1. Imperfect Competition
Unit 4: Imperfect Competition
FOUR MARKET STRUCTURES
Imperfect Competition
Perfect
Competition
Pure
Monopoly
Monopolistic
Oligopoly 1

2. 4

3. 5 Characteristics of a Monopoly
1. Single Seller
One firm controls the vast majority of a market
The firm IS the Industry
2. Unique good with no close substitutes
3. “Price Maker”
The firm can manipulate the price by changing the quantity it produces (ie. supply shifts to the left).
Ex: California electric companies
4. High Barriers to Entry
New firms can NOT enter market
No immediate competitors
Firm can make profit in the long-run
5. Some “Nonprice” Competition
Despite having no close competitors, monopolies still advertise their products in an effort to increase demand. 5

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

5. 7

6. 4 types of monopolies
Geographical
Government
Technological
Natural

7. 4 types of monopolies Geographical
Technological
Government
Natural
Location or control of resources limits competition and leads to one supplier.
Ex: Nowhere gas stations, Cable TV, Los Angeles Lakers

8. 4 types of monopolies Technological
Geographical
Technological
Government
Natural
Location or control of resources limits competition and leads to one supplier.
Patents and widespread availability of certain products lead to only one major firm controlling a market.
Ex: Nowhere gas stations, Cable TV, Los Angeles Lakers
Ex: Microsoft, Intel, Frisbee, Band-Aide…

9. 4 types of monopolies Government
Geographical
Technological
Government
Natural
Location or control of resources limits competition and leads to one supplier.
Patents and widespread availability of certain products lead to only one major firm controlling a market.
Government allows monopoly for public benefits or to stimulate innovation.
The government issues patents to protect inventors and forbids others from using their invention. (They last 20 years)
Ex: Nowhere gas stations, Cable TV, Los Angeles Lakers
Ex: Microsoft, Intel, Frisbee, Band-Aide…
Ex: water company, firefighters, the army, pharmaceutical drugs, rubix cubes…

10. 4 types of monopolies Natural
Geographical
Natural
Government
Technological
Government allows monopoly for public benefits or to stimulate innovation.
The government issues patents to protect inventors and forbids others from using their invention. (20 yrs)
Economies of scale make it impractical to have smaller firms.
Natural Monopoly- It is NATURAL for only one firm to produce because they can produce at the lowest cost.
Location or control of resources limits competition and leads to one supplier.
Ex: water company, firefighters, the army, pharmaceutical drugs, rubix cubes…
Patents & widespread availability of certain products lead to only one major firm controlling a market.
Ex: Electric Companies (SDGE)
If there were three competing electric companies they would have higher costs.
Having only one electric company keeps prices low
Ex: Microsoft, Intel, Frisbee, Band-Aide…
Ex: Nowhere gas stations, Cable TV, Los Angeles Lakers

11. Drawing Monopolies Good news…
Only ONE graph because the firm IS the industry.
The cost curves are the same
The profit maximizing rule MR=MC still applies
Shut down point rule still applies 13

12. THE MARGINAL REVENUE DOES NOT EQUAL THE PRICE!
The Main Difference
Monopolies (and all imperfectly competitive firms) have downward sloping demand curve.
Which means, in order to sell more, a firm must lower its price.
This changes MR…
THE MARGINAL REVENUE DOES NOT EQUAL THE PRICE! 14

13. Why MR is less than Demand? P Qd TR MR $10 $9 $8 $7 $6 $5 $4 $11 - $10-
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $8 $7 $6 $5 $4 15

14. Hotel Enigma
Three people check into a hotel. They pay $30 to the manager and go to their room. The manager finds out that the room rate is $25 and gives the bellboy $5 to return to the guests. On the way to the room the bellboy reasons that $5 would be difficult to split among three people so he pockets $2 and gives $1 to each person. Now each person paid $10 and got back $1. So they paid $9 each, totaling $27. The bellboy has another $2, adding up to $29. Where is the remaining dollar?

15. Why MR < PRICE MR is less than Demand? P Qd TR MR $10 $9 $8 $7 $6
$11 -
$10 1 10 $9 2 18 8 $8 3 24 6 $7 4 28 $6 5 30 $5 $4 7 -2
$10 $9 $8 $7 $6 $5 $4 17

16. Why is MR below Demand? P($)
How many units can be sold for a price of $10?
What is the total revenue at price of $10? TR=____
How many units can be sold for a price of $9?
As price decreases from $10 to $9, TR=____
$10
$18
P($)
TR will increase with the additional unit sold. 10 9 8 6 4
How about MARGINAL REVENUE?
From 1 to 2 units,
MR = $18-$10
= $8 Q

17. Why is MR below Demand?
$10
What is the total revenue at price of $10? TR=____
As price decreases from $10 to $9, TR=____
As price decreases from $9 to $8, TR=____
$18
$24
As price continuously decreases, TR will increase.
P($)
TR will increase with the additional unit sold. 10 9 8 6 4
How about MARGINAL REVENUE?
From 1 to 2 units,
MR = $18-$10
= $8
From 2 to 3 units,
MR = $24-$18
= $6 D MR Q

18. Combine the Demand of an industry with the costs of a firm.
MR < Demand MC
ATC
Costs (dollars)
= Price D MR
Quantity

19. Calculating Marginal Revenue

20. What happens to TR when MR hits zero?
Demand & MR Curves
Plot the Demand, MR & TR Curves
What happens to TR when MR hits zero?
$15 10 5
Dollars D Q MR
$105 55 30
When MR goes negative,
TR will fall
Dollars TR Q

21. Elastic vs. Inelastic Range of Demand Curve24

22. A monopoly will only produce in the elastic range
Elastic vs. Inelastic Range
$15 10 5
Elastic
Inelastic
Total Revenue Test
If price & TR demand is…
Dollars
ELASTIC D Q MR
Total Revenue Test
If price & TR demand is…
$105 55 30
Dollars
A monopoly will only produce in the elastic range
INELASTIC TR Q

23. How much is the TR, TC and Profit or Loss?
What output should this monopoly produce?
Maximizing Profit
MR = MC
How much is the TR, TC and Profit or Loss? $9 8 7 6 5 4 3 2 Q
Price
Conclusion:
Monopolists produce where MR=MC, but charges the price consumer are willing to pay identified by the demand curve. MR D MC
ATC
Profit =$5

24. How much is the TR, TC and Profit or Loss?
What if cost is higher?
How much is the TR, TC and Profit or Loss? MC Q
$90 80 70 60 50 40 30 20 10
ATC D MR
Costs
AVC
Loss
Price
Minimum AVC is shut down point

25. Price, costs, and revenue
Quiz Time
TR =
TC =
Profit/Loss =
Profit/Loss per Unit =
$780
$600
$180
--- $30 Q
Price, costs, and revenue D MR
$175
150
125
100 75 50 MC
ATC
$130
$110
Profit=$180
TR=$780
TC=$600

26. Are Monopolies Efficient?

27. Efficiency of Perfect Competition
CS and PS of a Perfect Competition
S = MC P
An industry in perfect competition
sells where supply &
demand are equal CS Pc PS D Q Qc

28. Monopolies underproduce & over charge, decreasing CS & increasing PS.
INEFFICIENCY OF MONOPOLY
Monopolies underproduce & over charge, decreasing CS & increasing PS.
CS and PS of a Monopoly
S = MC
Result is DEADWEIGHT LOSS to society P MR
At MR=MC,
A monopolist will
produce less and
charge higher price CS Pm Qm Pc PS D Q Qc

29. Graphically it is where… Graphically it is where…
MONOPOLIES AND EFFICIENCY
Productive Efficiency
The production of a good in a least costly way. (minimum amount of resources are being used)
Graphically it is where…
Price = Minimum ATC
Allocative Efficiency
The apportionment of resources towards the production of products most wanted by society (as measured by their price).
Graphically it is where…
Price = MC

30. Price, costs, and revenue
Are Monopolies Efficient?
Price = Min ATC ?
Price = MC ?
Monopolies are NOT
productive efficient
Monopolies are NOT
allocative efficient Q
150
125
100 75 50 25
Price, costs, and revenue MC MR
ATC D

31. Because there is little external pressure to be efficient
Are Monopolies Efficient?
Monopolies are NOT efficient!
Monopolies are inefficient because…
They charge a higher price
They don’t produce enough
No allocative efficiency
They produce at higher costs
No productive efficiency
They have little incentive to innovate
Why?
Because there is little external pressure to be efficient 34

32. 2004 AP Micro FRQ B #1
Due to a new technology, Brunelle Inc. enjoys monopoly power. Brunelle does not engage in price discrimination.
Explain why the demand curve lies above the marginal revenue curve for Brunelle.
Assume that Brunelle is earning short-run economic profits. Using a correctly labeled graph, show the following for Brunelle.
Profit-maximizing level of output, labeled as Q*
Profit-maximizing price, labeled as P*
Economic profits, as a shaded area
(c) If Brunelle wants to maximize its total revenues instead of profits, using the graph from part (b) show the following
Revenue-maximizing level of output, label as Qr
Revenue-maximizing price, labeled as Pr
(d) Given your answer in part (b), indicate whether Brunelle is producing the allocatively efficient level of output. Explain.
(e) Explain what will happen to Brunelle’s demand curve as other firms adopt the same technology.

33. Regulating Monopolies

34. Regulating Monopoly Why would the government regulate an monopoly?
To keep prices low
To make monopolies efficient
How do they regulate?
Use Price controls:
a. Price Ceiling b. Price Floor
Why don’t taxes work?
Taxes limit supply and that’s the problem

35. The firm would make a loss and would require a subsidy
REGULATING MONOPOLY
What happens if the government sets a price ceiling to get the socially optimal quantity?
Dilemma of Regulation
Which Price?
The firm would make a loss and would require a subsidy
MR = MC
Monopoly/Unregulated price MC
ATC
Fair-Return Price
Normal Profit
TR = TC Pm
Price and Costs Pf
P = MC
Socially-Optimum Price Ps D MR Q Qm Qf Qs

36. Socially-Optimum Price P = MC (Allocative Efficiency)
Where should the government place the price ceiling?
Socially-Optimum Price
P = MC (Allocative Efficiency) OR
Fair-Return Price
P = ATC (Normal Profit)

37. 2007 AP Micro FRQ A #1
A patent gives inventors the exclusive right to produce and market a product for a period of time. GCR Company is a profit-maximizing firm. It has a patent for a unique antispyware computer program called Aspy.
Assume that GCR is making economic profit. Draw a correctly labeled graph and show the profit-maximizing price and quantity.
(b) Assume that the government imposes a lump-sum tax on GCR.
What will happen to output and market price? Explain.
What will happen to GCR’s profits?
(c) Assume instead that the government grants a per-unit subsidy to GCR for Aspy.

38. Price Discrimination

39. PRICE DISCRIMINATION Conditions
Practice of selling specific products to different buyers at different prices.
Conditions
Firm must have monopoly power
Firm must be able to segregate the market
Consumers must not be able to resell product

40. PRICE DISCRIMINATION
Price discrimination seeks to charge each consumer what they are willing to pay in an effort to increase profits.
Those with elastic demand are charged less than those with inelastic.
Examples:
Airline Tickets (vacation vs. business)
College
All Coupons (spenders vs. savers)
WHS soda machine (students vs. teachers)

41. NON-PRICE DISCRIMINATION
Monopoly
NON-PRICE DISCRIMINATION P
Economic one MR=MC price D MR MC
ATC
Price
Costs Q Q1

42. Economic profits with price discrimination
A perfectly discriminating monopolist has MR=D, producing more product and more profit! P
Economic profits with price discrimination D MC
ATC
MR’ MR
Price and Costs Q Q1 Q2

43. Economic profits with price discrimination
A perfectly discriminating monopolist has MR=D, producing more product and more profit! P
Economic profits with price discrimination D MC
ATC
MR’ MR
Price and Costs Q Q1 Q2

44. What’s the Point? PRICE DISCRIMINATION
A perfectly discriminating can charge each person differently so the Marginal Revenue = Demand
What’s the Point?
Perfectly price discriminating firms:
Make more profit
Produce more
Produce at allocative efficiency
Price Discrimination results in several prices, more profit, No CS, and a higher socially optimal quantity

45. Can You Do The Following?
Draw a monopoly making a profit identify price, quantity, and profit.
Draw a perfectly competitive industry AND firm at long-run equilibrium
Draw a price discriminating monopoly at equilibrium and label price, quantity, MR, and profit