1. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Market Structure – A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry and exit Monopoly one firm with market power unique product (no close substitutes) impossible entry and exit price maker (monopoly company sets the price) Monopoly firm demand curve is downward sloping (must discount to sale more)

2. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Barriers to Entry and Exit Legal barriers – Licenses – Patents and copyrights – Public franchises – Tariffs, quotas and other trade restrictions Strategic barriers – Predatory pricing – Marketing (product differentiation) Structural barriers – Economies of scale (Natural monopoly) – Vertical integration – Control of essential resources (technologies / commodities) – Brand loyalty Monopoly

3. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us QP $210 1 2 3 4 5 6 7 8 9 $19 $17 $15 $13 $11 $9 $7 $5 $3 TR $0 $19 $34 $45 $52 $55 $54 $49 $40 $27 MR ---- $19 $15 $11 $7 $3 - $1 - $5 - $9 - $13 D MR Revenue with Market Power

4. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us TFC $10 TVC $0 $4 $7 $11 $18 $28 $47 $74 $112 $162 TC $10 $14 $17 $21 $28 $38 $57 $84 $122 $172 MC ---- $4 $3 $4 $7 $10 $19 $27 $38 $50 AFC $10 $5 $3.33 $2.50 $2.00 $1.67 $1.43 $1.25 $1.11 AVC $0 $4.00 $3.50 $3.67 $4.50 $5.60 $7.83 $10.57 $14.00 $18.00 ATC $10.00 $14.00 $8.50 $7.00 $7.60 $9.50 $12.00 $15.25 $19.11 $17 Profit -$10 $5 $17 $24 -$3 -$35 -$82 -$145 QP $210 1 2 3 4 5 6 7 8 9 $19 $17 $15 $13 $11 $9 $7 $5 $3 TR $0 $19 $34 $45 $52 $55 $54 $49 $40 $27 MR ---- $19 $15 $11 $7 $3 - $1 - $5 - $9 - $13 Short-run Equilibrium

5. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us MC D MR $13.00 $4.50 Revenue Total Cost TVC TFC $52 $18 $10 $28 Profit$24 When Q=4 $7.00 Short-run Equilibrium P ATC AVC $ MR = MC Profit Max: Q 4

6. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Profit maximization – When MR > MC – increase production – When MR < MC – decrease production – When MR = MC – Maximum profit Short-run Equilibrium

7. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us MC D monopoly MR AC $ Q Long Run View D perfect competition P pc PmPm QmQm Q pc Pm > Ppc and Qm < Qpc Monopoly allocates resources inefficiently

8. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Monopoly produces quantity where MC = MR – which produces less than the socially efficient quantity of output – charges a Price > Marginal Cost Inefficiency of monopoly

9. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Price Discrimination Price Discrimination – selling the a product or service at different prices to different customers Requires the ability to separate customers according to their willingness to pay (market segmentation) Certain market forces can prevent firms from price discriminating such as arbitrage (buying a good in one market then selling it in other market at a higher price) Price Discrimination is a rational strategy: – Charge each customer a price closer to his or her willingness to pay – Producers earn higher profit – Sell more output Perfect price discrimination charges each customer a different price exactly equal to his or her willingness to pay

10. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Quantity 0 Monopolist with Price Discrimination Demand Price Discrimination QmQm PmPm QvQv PvPv PlPl QlQl Revenue Examples of price discrimination –Movie tickets Children Middle Aged Seniors –Airline prices Lecture Business –Discount coupons –Financial aid –Quantity discounts Outlets to purchase a sweater l = Lord and Taylor m = Macy’s v = Venture Price

11. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Antitrust and Monopoly Increasing competition with antitrust laws – Sherman Antitrust Act, 1890 Reduce the market power of trusts – Clayton Antitrust Act, 1914 Strengthened government’s powers Authorized private lawsuits – Prevent mergers – Break up companies – Prevent companies from coordinating their activities to make markets less competitive Public Policy

12. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Regulation and Monopoly – Regulate pricing behavior of monopolists – Common in case of natural monopolies – Force marginal cost pricing May set price below ATC forcing an economic loss No incentive to reduce costs Public Policy

13. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Natural Monopoly – Infinite economics of scale leading to a single company having lowest cost Water service Sewer service Power service Trash service Should a municipality own these services? Is trash collection a natural monopoly? National law allows for natural monopoly so long firms surrender pricing power Regulation tries to price near perfect competition (P = MC) rather than (P > MC) Regulators generally do a poor job protecting society interest. Case: Power service in Lubbock, TX and San Diego, CA Natural Monopoly $ Q AC

14. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Ownership and Monopoly – Private owners Incentive to minimize costs (maximize profit) – Public owners (government owned) – If government does a bad job the losers are customers and taxpayers Public Policy

15. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Comparing Perfect Competition to Monopoly CompetitionMonopoly Similarities Goal of firms Rule for maximizing Can earn economic profits in short run? Differences Number of firms Marginal revenue Price Produces welfare-maximizing level of output? Entry in long run? Can earn economic profits in long run? Price discrimination possible? Maximize profits MR = MC Yes Many MR = P P = MC Yes No Maximize profits MR = MC Yes One MR < P P > MC No Yes Summary