Principles of Marketing Monopoly Microeconomics All text in these slides is taken from https://courses.lumenlearning.com/waymakermacromicro-fall2016/ where it is published under one or more open licenses. All images in these slides are attributed in the notes of the slide on which they appear and licensed as indicated. Cover Image: Untitled Author: Radek Grzybows  Located at: https://unsplash.com/photos/8tem2WpFPhM License: Creative Commons Zero What is Marketing? Principles of Marketing

Monopoly A monopoly is a situation in which one firm produces all of the output in a market Monopoly by Christopher Dombres, CC-BY.

Barriers to Entry Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market Monoplane by Robert Payne, CC-BY.

Barriers to Entry Barrier to Entry Government Role? Example Natural monopoly Government often responds with regulation (or ownership) Water and electric companies Control of a physical resource No DeBeers for diamonds Legal monopoly Yes Post office, past regulation of airlines and trucking Patent, trademark, and copyright Yes, through protection of intellectual property New drugs or software Intimidating potential competitors Somewhat Predatory pricing; well-known brand names

Natural Monopoly In natural monopoly economic conditions in the industry, for example, economies of scale or control of a critical resource, limit effective competition

Legal Monopoly Legal prohibitions against competition, such as regulated monopolies and intellectual property protection New Packaging Display by tales of a wandering youkai. CC-BY.

Legal Intellectual Property Protection Copyright: a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music intellectual property: the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions Patent: a government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time trade secrets: methods of production kept secret by the producing firm Trademark: an identifying symbol or name for a particular good and can only be used by the firm that registered that trademark

Perceived Demand Principles of Microeconomics Chapter 9.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/6i8iXmBj@10.31:xGGh_jHp@8/How-a-Profit-Maximizing-Monopo. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest The demand curve as perceived by a perfectly competitive firm is not the overall market demand curve for that product. However, the firm’s demand curve as perceived by a monopoly is the same as the market demand curve

Total Cost and Total Revenue in a Monopoly Principles of Microeconomics Chapter 9.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/6i8iXmBj@10.31:xGGh_jHp@8/How-a-Profit-Maximizing-Monopo. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Marginal Revenue and Cost Principles of Microeconomics Chapter 9.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/6i8iXmBj@10.31:xGGh_jHp@8/How-a-Profit-Maximizing-Monopo. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Illustrating Monopoly Profits Principles of Microeconomics Chapter 9.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/6i8iXmBj@10.31:xGGh_jHp@8/How-a-Profit-Maximizing-Monopo. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

How a Profit-Maximizing Monopoly Decides Price Principles of Microeconomics Chapter 9.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/6i8iXmBj@10.31:xGGh_jHp@8/How-a-Profit-Maximizing-Monopo. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

The Monopolist’s Marginal Revenue Curve versus Demand Curve Because the market demand curve is conditional, the marginal revenue curve for a monopolist lies beneath the demand curve Principles of Microeconomics Chapter 9.2. Authored by: OpenStax College. Located at: http://cnx.org/contents/6i8iXmBj@10.31:xGGh_jHp@8/How-a-Profit-Maximizing-Monopo. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Monopolies are Inefficient Consumers will suffer from a monopoly because a lower quantity will be sold in the market, at a higher price, than would have been the case in a perfectly competitive market A monopoly that does not need to fear competition can just produce the same old products in the same old way

Monopoly and Deadweight Loss Principles of Microeconomics Section 10.3. Authored by: Anonymous. Located at: http://2012books.lardbucket.org/books/microeconomics-principles-v2.0/s13-03-assessing-monopoly.html. License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike

Price Discrimination When a firm charges different prices for the same good or service to different consumers, even though there is no difference in the cost to the firm of supplying these consumers, the firm is engaging in price discrimination

Practice Question Why is price discrimination efficient? Price discrimination is efficient because each consumer is able to get the product they want at the price they are willing to pay. The producer is able to maximize profit by selling each unit for the most the consumer is willing to pay for it.

Requirements for Price Discrimination A Price-Setting Firm The firm must have some degree of monopoly power—it must be a price setter. A price-taking firm can only take the market price as given—it is not in a position to make price choices of any kind. Firms in monopoly, monopolistically competitive, or oligopolistic markets may engage in price discrimination. Distinguishable Customers The market must be capable of being fairly easily segmented—separated so that customers with different elasticities of demand can be identified and treated differently. Prevention of Resale The various market segments must be isolated in some way from one another to prevent customers who are offered a lower price from selling to customers who are charged a higher price.

Mergers and Acquisitions A corporate merger occurs when two formerly separate firms combine to become a single firm. When one firm purchases another, it is called an acquisition Principles of Microeconomics Chapter 11.1. Authored by: OpenStax College. Located at: http://cnx.org/contents/6i8iXmBj@10.31:VhgPN-9A@5/Corporate-Mergers. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Anti-trust Laws outlaw: mergers and acquisitions where the outcome would be to “substantially lessen competition” in an industry price discrimination tied sales: where purchase of one product commits the buyer to purchase some other product vertical and conglomerate mergers restrictive practices: practices that do not involve outright agreements to raise price or to reduce the quantity produced, but that might have the effect of reducing competition Predatory pricing: when an existing firm uses sharp but temporary price cuts to discourage new competition The Federal Trade Commission (FTC) and the U.S. Department of Justice enforce antitrust laws

Measuring Market Competition The concentration ratio measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms The Herfindahl-Hirschman Index (HHI) is calculated by summing the squares of the market share of each firm in the industry

Regulating Monopolies A natural monopoly will maximize profits by producing at the quantity where marginal revenue (MR) equals marginal costs (MC) and by then looking to the market demand curve to see what price to charge for this quantity. This monopoly will produce at point A. If antitrust regulators split this company exactly in half, then each half would produce at point B. The regulators might require the firm to produce where marginal cost crosses the market demand curve at point C but the firm would lose money. The most likely choice is point F Principles of Microeconomics Chapter 11.3. Authored by: OpenStax College. Provided by: Rice University. Located at: http://cnx.org/contents/6i8iXmBj@10.31:MG3-75uT@6/Regulating-Natural-Monopolies. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Regulation Strategies cost-plus regulation  price cap regulation Regulator sets price by adding average cost to the normal rate of profit the firm should expect to earn No incentives to minimize costs Regulator sets a price that the firm can charge over the next few years Can provide incentives for efficiency Setting the cap is challenging

Deregulation Deregulation: removing government controls over setting prices and quantities in certain industries (Credit: modification of work by Derrick Coetzee/Flickr Creative Commons) in Principles of Microeconomics Chapter 11. Authored by: OpenStax College. Provided by: Rice University. Located at: http://cnx.org/contents/6i8iXmBj@10.31:UtJZjFyV@5/Introduction-to-Monopoly-and-A. License: CC BY: Attribution. License Terms: Download for free at http://cnx.org/content/col11627/latest

Quick Review What are the characteristics of a monopoly What are barriers to entry? How do economists calculate and graph a monopoly’s fixed, variable, average, marginal and total costs? Why is a monopoly is inefficient? What are different strategies to control monopolies, including natural monopolies?