficiency.
Regulating a natural monopoly . . .

17. How do you regulate? At P=MC, firm has negative econ. profit.
Natural Monopoly
Experiences economies of scale:
--Profit max. rule is still the same. --Price off of demand. --May earn positive economic profit in LR. Q P D MR
ATC Qm Pm MC
How do you regulate? At P=MC, firm has negative econ. profit.
Q*?
P*?

18. Natural Monopoly --We can set the price equal to the MC. PD MR Qm Pm
ATC MC
… and give the monopoly a subsidy equal to its losses!
--Or, we can set the price equal to the ATC.
Q*?
P*?
… and the firm can earn zero econ profits, but is alloc. inefficient.

19. Monopoly - Price Discrimination
When different people/customers are charged different prices when costs are equal.
When different people/customers are charged the same price when costs are different.

20. Monopoly - Price Discrimination
1st degree price discrimination (perfect p.d.)
when a firm can charge each individual the max. they are willing to pay.
2nd degree price discrimination (method #1)
when a firm uses volume discounts to vary the price.
3rd degree price discrimination (method #2)
when a firm segments the market by elasticity.
more elastic = lower price; less elastic = higher price

21. Monopoly - Price Discrimination
If the firm is collecting different prices from each customer, to sell one more unit, it need only lower the price for that unit, not for all.
Perfect price discrimination Q* Q
Price
D=MR MC
Pmax
Pmin
This only works if: --you prevent resale. --you can easily separate customers.

22. Monopoly - Segmented markets
Day/night billing phone/electric
Matinee/evening theater
Senior menu restaurant
Ladies night bar
Student price restaurant/other
Coupons & club cards grocery
Is it easy to separate customers?
Can resale be prevented?

23. Monopoly - A Single Seller
Microeconomics - Dr. D. Foster
Monopoly - A Single Seller MR P D Q