UNIT 4.1: IMPERFECT COMPETITION Monopoly

1. Define a monopoly 2. Marginal Revenue and Demand relationship 3. Identify a monopoly graphically 4. Distinguish between single-price vs. price discriminating monopoly 5. Productive vs allocative efficiency for a monopolist. 6. Compare perfect competition vs monopoly 7. Regulation of monopolies: taxes & ceilings In this section we will examine:

Comparison of Market Structures

Are Microsoft’s prices too high?

What do you already know about monopolies? True or False? 1.All monopolies make a profit. 2.Monopolies are usually efficient. 3.All monopolies are bad for the economy. 4.All monopolies are illegal. 5.Monopolies charge the highest price possible 6.The government never prevents monopolies from forming.

Conditions of Monopoly 1) There is a single seller. 2) A price-maker: (set their own price) 3) Barriers to Entry: impossible (other sellers cannot enter the market) 4) Highly wasteful and inefficient. Exact Opposite of Pure Competition.

Graphing a Monopoly Firm

Graphing a Monopoly: MR A monopolist’s MR curve is below the D curve because the monopoly must lower price to sell more. WHY?

Graphing a Monopoly: MR A monopolist’s is STILL subject to the limitations of the consumer. Notice the shape of the total revenue curve along the left side of the demand curve verses the right side of the demand curve. As quantity increases, TR increases (Ed > 1) As quantity increases, TR decreases (Ed < 1)

Graphing a Monopoly: MR Notice that as you go down the demand curve, marginal revenue is twice the slope of demand. This is due to the fact that the total revenue (TR) curve slope becomes less as they sell more products at decreasing prices. Inelastic As quantity increases, TR decreases Elastic As quantity increases, TR increases The monopoly will only produce in the elastic range

Types of Monopolies

1. Geographic Monopoly: The only business in a geographic region.  Some of these are decreasing in the U.S. because of mobility of consumers. EXAMPLE: Only person selling water in the desert. EXAMPLE: Turner Field

2. Technological Monopoly: Firm has discovered a new process or product. Constitution has given government the right to grant technological monopolies (protect property rights)  Patent: 20 years exclusive rights to a developed technology.  Trademark ™ or Copyright ©: Life plus 70 years. (Artists and writers) Types of Monopolies

3. Government Monopoly: Types of Monopolies Sale of alcohol license in some counties Sales of driver’s license Sales of healthcare (just kidding)

Types of Monopolies 4. Natural Monopoly: Where costs are minimized by having a single producer of the product.  Sometimes government creates natural monopolies in the natural gas, water & electricity industry by franchising these utilities.  Economies of Scale: the firm’s long-run average cost curve slopes downward, thus one firm can simply produce the product cheaper than all other firms  TVA is the largest government-owned power producer in the US. Its power facilities include 11 fossil-powered plants, 29 hydroelectric dams, three nuclear plants, and six combustion turbine plants.  The corporation transmits electricity to 8.7 million consumers.

Types of Monopolies Natural Monopolies Arizona Public Service Company Example of a Monopolist’s power

Visualizing Natural Monopolies This figure shows a natural monopoly. 1. Economies of scale exist over the entire LRAC curve. 2. One firm can distribute 4 million kilowatt hours at a cost of 5 cents a kilowatt-hour.

Visualizing Natural Monopolies 4. and 15 cents a kilowatt-hour with four firms. 3. This same total output costs 10 cents a kilowatt- hour with two firms, One firm can meet the market demand at a lower cost than two or more firms can. One firm can meet the market demand at a lower cost than two or more firms can.. This is a natural monopoly

Efficiency for a Monopolist

Welfare Loss to Society from a Monopolist MC Q P D QMQM PMPM The welfare loss from a monopoly is represented by the triangles B and D The rectangle C is a transfer of surplus from the consumer to the monopolist The area A represents the opportunity cost of diverted resources, which is a loss to society. MR P PC Q PC A B D C Thus a monopoly does not produce at an allocativily efficient point. Deadweight Loss (D+B) A monopolist is not productively efficient nor is it allocativily efficient.

A Monopolist Profit and Price Discrimination

What is Price Discrimination? What impact does this have on the consumer’s surplus? Charging different price to different consumers for the same product. Examples: Charging different prices for senior citizens vs. college students at a restaurant. Airline Tickets (coach vs business class) Movie Tickets (child vs. adult) SHS Football Tickets (students vs parents)

D MR MC ATC g h bc0bc0 i m Profit and Price Discrimination Profit resulting from price discrimination (loss to C.S.) Normal Profit resulting from monopolist’s normal price Consumer surplus remaining after price discrimination REMEMBER the firm will always produce at MC=MR. They are just choosing to sell a certain number of units at a higher price.

A Monopoly in the Long-run

Monopoly in the Long-run Since a monopoly is the only player in the market. It’s short-run graph is the same in the long-run. WHY? Since the barriers to entry are high, no other firm can enter the market and dissolve the short-term profits. PROFIT Still making the cash!! Finally, something easy to remember!!!

Government Regulation on a Monopolist

Regulation of a Monopolist: Price Ceiling Why would the gov. regulate a monopoly? 1.To keep prices low 2.To make monopolies efficient How do they regulate? 1.Price Ceilings 2.Taxes don’t work (taxes limit supply and that’s a problem)

Regulation of a Monopolist: Price Ceiling Where should the gov. place the price ceiling? 1.Socially Optimal Price P = MC (Allocative Efficiency) OR 2.Fair-Return Price (Break-even) P = ATC (Normal Profit)

Regulation of a Monopolist: Price Ceiling EXAMPLE: Price ceiling set at the Socially Optimal Price P = MC Price Ceiling PcPc

Regulation of a Monopolist: Price Ceiling EXAMPLE: Price ceiling set at the Fair Returns P = ATC (No economic profit) Price Ceiling PcPc P = ATC

Regulation of a Monopolist: Price Ceiling What happens if the socially optimal price is below the ATC? Two Options: 1. 1.The fair-return price will be chosen (m) OR 2. 2.The firm will receive a subsidy to shift down its ATC so that the optimal price is at the fair-return price (P=ATC). P < ATC P = ATC ATC after subsidy

Regulation of a Monopolist: Price Ceiling Summary PcPc Fair Return Socially Optimal Unregulated

Regulation of a Monopolist: Consumer Surplus PcPc Consumer surplus with an Unregulated Monopoly Consumer surplus with an Regulated Monopoly